##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|  |  |                                                                                       
|- |  | --------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
| 
|  |  | For the Fiscal Year Ended December 31,
	2001                                          

Commission File Number: 0-21626

Electroglas, Inc.

(Exact Name of Registrant as Specified in its
Charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 77-0336101                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

|                                                           |  |                                                     
|---------------------------------------------------------- |  | ----------------------------------------------------
|6024 Silver Creek Valley Road,
	San Jose, California 95138 |  | (408) 528-3000                                      
|(Address of Principal Executive Offices) (Zip
	Code)       |  | (Registrants Telephone Number Including
	Area Code)

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

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

Common Stock, $0.01 par value


(Title of Class)


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

As of January 30, 2002, the aggregate market
value of the voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $316,000,000,
based on the closing sale price as reported on the Nasdaq
National Market on such date. This calculation does not reflect
a determination that certain persons are affiliates of the
Registrant for any other purposes.

As of January 30, 2002, the Registrant had
outstanding 21,081,000 of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement
in connection with its 2001 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Form 10-K
Report.



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TABLE OF CONTENTS



|                           |                                                                                              |  |  |  |  |  |  | 
|-------------------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|FORWARD LOOKING STATEMENTS
|PART I                    
|                           | Item 1. Business                                                                            
|                           | Item 2. Properties                                                                          
|                           | Item 3. Legal Proceedings                                                                   
|                           | Item 4. Submission of Matters to a Vote of Security Holders                                 
|PART II                   
|                           | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters           
|                           | Item 6. Selected Financial Data                                                             
|                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
|                           | Item 7A. Quantitative and Qualitative Disclosures about Market Risk                         
|                           | Item 8. Financial Statements and Supplementary Data                                         
|                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|PART III                  
|                           | Item 10. Directors and Executive Officers of the Registrant                                 
|                           | Item 11. Executive Compensation                                                             
|                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                     
|                           | Item 13. Certain Relationships and Related Transactions                                     
|PART IV                   
|                           | Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                   
|SIGNATURES                
|EXHIBIT 10.12             
|EXHIBIT 10.13             
|EXHIBIT 10.14             
|EXHIBIT 21.1              
|EXHIBIT 23.1              



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ELECTROGLAS, INC.

FORM 10-K

For the Year Ended December 31,
2001


INDEX

|         |    |  |  |                                                                                        |  |  |    | 
|-------- | -- |  |  | -------------------------------------------------------------------------------------- |  |  | -- | 
|         |    |  |  | Page                                                                                  
|ITEM     |    |  |  |                                                                                       
|PART I  
|         | 1  |  |  | Business                                                                               |  |  | 3  | 
|         | 2  |  |  | Properties                                                                             |  |  | 10 | 
|         | 3  |  |  | Legal Proceedings                                                                      |  |  | 10 | 
|         | 4  |  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |  | 10 | 
|PART II 
|         | 5  |  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |  | 10 | 
|         | 6  |  |  | Selected Financial Data                                                                |  |  | 11 | 
|         | 7  |  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |  | 13 | 
|         | 7A |  |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |  |  | 22 | 
|         | 8  |  |  | Financial Statements and Supplementary Data                                            |  |  | 23 | 
|         | 9  |  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |  | 45 | 
|PART III
|         | 10 |  |  | Directors and Executive Officers of the Registrant                                     |  |  | 45 | 
|         | 11 |  |  | Executive Compensation                                                                 |  |  | 45 | 
|         | 12 |  |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |  | 45 | 
|         | 13 |  |  | Certain Relationships and Related Transactions                                         |  |  | 45 | 
|PART IV 
|         | 14 |  |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                       |  |  | 45 | 
|         |    |  |  | Signatures                                                                             |  |  | 46 | 

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K and certain
information incorporated herein by reference contain forward
looking statements within the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. All
statements included or incorporated by reference in this Annual
Report, other than statements that are purely historical are
forward-looking statements. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates and similar expressions
also identify forward looking statements. These forward looking
statements, which include statements about the growth of the
semiconductor industry; increasing costs in the semiconductor
industry; market size, share and demand, product performance;
our expectations, objectives, anticipations, intentions and
strategies regarding the future, expected operating results,
revenues and earnings and current and potential litigation are
not guarantees of future performance and are subject to risks
and uncertainties that could cause actual results to differ
materially from the results contemplated by the forward looking
statements. Forward-looking statements in this Annual Report on
Form 10-K include, without limitation:



| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The statement that demand for the Companys
	products fluctuate with the semiconductor business cycles and is
	expected to continue to fluctuate from period to period;                                                                                                                                                                             
|
| |  | The Companys belief that it has certain
	technological and other advantages over its competitors;                                                                                                                                                                                                                                                  
|
| |  | The Companys expectations that
	international sales will continue to represent a significant
	percentage of net sales;                                                                                                                                                                                                                             
|
| |  | The Companys intention to capitalize on its
	market position and technical skills to further broaden existing
	product lines through internally developed products and, from
	time to time, through strategic alliances and acquisitions;                                                                                                          
|
| |  | The Companys intention to continue to
	strengthen its existing customer relationships by continuing to
	provide high levels of service and support;                                                                                                                                                                                                
|
| |  | Statements regarding a growing trend for
	semiconductor manufacturers to contract with other companies to
	perform their wafer sort operations;                                                                                                                                                                                                     
|
| |  | The Companys belief that the requirement
	for automated inspection after the completion of the wafer
	manufacturing process (post fab) is growing;                                                                                                                                                                                               
|
| |  | The Companys expectation that an emerging
	application for post fab inspection is the Micro
	Electro-Mechanical (MEMS) device market and discussions
	regarding the growth of the use of flip chip packaging;                                                                                                                                      
|
| |  | The Companys expectation to continue to
	invest in research and development to anticipate and address
	technological advances in semiconductor processing;                                                                                                                                                                                         
|
| |  | The Companys intention to control
	discretionary expenses and continue investing in its new product
	development programs during the current business cycle downturn;                                                                                                                                                                              
|
| |  | The Companys anticipation that its existing
	capital resources and cash flow generated from future operations
	will enable it to maintain its current level of operations, its
	planned operations and its planned capital expenditures for the
	foreseeable future, including its significant contractual
	obligations and commercial commitments;
|
| |  | Statements regarding the Companys belief
	that its lenders will provide waivers if necessary or allow the
	Company to renegotiate its lease;                                                                                                                                                                                                       
|
| |  | The Companys belief that alternative
	sources of manufacturing or supplies exist or can be developed,
	if necessary;                                                                                                                                                                                                                               
|
| |  | Discussions regarding the Companys ability
	to continue to collect its receivables without significant
	delays in payments or product concessions;                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys expectation to record a
	restructuring charge of $1.0 to $1.5 million in the first
	quarter of 2002 in connection with the move of its prober
	manufacturing operations to Singapore; and                                                                                                                     
|
| |  | The Companys belief that its products do
	not infringe on the Lemelson patents, as described in the
	subsection Factors that May Affect Results and Financial
	Condition, Patents and other intellectual property under
	Item 7 Managements Discussion and Analysis of
	Financial Condition and Results of Operations.

All forward-looking statements included in this
document are made as of the date hereof, based on information
available to the Company as of the date hereof, and Electroglas
assumes no obligation to update any forward looking-statement or
statements. It is important to note that such forward looking
statements are subject to risks and uncertainties and that the
Companys actual results could differ materially from those
in such forward-looking statements. The following important
factors, as well as those set forth in the previous discussion
in Item 1 hereof, among others, in some cases have
affected, and in the future could affect, the Companys
actual operating results and could cause the Companys
actual consolidated operating results to differ materially from
those expressed in any forward-looking statement made by, or on
behalf of, the Company.

Stockholders are cautioned not to place undue
reliance on forward-looking statements contained in this Annual
Report on Form 10-K, which speak only as of the date of
this Annual Report on Form 10-K. The reader should also
consult the cautionary statements and risk factors listed from
time to time in the Companys Reports on Forms 10-Q, 8-K,
10-K and its Annual Reports to Stockholders.




PART I




Item 1.     Business

Overview

Electroglas, Inc. (Electroglas or
the Company) is a major supplier of process
management tools to the global semiconductor industry.
Semiconductor manufacturers depend on the Companys wafer
probers, inspection systems and software to improve their
productivity and control their processes, optimizing
manufacturing efficiency. Electroglas was formed on
April 1, 1993, to succeed to the wafer prober business
conducted by the Electroglas division of General Signal
Corporation (former Parent). Immediately prior to
the closing of the initial public offering of its Common Stock
(the IPO) on July 1, 1993, the Company assumed
the assets and liabilities of the Electroglas division in the
asset transfer. Following the IPO, the Company commenced
operations as an independent corporation. The Company, through
its predecessors, has been in the semiconductor equipment
business for more than 40 years. Historically, the
Companys primary product has been automatic wafer probing
equipment. Electroglas believes it is one of the largest
suppliers of wafer probers worldwide. The Company has sold over
15,000 wafer probers and believes it is the leading supplier of
the probers used in the United States and European markets.

The Company is also involved in the development,
manufacture, marketing, and servicing of semiconductor wafer
inspection products and process management software products as
part of its strategy to move from a supplier of wafer probers to
a process management tool provider. The move began with two
acquisitions completed in 1997. In May 1997, Electroglas
acquired Sunnyvale, California-based Knights Technology, Inc.
(Knights). In December 1997, Electroglas acquired
Albany, Oregon-based Techné Systems, Inc. (renamed
Electroglas Inspection Products). In January 2001,
the Company acquired Statware Inc., of Corvallis, Oregon
(Statware) to further expand its product offerings
in the process management area.

In November 2001, the Company combined the
operations of Knights Technology, Statware and the networking
software section of the prober operations into a single
operating division, called EGsoft. The Company is currently
organized into three operating divisions, the Prober Products
Division (PPD), Inspections Products Division and EGsoft.

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Industry Background

Semiconductor devices are fabricated by repeating
a complex series of process steps on a substrate
(wafer) which is usually made of silicon. These
wafers measure from 75mm to 300mm (3 to 12) in
diameter. Wafers are typically sent through a series of 100 to
400 process steps. A finished wafer consists of many integrated
circuits (each referred to as a device or
die of chip), the number depending on
the area of the circuits and the size of the wafer.
Manufacturers have increasingly utilized larger diameter wafers
to achieve more cost-effective production. The move to 300mm (12
inch) wafers began in 1999. The manufacture of semiconductor
devices is very capital intensive. A typical state of the art
facility, usually called a wafer fab, will cost more
than $1 billion.

The purchase of semiconductor manufacturing
equipment and spare parts, the integration of such equipment
into production lines, and the training of employees on a
particular suppliers equipment require significant
expenditures by semiconductor manufacturers. To maximize the
benefits of their investment in machinery, parts, production
line integration and training, semiconductor manufacturers
generally are reluctant to replace existing equipment with
equipment from another supplier, thus establishing and
maintaining strong customer relationships is critical for the
success of a supplier to these manufacturers.

Wafer
Probing

A wafer prober successively positions each
die on the wafer so that the electrical contact
points (pads) on the die align under and make
contact with probe pins, which are located on a probe card
mounted on the wafer prober. The probe card, which is generally
custom made by other suppliers for the specific integrated
circuit being tested, is connected to a test system, also
supplied by other suppliers, which performs the required
parametric or functional test. Parametric testing is performed
during the wafer fabrication process (in-line
testing) and at the completion of the wafer fabrication
process (end-of-line testing) to measure electrical
parameters that verify the reliability of the wafer fabrication
process. Functional testing is performed after the completion of
wafer fabrication to identify devices that do not conform to
particular electrical specifications or performance criteria.
This process is typically called wafer sort. Wafers
often go through several wafer probing steps.

Automatic wafer probers are primarily used during
this wafer sort process, which occurs after the
fabrication steps are completed and before the separation and
packaging of each individual device. Wafer probers are also
increasingly used during in-line parametric testing. In-line
testing requires special equipment features such as cleanroom
compatibility and low-noise electrical measurement capability,
as tests are carried out during the fabrication process. This
testing is done to verify the manufacturing process while wafers
are in an unfinished state where corrective action can occur. A
small number of probers are also used for research and
development, and quality and process control applications. The
Company estimates, based upon its experience, that wafer sort
applications represent approximately 85% of the market for
automatic wafer probers. The remaining 15% is divided between
in-line and end-of-line testing and laboratory applications.

There is a growing trend for semiconductor
manufacturers to contract with other companies to perform their
wafer sort operations. These contract test companies, typically
called test houses, perform the wafer testing
service and often additionally provide assembly and packing
services as well.

A semiconductor manufacturer typically purchases
wafer probers when outfitting a new wafer fabrication facility
or expanding an existing facility. Wafer probers are also
purchased to replace equipment in response to major changes in
technology such as larger wafer sizes and greater device
complexity. A semiconductor fabrication facility typically
requires 20 to 80 probers to meet testing requirements on a
timely basis. A test house may require hundreds of wafer probe
systems to support the testing requirements of the companies
that contract with them.

Post-fab
Wafer Inspection

Before wafers are sent from the wafer sort
operation to final assembly, they typically undergo an optical
inspection step. This step identifies die with physical defects
that may have passed electrical test, but are at

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risk of failure after the devices have been
packaged. Sorting die both optically and electrically improves
product reliability while avoiding the cost of packaging
marginal die. Optical inspection on the sort floor is also used
after wafer probe to determine whether the probe tips caused
bond-pad damage. Wafer inspection tools automate this process of
defect identification, defect classification, and feedback
control processes. The tools can analyze each individual die on
each wafer for defects and process excursions, identify the type
of defect or pattern anomaly, measure the defect or anomaly, and
pass the quantitative results to both upstream and downstream
production machines. The requirement for automated inspection
after the wafer manufacturing process is complete (post
fab) is growing. Both the costs of manual inspection and
the changing technologies of the packaging processes are driving
the need for more detailed inspection and process control in the
post fab environment.


Lightweight, portable electronic devices are
driving the growth of new flip chip packaging technologies.
Unlike conventional packaging that uses fine gold wires to
electrically connect the semiconductor chip to its package, flip
chips utilize gold or solder bumps that are deposited onto
bonding pads on the chip surface. The chips are then flipped
into chip scale packages (packages that are only slightly larger
then the actual chip) or directly onto printed circuit boards.
Flip chips take up much less space then conventional chips, and
due to the elimination of the gold wires, flip chips can also
operate at higher speeds. The use of flip chip packaging is
expected to grow rapidly as memory, ASIC and other device types
are required to operate at high speed and in tight spaces. Wafer
bumping is an expensive process, and the cost of flip chip
packaging can be very high. Bumps that are deformed, missing,
and oversized or undersized will cause the failure of flip chip
devices. To avoid the cost of packaging defective chips,
semiconductor manufacturers are turning to automated wafer
inspection systems. Automated inspection systems must be able to
inspect every bump on every wafer in order for semiconductor
manufacturers to control their wafer bumping processes and
screen out defective chips prior to probing and packaging.

An emerging application for post fab inspection
is the Micro Electro-Mechanical (MEMS) device market. MEMS
devices are miniaturized electromechanical devices such as
switches, accelerometers and inkjet printheads, which are
fabricated using semiconductor manufacturing techniques. These
MEMS devices need optical inspection to verify the small
structures fabricated into the structure of the device.

Process
Management Software

There is a growing importance of software in the
IC manufacturing process. Capital and operating costs of a
fabrication facility are very high so semiconductor
manufacturers are seeking ways to improve overall equipment
efficiency (OEE), optimize yield and provide plant-wide
integration. Manufacturers are seeking a total integrated
software infrastructure to produce, correlate, manage, and
analyze data throughout the production process. Yield, or the
percentage of good die that can be realized from a wafer, is a
critical factor in determining the profitability of a production
line, and often the semiconductor manufacturer as a whole.
Therefore, efforts to maximize the yield of each product line
have become a key engineering priority at these companies. This
has led to a growing need for tools that monitor and analyze
defects. Also, as defect problems are brought under control,
there is an increased emphasis on operational efficiency.

Software tools are used to bring together fab
process data, inspection results, electrical test data, and
product test data to help determine which process zones or tools
contribute most significantly to yield loss and to automate and
optimize the operational efficiency of the semiconductor
fabrication facility. The software provides a common location
and format for presenting this data and doing cross-correlation
between data types for the purpose of yield enhancement analysis
and process optimization. Software tools also provide
computerized interfaces and navigation capabilities for IC
design, failure analysis (FA), defect review and debugging.

Historically, much of the software used in this
market was developed in-house by the engineering group
responsible for yield or through a dedicated software
development group. This created some highly customized, but also
inflexible and expensive to maintain, solutions to problems
related to data storage and analysis. Many organizations are now
looking to out-source this work to lower their support costs,
maximize their engineers productivity and increase the
overall functionality of their analysis tools.

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Company Strategy

Electroglas has become a leader in the wafer
probing market through a combination of strengths, including
advanced technical capabilities, close relationships with the
leading manufacturers of integrated circuits, a broad line of
high quality products, and a well-established, highly qualified
distribution organization. Building on these strengths,
Electroglas strategy is comprised of the following key
elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on technological innovation.The Company has invested heavily in
	research and development to add features and functionality to
	its products. The Company was the first to introduce automatic
	wafer probers using a linear motor positioning system for
	precise motion control and digital pattern recognition
	processors for automatic alignment. The Company expects to
	continue to invest in research and development to anticipate and
	address technological advances in semiconductor processing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Expand product lines and applications.The Company intends to capitalize on
	its market position and technical skills to further broaden
	existing product lines through internally developed products
	and, from time to time, through strategic alliances and
	acquisitions such as the Knights and Techné acquisitions of
	1997, and the Statware acquisition in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Maintain strong customer relationships.The Company has long-standing
	relationships with its customers. The Companys development
	of products and product enhancements is market-driven.
	Engineering, sales and management personnel collaborate with
	customer counterparts to determine customers needs and
	specifications. The Company intends to continue to strengthen
	its existing customer relationships by continuing to provide
	high levels of service and support.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Emphasize quality products.The Company believes it has developed
	a reputation as a leader in providing high-quality products. The
	Company was chosen as one of the 10 Best test and
	measurement equipment manufacturers for nine of the last ten
	years in an annual customer survey conducted by VLSI Research,
	Inc. The Company has received quality awards from its customers
	and the SEMATECH Partnering for Total Quality award. The Company
	has a companywide quality program and received International
	Organization for Standardization (ISO) 9002 Certification
	in 1997 and ISO 9001 Certification in 2000. The Companys
	quality training program emphasizes continuous improvement; data
	driven decisions; and close collaboration among the
	Companys employees, customers and suppliers. The Company
	trains all of its employees in basic quality skills. The Company
	also regularly participates in quality sharing meetings with
	other equipment manufacturers and customer quality audits of
	procedures and personnel.

Products

Wafer
Probers

Horizon 4000 Series:The 4090u (micro) and the
4090fare the Companys primary offerings in the
Horizon 4000 Series of wafer probers. This product line is
positioned to satisfy high-volume semiconductor manufacturing
applications for 200mm and smaller wafers. The Horizon 4000
Series provides many advanced automation capabilities, including
automatic probe-to-pad-alignment, in-process inspection and
optical character recognition (OCR), and a
temperature-controlled chuck top, providing the ability to
maintain precisely a customer-selected wafer temperature during
testing. The 4090u prober also offers an integrated
mini-environment and clean air system to provide a class 1
probing environment. The 4090fprober has a unique wafer
handling system that allows wafers to be probed which could not
normally be handled on an automated prober. The Horizon Series
utilizes the Companys EGCommandersystem software,
which allows significant application and customer driven
customization of the wafer prober and is compatible with the
standard MS-DOS operating system. In 2001, the Company released
a new version of the Companys EGCommandersoftware,
which runs under the Window-NT operating system. The user
interface features color graphics, touch screen programming,
probing recipes, control maps, and real-time maps. The Horizon
4000 Series probers feature a distributed multiple processor
architecture to maximize productivity and expandability.

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The EG4/200:Introduced in 1999, the EG4/200is targeted at high-end
probing applications for 200mm wafers. The EG4/200utilizes a unique probe-centered z-drive to
provide very low deflections even under extremely high probe
forces. This is important when testing multi-site or high pin
count devices. The EG4/200retains many of the features
of the Horizon 4090 series probers such as linear motor and
air-bearing positioning system. The EG4/200 uses a new
version of the Companys EGCommandersystem
software, which runs under the Windows-NT operating system.

EG5/300:Introduced
in 1999, the EG5/300is a new generation of wafer prober
from Electroglas. It is targeted at the emerging 300mm wafer
probing market. The EG5/300utilizes a completely new
system architecture that allows for faster and more accurate
probing over the larger wafer sizes. Closed loop motion control
and linear motors ensure precise wafer positioning over a wide
range of temperatures and operating conditions. A modular design
allows for configuration flexibility to meet the diverse needs
of the emerging 300mm market. A new version of the EG5/300system, named the Argos, was introduced in 2001. The Argos
model provides what the Company believes is the highest accuracy
capabilities available in the auto prober market. The EG5/300uses a new version of the Companys EGCommandersystem software, which runs under the Windows-NT operating
system.

EG5/300e and EG4/200e:The EG5/300e,introduced in
December 2000, and the EG4/200e, introduced in July 2001,
are targeted at the parametric test (e-test) segment
of the wafer probe market. The EG5/300e, based on the
EG5/300, is targeted at the emerging 300mm market. The
EG4/200e, based on the EG4/200platform is for the
200mm market. Both systems incorporate patented technology
licensed from our partner, Cascade Microtech Inc. This
technology allows extremely precise, low-level electrical
measurements to be made at the wafer level. This type of
electrical measurement performance is becoming increasingly
critical for advanced sub-micron semiconductor processes.

EGsoft
Software Products

EGsofts business focus is on Collaborative
Process Management, providing software tools and solutions for
semiconductor manufacturing. EGsofts collaborative
manufacturing tools deliver new ways of leveraging the Internet
and process management technologies. These tools allow
semiconductor manufacturers to convert data to corrective action
at any level from the process cell to the entire
manufacturing enterprise. EGsoft offers semiconductor makers a
complete software infrastructure that spans everything from IC
design-for-manufacturing to final test. EGsofts offerings
provide a software environment that connects people, equipment,
and processes throughout the fab and around the world. This
software infrastructure enables our customers to manage their
fabs more efficiently, to speed product cycles, and to improve
yield and profitability. EGsofts products include:
Collaborative Process Management Tools, Design for Manufacturing
software (CADNav  Merlin), Fab Solutions (YieldManager,
LCD-YM), and Test Solutions (SORTnet, SORTmanager).

Wafer
Inspection Products

The QuickSilver series of automated wafer
inspection products are designed for inspection of wafers in the
post fab environment. These products feature sophisticated
technologies such as Time Delay Integration (TDI) and
dedicated image processing systems that allow for high-speed
acquisition of complex images of the wafer surface. This
high-speed image acquisition allows the QuickSilver system to be
used in production applications, inspecting every die on every
wafer. The QuickSilver system can be configured for several
different inspection applications including solder bump, gold
bump, surface defect, and probemark inspection. An important
capability of the QuickSilver inspection systems is the ability
to train new products, review inspection results and
automatically classify defects. The QuickLook process
visualization station is offered to provide these capabilities
in an off-line mode, allowing users to get maximum utilization
on their QuickSilver inspection system.

7



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Engineering, Research and
Development

The market for semiconductor manufacturing
equipment is characterized by continuous technological
development and product innovation. The Company believes that
continued, timely development of new products and enhancements
to existing products is necessary to maintain its competitive
position. Accordingly, the Company devotes a significant portion
of its personnel and financial resources to engineering,
research and development programs. The Company uses its close
relationships with key customers to make product improvements
that respond to such customers needs.

Engineering, research and development expenses
were $31.6 million, $28.3 million and $26.9 million in
2001, 2000 and 1999, respectively, or 37.3%, 12.6% and 21.2% of
net sales, respectively. Engineering, research and development
expenses consist primarily of salaries, project materials,
consultant fees, and other costs associated with the
Companys ongoing efforts in hardware and software product
development and enhancement.

Marketing, Sales and Service

The Company primarily sells its products directly
to end-users and believes that using a direct sales force
provides a significant competitive advantage in communicating
with customers and responding to market demands. The Company
generally sells product on net 30-day terms to most customers.
Other, primarily foreign, customers are required to deliver a
letter of credit typically payable upon product delivery. The
Company generally warrants its products for a period of up to
12 months from shipment for material and labor repair.
Installation is customarily included in the price of the
product. The Companys field engineers provide customers
with call out repair and maintenance services for a fee.
Customers may enter into repair and maintenance service
contracts covering the Companys products. For a fee, the
Company trains customer employees to perform routine service.
Telephone consultation services are generally provided free of
charge.

In the United States, Electroglas maintains sales
and service offices in Arizona, California, Oregon,
Massachusetts and Texas. In Europe, the Company maintains sales
and service offices in France, Germany and the United Kingdom.
In Asia, the Company maintains direct sales and service offices
in Japan, Korea, Peoples Republic of China, Singapore and
Taiwan. As of December 31, 2001, the Company employed
approximately 196 people worldwide in sales, service,
applications, logistics, technical support, and customer service.

Customers

Electroglas sells its products to leading
semiconductor manufacturers throughout the world. In 2001,
STMicroelectronics accounted for 12% of net sales. In 2000,
STMicroelectronics, Philips and Atmel accounted for 18%, 14% and
13% of net sales, respectively. In 1999, STMicroelectronics and
IBM accounted for 19% and 14% of net sales, respectively.
International sales represented 51%, 53% and 38% of the
Companys net sales in 2001, 2000 and 1999, respectively.
These sales represent the combined total of export sales made by
United States operations and all sales made by foreign
operations.

Manufacturing and Suppliers

The Companys assembly equipment
manufacturing activities consist primarily of integrating
components and subassemblies to create finished prober systems,
spares and upgrades configured to customer specifications. The
Company schedules production based upon firm customer
commitments and anticipated orders during the planning cycle. In
January 2002, the Company announced plans to move prober
manufacturing from San Jose, California to Singapore. Certain of
the components and subassemblies included in the Companys
products are obtained from a single source. However, the Company
believes that alternative sources exist or can be developed, if
necessary.

Quality control is maintained through the
assembly and test process, with documented instructions and test
procedures and final inspection for all manufactured equipment
prior to shipment. The Company trains all of its employees in
basic quality skills and regularly participates in quality
sharing meetings with other

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equipment manufacturers and customer quality
audits of procedures and personnel. The Company is ISO 9001
Certified.


Backlog

The Companys backlog was $22.6 million
and $54.6 million as of December 31, 2001 and 2000,
respectively. The Companys backlog consists of product
orders for which a customer purchase order has been received or
a customer order has been communicated and which is scheduled
for shipment or is earned within the next twelve months. Orders
are subject to cancellation or rescheduling by the customer,
generally with a cancellation charge. Due to possible changes in
product delivery schedules and cancellation of product orders
and because the Companys sales will often reflect orders
shipped in the same quarter received, the Companys backlog
at any particular date is not necessarily indicative of actual
sales for any succeeding period. Backlog also includes deferred
revenue comprised of products shipped (but not recognizable as
revenue per the Companys revenue recognition policy),
maintenance revenue that is being amortized over twelve months
or less, and services earned or to be performed within the next
year.

Competition

The semiconductor equipment industry is highly
competitive. The principal competitive factors in the industry
are product performance, reliability, service and technical
support, product improvements, price, established relationships
with customers and product familiarity. The Company believes
that its products compete favorably with respect to each of
these factors.

The Companys major competitors in the
prober market segment are Tokyo Electron Limited
(TEL) and Tokyo Seimitsu (TSK). The
major competitor in the post fab inspection market segment is
August Technologies. The main competitors in the process
management software market segment are KLA-Tencor and HPL
Technologies. Some of the Companys competitors have
greater financial, engineering and manufacturing resources than
the Company as well as larger service organizations and
long-standing customer relationships. There can be no assurance
that levels of competition in the Companys particular
product market will not intensify or that the Companys
technological advantages will be reduced or lost as a result of
technological advances by competitors or changes in
semiconductor processing technology. (See Factors that May
Affect Results and Financial Condition  Highly
competitive industry, Japanese market segment and Japanese
competition.)

Patents, Trademarks, Copyrights and Other
Intellectual Property

The Company believes that the success of its
business depends more on the technical competence, creativity
and marketing abilities of its employees, rather than on
patents, trademarks and copyrights. Nevertheless, the Company
has a policy of seeking patents when appropriate on inventions
concerning new products and improvements as part of its ongoing
research, development and manufacturing activities. The Company
owns various patents and has applied for additional patent
protection in the United States and abroad for the technology in
its products. The Company also has several registered United
States and international trademarks. The Company maintains
unregistered copyrights on its software and typically maintains
the source code for its products as a trade secret.

The Company also relies upon trade secret
protection for its confidential and proprietary information. The
Company routinely enters into confidentiality agreements with
its employees. There can be no assurance, however, that others
will not independently gain information and techniques or
otherwise gain access to the Companys trade secrets or
that the Company can meaningfully protect its trade secrets.
(See Factors that May Affect Results and Financial
Condition  Patents and other intellectual
property.)

Employees

As of December 31, 2001, the Company
employed approximately 635 people. Many of the
Companys employees are highly skilled, and the
Companys success will depend in part upon its ability to
attract and retain such employees, who are in great demand. The
Company has never had a work stoppage or strike, and

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no employees are represented by a labor union or
covered by a collective bargaining agreement. The Company
considers its employee relations to be good.





Item 2.     Properties

In the first quarter of 2000, the Company
consolidated its executive office, manufacturing, engineering,
and research and development operations into an approximately
260,000 square foot facility located in San Jose,
California. This space is under a lease expiring in 2003, with
monthly rent payments based on the London Interbank Offering
Rate (LIBOR). At current interest rates and based on the lease
amount of $48.3 million at December 31, 2001, the
annual lease payments currently represent approximately
$1.3 million. In January 2002, the Company entered into a
three-year operating lease for a 39,000 square foot
manufacturing facility in Singapore with annual lease payments
of approximately $402,000. Management considers the above
facilities suitable and adequate to meet the Companys
requirements for the next twelve months and that suitable
additional or substitute space will be available as needed.




Item 3.     Legal
Proceedings

The Company is not currently involved in any
legal actions that it believes are material. From time to time,
however, the Company may be subject to various claims and
lawsuits by customers, suppliers, competitors, and employees
arising in the normal course of business, including suits
charging infringement or violations of antitrust laws. Such
suits may seek substantial damages and, in certain instances,
any damages awarded would be trebled.




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

No matters were submitted to a vote of the
security holders of the Company during the fourth quarter ended
December 31, 2001.




PART II




Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Market Prices for Common Stock

The Companys common stock is traded on the
Nasdaq National Market System under the symbol EGLS.
The following table sets forth for the periods indicated the
actual high and low sales prices per share of common stock as
reported on the Nasdaq National Market System:

|            |  |      |    |       |  |      |    |       |  |  |    |      |  |  |    |      
|----------- |  | ---- | -- | ----- |  | ---- | -- | ----- |  |  | -- | ---- |  |  | -- | -----
|            |  |      |    |      
|            |  | 2001 |    | 2000 
|            |  |      |    |      
|            |  | High |    | Low   |  | High |    | Low  
|            |  |      |    |       |  |      |    |      
|Fiscal Year |  |      |    |       |  |      |    |       |  |  |    |      |  |  |    |      
|1st Quarter |  |      | 19 | 1/8   |  |      | 14 | 11/16 |  |  | 43 | 7/16 |  |  | 22 | 1/8  
|2nd Quarter |  |      | 17 | 11/16 |  |      | 14 | 3/8   |  |  | 40 | 5/8  |  |  | 21 | 1/2  
|3rd Quarter |  |      | 17 | 9/16  |  |      | 12 |       |  |  | 25 | 3/16 |  |  | 17 | 1/16 
|4th Quarter |  |      | 16 | 1/16  |  |      | 12 | 1/8   |  |  | 17 | 5/16 |  |  | 12 | 15/16

On January 30, 2002, the closing price of
our common stock was $14.98.

The Company has never declared or paid cash
dividends on the shares of common stock and does not anticipate
paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the
development and growth of its business. As of January 30,
2002, the Company had approximately 8,000 shareholders of
record.

10



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##### Table of Contents






Item 6.     Selected
Financial Data

On December 3, 1999, the SEC Staff issued
Staff Accounting Bulletin (SAB 101), Revenue
Recognition in Financial Statements. The SEC Staff
addressed several issues in SAB 101, including the timing
for recognizing revenue derived from selling arrangements that
involve contractual customer acceptance provisions and
installation of the product if these events occur after shipment
and transfer of title. In connection with its adoption of
SAB 101, the Company recorded a non-cash charge of
$2.0 million, or ($0.09) per diluted share, to reflect the
cumulative effect of the accounting change as of the beginning
of the fiscal year 2000. The Companys revenue recognition
policies are disclosed in Note 1 to the Companys
Consolidated Financial Statements.

|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |        |         |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------- | ----------------------------------- | ------- | ------------------------------------- | ------- | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ----- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                                                                    |                                       |                                    
|                                                                                                    |                                       | Year Ended December 31,            
|                                                                                                    |                                       |                                    
|                                                                                                    |                                       | 2001                                |         | 2000                                  |         | 1999 |         | 1998   |        | 1997
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |     
|                                                                                                    |                                       |                                     |         |                                       |         |     
|                                                                                                    |                                       |                                     |         | (In thousands, except per share data) |         |     
|Selected consolidated financial data                                                                |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Net sales                                                                                           |                                       | $                                   | 84,662  |                                       |         | $    | 225,529 |        |        | $    | 126,695 |        |       | $ | 101,599 |        |         | $ | 150,035 |       
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Gross profit                                                                                        |                                       |                                     | 21,232  |                                       |         |      | 107,520 |        |        |      | 57,795  |        |       |   | 33,724  |        |         |   | 63,626  |       
|                                                                                                    | Engineering, research and development |                                     |         | 31,552                                |         |      |         | 28,336 |        |      |         | 26,865 |       |   |         | 30,538 |         |   |         | 21,897 |        
|                                                                                                    | Selling, general and administrative   |                                     |         | 38,890                                |         |      |         | 42,430 |        |      |         | 29,667 |       |   |         | 33,334 |         |   |         | 32,532 |        
|                                                                                                    | In-process research and development   |                                     |         | 281                                   |         |      |         |       |        |      |         |       |       |   |         |       |         |   |         | 27,029 |        
|                                                                                                    | Impairment of long-lived assets       |                                     |         |                                      |         |      |         |       |        |      |         |       |       |   |         | 9,578  |         |   |         |       |        
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Operating income (loss)                                                                             |                                       |                                     | (49,491 | )                                     |         |      | 36,754  |        |        |      | 1,263   |        |       |   | (39,726 | )      |         |   | (17,832 | )     
|Interest and other income, net                                                                      |                                       |                                     | 7,853   |                                       |         |      | 9,573   |        |        |      | 6,171   |        |       |   | 5,527   |        |         |   | 4,844   |       
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Income (loss) before income taxes                                                                   |                                       |                                     | (41,638 | )                                     |         |      | 46,327  |        |        |      | 7,434   |        |       |   | (34,199 | )      |         |   | (12,988 | )     
|Provision (benefit) for income
	taxes(1)                                                            |                                       |                                     | 16,431  |                                       |         |      | 3,854   |        |        |      | 1,858   |        |       |   | (2,614  | )      |         |   | 2,949   |       
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Income (loss) before cumulative effect of
	change in accounting principle                           |                                       |                                     | (58,069 | )                                     |         |      | 42,473  |        |        |      | 5,576   |        |       |   | (31,585 | )      |         |   | (15,937 | )     
|Cumulative effect of change in accounting
	principle, net of $0 tax                                 |                                       |                                     |        |                                       |         |      | (2,029  | )      |        |      |        |        |       |   |        |        |         |   |        |       
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|                                                                                                    |                                       | Net income (loss)(1)(2)(3)          |         | $                                     | (58,069 | )    |         | $      | 40,444 |      |         | $      | 5,576 |   |         | $      | (31,585 | ) |         | $      | (15,937 | )
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Basic net income (loss) per share before
	cumulative effect of change in accounting principle       |                                       | $                                   | (2.78   | )                                     |         | $    | 2.06    |        |        | $    | 0.28    |        |       | $ | (1.62   | )      |         | $ | (0.86   | )     
|Cumulative effect of change in accounting
	principle                                                |                                       |                                     |        |                                       |         |      | (0.10   | )      |        |      |        |        |       |   |        |        |         |   |        |       
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|                                                                                                    |                                       | Basic net income (loss) per share   |         | $                                     | (2.78   | )    |         | $      | 1.96   |      |         | $      | 0.28  |   |         | $      | (1.62   | ) |         | $      | (0.86   | )
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Diluted net income (loss) per share before
	cumulative effect of change in accounting principle     |                                       | $                                   | (2.78   | )                                     |         | $    | 2.01    |        |        | $    | 0.27    |        |       | $ | (1.62   | )      |         | $ | (0.86   | )     
|Cumulative effect of change in accounting
	principle                                                |                                       |                                     |        |                                       |         |      | (0.09   | )      |        |      |        |        |       |   |        |        |         |   |        |       
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|                                                                                                    |                                       | Diluted net income (loss) per share |         | $                                     | (2.78   | )    |         | $      | 1.92   |      |         | $      | 0.27  |   |         | $      | (1.62   | ) |         | $      | (0.86   | )
|                                                                                                    |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|Pro forma amounts assuming the accounting change
	for SAB 101 is applied retroactively (unaudited): |                                       |                                     |         |                                       |         |      |         |        |        |      |         |        |       |   |         |        |         |   |         |       
|                                                                                                    |                                       | Net income (loss)                   |         |                                       |         |      |         | $      | 42,473 |      |         | $      | 5,160 |   |         | $      | (32,377 | ) |         |        | *       |  
|                                                                                                    |                                       | Basic net income (loss) per share   |         |                                       |         |      |         | $      | 2.06   |      |         | $      | 0.26  |   |         | $      | (1.67   | ) |         |        | *       |  
|                                                                                                    |                                       | Diluted net income (loss) per share |         |                                       |         |      |         | $      | 2.01   |      |         | $      | 0.25  |   |         | $      | (1.67   | ) |         |        | *       |  
|Working capital                                                                                     |                                       | $                                   | 119,197 |                                       |         | $    | 215,629 |        |        | $    | 165,731 |        |       | $ | 136,643 |        |         | $ | 172,423 |       
|Total assets                                                                                        |                                       |                                     | 213,871 |                                       |         |      | 291,430 |        |        |      | 202,191 |        |       |   | 184,241 |        |         |   | 228,919 |       
|Short-term borrowings                                                                               |                                       |                                     | 1,171   |                                       |         |      | 1,232   |        |        |      | 1,624   |        |       |   | 566     |        |         |   | 1,160   |       
|Total equity                                                                                        |                                       |                                     | 179,816 |                                       |         |      | 234,029 |        |        |      | 177,338 |        |       |   | 167,667 |        |         |   | 199,734 |       



---



|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|* | Data was not available in sufficient detail to
	provide pro forma information for this year.



|    |                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Net loss for 2001 includes a charge of
	$15.6 million relating to the revaluation of the
	Companys deferred tax assets.                                                                                                                                                                                                            
|   
|(2) | Net loss for 1998 includes a $9.6 million
	pretax charge for impaired technology and intangibles related to
	previous acquisitions and a $8.1 million charge related to
	the revaluation of the Companys deferred tax assets.                                                                                                      
|   
|(3) | Net loss for 1997 includes pretax in-process
	research and development charges of $23.5 million and
	$3.5 million resulting from the acquisitions of Knights
	Technology, Inc. and Techné Systems, Inc., respectively. In
	addition, the Company incurred a $1.6 million pretax charge
	in 1997 for environmental remediation costs.

11



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##### Table of Contents



Unaudited Quarterly Consolidated Financial
Data

The Companys fiscal year end is
December 31. The Companys fiscal quarters end on the
Saturday nearest the end of the calendar quarters. For
convenience, the Company has indicated that its quarters end on
March 31, June 30 and September 30.

|                           |  |                                       |        |        |  |       |         |        |  |   |         |   |  |   |         |  
|-------------------------- |  | ------------------------------------- | ------ | ------ |  | ----- | ------- | ------ |  | - | ------- | - |  | - | ------- | -
|                           |  |                                      
|                           |  | Quarter                              
|                           |  |                                      
|                           |  | First                                 |        | Second |  | Third |         | Fourth
|                           |  |                                       |        |        |  |       |         |       
|                           |  |                                      
|                           |  | (In thousands, except per share data)
|2001                       |  |                                       |        |        |  |       |         |        |  |   |         |   |  |   |         |  
|Net sales                  |  | $                                     | 40,079 |        |  | $     | 21,919  |        |  | $ | 9,454   |   |  | $ | 13,210  |  
|Gross profit (loss)        |  |                                       | 15,155 |        |  |       | 5,213   |        |  |   | (120    | ) |  |   | 984     |  
|Net loss                   |  |                                       | (2,158 | )      |  |       | (26,895 | )      |  |   | (14,416 | ) |  |   | (14,600 | )
|Basic net loss per share   |  |                                       | (0.10  | )      |  |       | (1.29   | )      |  |   | (0.69   | ) |  |   | (0.70   | )
|Diluted net loss per share |  |                                       | (0.10  | )      |  |       | (1.29   | )      |  |   | (0.69   | ) |  |   | (0.70   | )

The following information demonstrates the
effects on the first three quarters of fiscal 2000 as if the
provisions of SAB 101 had been applied as of the beginning
of the fiscal year.

|                                                                   |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |        | 
|------------------------------------------------------------------ | ---------- | ---------- | ------ | ------------------------------------- |  | ---------- | ------ | -------- |  | ---------- | ------ | ----------- |  | ------ | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                   |            |           
|                                                                   |            | Quarter   
|                                                                   |            |           
|                                                                   |            |            |        |                                       |  |            |        |         
|                                                                   |            | First      |        | Second                                |  | Third      |        |         
|                                                                   |            |            |        |                                       |  |            |        |         
|                                                                   |            | As         |        |                                       |  | As         |        |          |  | As         |        |             |  |       
|                                                                   |            | Previously |        |                                       |  | Previously |        | As       |  | Previously |        |             |  |       
|                                                                   |            | Reported   |        | As Restated                           |  | Reported   |        | Restated |  | Reported   |        | As Restated |  | Fourth
|                                                                   |            |            |        |                                       |  |            |        |          |  |            |        |             |  |       
|                                                                   |            |            |        |                                       |  |            |        |         
|                                                                   |            |            |        | (In thousands, except per share data) |  |            |        |         
|2000                                                               |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|Net sales                                                          |            | $          | 53,367 |                                       |  | $          | 50,102 |          |  | $          | 59,088 |             |  | $      | 56,593 |        |  | $ | 58,015 |        |  | $ | 59,359 |        |  | $ | 59,475 |       
|Gross profit                                                       |            |            | 26,536 |                                       |  |            | 24,532 |          |  |            | 28,601 |             |  |        | 27,957 |        |  |   | 27,268 |        |  |   | 28,144 |        |  |   | 26,887 |       
|Income before cumulative effect of change in
	accounting principle |            |            | 9,624  |                                       |  |            | 8,807  |          |  |            | 11,959 |             |  |        | 11,602 |        |  |   | 10,612 |        |  |   | 11,936 |        |  |   | 10,128 |       
|Cumulative effect of change in accounting
	principle               |            |            |       |                                       |  |            | (2,029 | )        |  |            |       |             |  |        |       |        |  |   |       |        |  |   |       |        |  |   |       |       
|                                                                   |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                   | Net income |            | $      | 9,624                                 |  |            | $      | 6,778    |  |            | $      | 11,959      |  |        | $      | 11,602 |  |   | $      | 10,612 |  |   | $      | 11,936 |  |   | $      | 10,128 | 
|                                                                   |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|Amounts per common share (diluted):                                |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|Income before cumulative effect of change in
	accounting principle |            | $          | 0.45   |                                       |  | $          | 0.42   |          |  | $          | 0.56   |             |  | $      | 0.54   |        |  | $ | 0.50   |        |  | $ | 0.57   |        |  | $ | 0.49   |       
|Cumulative effect of change in accounting
	principle               |            |            |       |                                       |  |            | (0.10  | )        |  |            |       |             |  |        |       |        |  |   |       |        |  |   |       |        |  |   |       |       
|                                                                   |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |       
|                                                                   | Net income |            | $      | 0.45                                  |  |            | $      | 0.32     |  |            | $      | 0.56        |  |        | $      | 0.54   |  |   | $      | 0.50   |  |   | $      | 0.57   |  |   | $      | 0.49   | 
|                                                                   |            |            |        |                                       |  |            |        |          |  |            |        |             |  |        |        |        |  |   |        |        |  |   |        |        |  |   |        |       

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Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operation

The components of the Companys statements
of operations, expressed as a percentage of net sales, are as
follows:

|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |      |      |  
|------------------------------------------------------------------------- | ------------------------------------- | ------------------------ | ----- | ---- | ----- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                                          |                                       |                         
|                                                                          |                                       | Years Ended December 31,
|                                                                          |                                       |                         
|                                                                          |                                       | 2001                     |       | 2000 |       | 1999
|                                                                          |                                       |                          |       |      |       |     
|Net sales                                                                 |                                       |                          | 100.0 | %    |       |      | 100.0 | %    |      |   | 100.0 | %   
|Cost of sales                                                             |                                       |                          | 74.9  |      |       |      | 52.3  |      |      |   | 54.4  |     
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|Gross profit                                                              |                                       |                          | 25.1  |      |       |      | 47.7  |      |      |   | 45.6  |     
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|Operating expenses:                                                       |                                       |                          |       |      |       |      |       |      |      |   |       |     
|                                                                          | Engineering, research and development |                          |       | 37.3 |       |      |       | 12.6 |      |   |       | 21.2 |     
|                                                                          | Selling, general and administrative   |                          |       | 46.0 |       |      |       | 18.8 |      |   |       | 23.4 |     
|                                                                          | In-process research and development   |                          |       | 0.3  |       |      |       |     |      |   |       |     |     
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|                                                                          |                                       | Total operating expenses |       |      | 83.6  |      |       |      | 31.4 |   |       |      | 44.6 |  
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|Operating income (loss)                                                   |                                       |                          | (58.5 | )    |       |      | 16.3  |      |      |   | 1.0   |     
|Interest income                                                           |                                       |                          | 9.0   |      |       |      | 4.4   |      |      |   | 5.0   |     
|Other expense, net                                                        |                                       |                          | 0.3   |      |       |      | (0.2  | )    |      |   | (0.1  | )   
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|Income (loss) before income taxes                                         |                                       |                          | (49.2 | )    |       |      | 20.5  |      |      |   | 5.9   |     
|Provision for income taxes                                                |                                       |                          | 19.4  |      |       |      | 1.7   |      |      |   | 1.5   |     
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|Income (loss) before cumulative effect of
	change in accounting principle |                                       |                          | (68.6 | )    |       |      | 18.8  |      |      |   | 4.4   |     
|Cumulative effect of change in accounting
	principle, net of $0 tax       |                                       |                          |      |      |       |      | (0.9  | )    |      |   |      |     
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     
|                                                                          |                                       | Net income (loss)        |       |      | (68.6 | )%   |       |      | 17.9 | % |       |      | 4.4  | %
|                                                                          |                                       |                          |       |      |       |      |       |      |      |   |       |     

Results of Operations

Years Ended
December 31, 2001, 2000 and 1999

Critical Accounting Policies and
Estimates

General:Our
discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates, including those related to
revenue recognition, inventory valuation, warranties, allowances
for doubtful accounts, and minority equity investments. We base
our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.

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

Revenue recognition:We recognize revenue on the sale of
our semiconductor manufacturing equipment when we have received
a customer purchase order or contract, when we have delivered
the products or services, when we can be assured of the total
purchase price without making significant concessions and when
we are assured of our ability to collect from our customer. We
sell to an industry that is highly cyclical with periods of high
demand and significant oversupply. The companies in the industry
continue to consolidate as they are faced with rapidly
increasing capital requirements and expensive technological
change (our top five

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customers accounted for 39% and 56% of sales in
fiscal years 2001 and 2000). In recognizing revenue we make
certain assumptions and estimates, namely: for our legacy
products, we recognize revenue upon product shipment or delivery
on the basis that we have a legally enforceable claim on payment
and for our newer products, we recognize revenue upon signed
customer acceptance. With respect to the assumption of
collectibility from our customers, we assume, based on past
history, that we will continue to collect our receivables from
them without significant delays in payments or product
concessions, despite the fact that they have larger financial
size relative to us and despite our dependence on a them in a
heavily concentrated industry.


Inventory valuation:We value our inventories at the lower
of cost or market using the first-in, first-out method. We may
record charges to write down inventory due to excess, obsolete
and slow moving inventory based on an analysis of the impact of
changes in technology on our products, the timing of these
changes and our estimates of future sales volumes. These
projections of changes in technology and forecasts of future
sales are estimates. We typically use a rolling twelve month
forecast based on anticipated product orders, product order
history, forecasts and backlog to assess our inventory
requirements. We then consider current market conditions and the
timing and impact of technological change. At December 31,
2001, as a result of the downturn that affected the entire
semiconductor industry and as we do not expect significant
technological change in our legacy products in the next eighteen
months, we have valued inventory based on our rolling forecast
beyond twelve months. If there is continued weak demand in the
semiconductor equipment markets and orders fall below our
forecasts, additional write downs of inventories may be required
which may negatively impact gross margins in future periods.

Warranty:We
generally warrant our products for a period of twelve months and
we accrue a current liability for the estimated cost of warranty
upon shipment. For our legacy products this accrual is based on
historical experience and for our newer products this accrual is
based on estimates from similar products. In addition, from time
to time, specific warranty accruals may be made if an unforeseen
technical problem arises. If we experience unforeseen technical
problems with our products in future periods to meet our product
warranty requirements, revisions to our estimated cost of
warranty may be required, and our gross margins will be
negatively impacted.

Allowance for doubtful accounts:We monitor the collectibility of our
accounts receivable and record a reserve for doubtful accounts
against specifically identified amounts that we believe are
uncollectible. We sell primarily to large, well financed
semiconductor manufacturers and we have not experienced
significant doubtful accounts losses in the past. We have,
however, experienced slow downs in receivable collections,
especially in semiconductor equipment down cycles, as customers
extend their payment schedules to conserve their cash balances.
If our customers continue to experience down cycles or their
financial condition were to deteriorate, we may be required to
increase our reserve for doubtful accounts.

Minority equity investments:We have certain minority equity
investments in non-publicly traded companies that are recorded
at the original cost. In determining if and when a cost method
investees decline in value below cost is
other-than-temporary, we evaluate the market conditions,
offering prices, trends of earnings, price multiples, and other
key measures for our investments accounted for at cost. When we
believe such a decline to be other-than-temporary, we recognize
an impairment loss in the current periods operating
results to the extent of the decline. For securities that do not
have a readily determinable market price, we compare the net
carrying amount of our cost method investments to similar equity
securities with quoted prices when possible after giving effect
to differences in risk premiums, estimated future cash flows,
and other factors influencing the market value of the
securities. When comparisons to quoted securities are not
practical, we estimate the fair value based on recent sales and
purchases of similar unquoted equity securities, independent
appraisals, or internally prepared appraisals to estimate the
fair value.

Net Sales

Net sales were $84.7 million in 2001, down
62.5% from $225.5 million in 2000. Net sales were
$225.5 million in 2000, up 78.0% from $126.7 million
in 1999. During 1999 and 2000, the Company showed sequential
quarterly sales growth as customers continued to order test
expansion capacity to meet the growth

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in demand for semiconductors. During the fourth
quarter of 2000, and throughout 2001, the Company experienced a
slowdown in equipment orders as customers continued to curtail
their capital spending in response to persisting excess
production capacity conditions. Historically, the semiconductor
and semiconductor equipment industries have been cyclical. These
conditions adversely impacted the Companys sales for 2001
and are expected to continue into 2002. The Company continues to
have poor visibility with respect to the level of orders for the
coming quarters.


Net sales were comprised of prober and inspection
systems, EGsoft products, and aftermarket sales, consisting
primarily of service, spare parts and upgrades in support of the
prober and inspection businesses. Net sales for prober and
inspection systems were $53.1 million, $189.6 million
and $95.4 million in 2001, 2000 and 1999, respectively. Net
sales for EGsoft products were $8.5 million,
$8.5 million and $9.9 million in 2001, 2000 and 1999,
respectively. Net sales for aftermarket sales were
$23.1 million, $27.4 million and $21.4 million in
2001, 2000 and 1999, respectively. Service revenue was less than
10% of net sales in each year.

International sales represented 51%, 53% and 38%
of net sales for the years 2001, 2000 and 1999, respectively.
During 2001, the Company experienced weakness across its major
geographic regions. The decrease in the percentage of
international sales in 2001 from 2000 was due to a greater
decline in European and Asian-Pacific region sales relative to
the decline in North American sales. During 2000 and 1999, the
Company experienced sales growth, in absolute dollars, across
all of its major geographic markets. The increase in the
percentage of international sales in 2000 from 1999 was due to
an increase in the purchase of probers by major customers in
Europe and Asia. French sales included in international sales
represented 14%, 20% and 11% of the Companys net sales in
2001, 2000 and 1999, respectively. Sales to Japan were
denominated in Japanese yen. Sales to the rest of Asia and
Europe were primarily denominated in United States dollars,
except for France in which the invoiced currency was a mix
between the United States dollar and French franc. The Company
anticipates that international sales will continue to be a
significant portion of sales in 2002.

Gross Profit

Gross profit was 25.1%, 47.7% and 45.6% in 2001,
2000 and 1999, respectively. The decrease in gross profit in
2001 compared to 2000 was due primarily to reduced unit sales
volumes and high factory fixed costs as a percentage of total
costs. In addition, the Company wrote down inventories by
$6.7 million, $2.7 million and $1.2 million in
2001, 2000 and 1999, respectively. The Company periodically
reviews the carrying value of its inventories by evaluating
material usage and requirements to determine inventory
obsolescence and excess quantities, and reduces the inventory
value when appropriate. The Company increased its inventory
write downs in fiscal 2001 over the prior year as outlooks for
demand in semiconductor equipment in the current cyclical
downturn continued to be weak. The Company generally warrants
its products for a period of twelve months and accrues a current
liability for estimated cost of warranty upon shipment. Due to a
62% decrease in 2001 net sales, the accrued liability for
estimated cost of warranty was reduced by $1.3 million from
the previous year. The increase in gross profit in 2000 compared
to 1999 was due primarily to increased capacity utilization from
higher unit volume and lower material costs, offset partially by
lower selling prices from changes in product mix.

The Company believes that its gross profit will
continue to be affected by a number of factors, including
competitive pressures, changes in demand for semiconductors,
product mix, the proportion of international sales, the level of
software sales, and excess manufacturing capacity costs.
Continued weak demand and changes in market conditions may cause
orders to be below forecasts as was experienced throughout 2001,
which may result in excess inventory. Consequently, additional
write downs of inventories may be required, which may negatively
impact gross profit in future periods.

In January 2002, the Company announced plans to
move its prober manufacturing operations to Singapore to realize
potential cost savings of 10% to 20% once full production is
reached. The Company expects to record a restructuring charge of
$1.0 to $1.5 million in the first quarter of 2002 in
connection with this move. There is no assurance the Company
will realize cost savings from such a move and that expenses
related to the move will not adversely affect operating results.

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Engineering, Research and
Development

Engineering, research and development (ER&D)
expenses were 37.3%, 12.6% and 21.2%, as a percentage of sales,
for 2001, 2000 and 1999, respectively. In 2001, ER&D
expenses were $31.6 million, up 11.3% from
$28.3 million in 2000. This increase, as a percentage of
sales, was primarily due to lower sales volume in 2001, and the
increase in year over year spending resulted from increased
prototype expenses in 2001 related to new product development
programs, as well as increased personnel costs. In 2000,
ER&D expenses were $28.3 million, up 5.5% from
$26.9 million in 1999. This increase reflects ongoing
investment in new product development programs in both the
hardware and software businesses.

During the current business cycle downturn, the
Company intends to control discretionary expenses and continue
investing in its new product development programs. Engineering,
research and development expenses consist primarily of salaries,
project materials, consultant fees, and other costs associated
with the Companys ongoing efforts in hardware and software
product development and enhancement.

Selling, General and Administrative

Selling, general and administrative (SG&A)
expenses were 46.0%, 18.8% and 23.4%, as a percentage of sales,
in 2001, 2000 and 1999, respectively. In 2001, SG&A expenses
were $38.9 million, down 8.3% from $42.4 million in
2000. This decrease was primarily due to reduced employee
incentives and sales commissions, mandatory vacations and
curtailed discretionary spending. In 2000, SG&A expenses
were $42.4 million, up 43.0% from $29.7 million in
1999. This increase was primarily due to higher employee
incentives and sales commission costs and additional occupancy
expenses related to the Companys move to its new
facilities in San Jose, California.

In-process Research and Development

In-process research and development was
$0.3 million in 2001. This charge in 2001 resulted from the
write-off of in-process research and development costs in the
acquisition of Statware, Inc.

Interest Income

Interest income was $7.6 million,
$10.0 million and $6.3 million in 2001, 2000 and 1999,
respectively. The decrease in 2001 from 2000 was principally due
to declining interest rates and lower cash and short-term
investment balances. The increase in interest income from 1999
to 2000 was principally due to higher yielding instruments and
higher average cash balances.

Other Income (Expense), Net

Other income (expense), net was
$0.2 million, ($0.4) million, and ($0.2) million in 2001,
2000 and 1999, respectively. In 2001, these amounts consist
primarily of rental income from a facilities sublease offset by
foreign exchange losses.

Provision for Income Taxes

The income tax rate as a percentage of income
(loss) before taxes was 39.5%, 8.7% and 25.0%, for 2001,
2000 and 1999, respectively. The increase in the 2001 income tax
rate compared to 2000 reflects minimum state and foreign income
taxes plus an increase of $15.6 million in 2001 in the
valuation allowance against its net deferred tax assets to a
full valuation allowance in the amount of $45.8 million.
Realization of the Companys deferred tax assets depends on
the Company generating sufficient taxable income in future years
in appropriate tax jurisdictions to obtain benefit from the
reversal of temporary differences and from net operating loss
and credit carryforwards. Due to the uncertainty of the timing
and amount of such realization, management concluded that a full
valuation allowance was required at December 31, 2001. The
decrease in the 2000 income tax rate compared to 1999 reflects
the partial release of the valuation allowance related to net
operating losses and tax credit carryforwards and the
utilization of the 2000 estimated research and development tax
credits.

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Liquidity and Capital Resources

The Companys cash, cash equivalents,
short-term investments, and restricted cash were
$135.1 million at December 31, 2001, a decrease of
$29.4 million from $164.5 million at December 31, 2000.

Cash used in net operating activities was
$20.4 million for the year 2001. This was due to net loss
of $58.1 million offset primarily by noncash charges of
depreciation, amortization, write-off of in-process research and
development, and the loss on the sale of fixed assets to income
of $7.9 million, a decrease in operating assets of
$10.8 million, and a decrease in deferred income taxes of
$18.9 million. The net decrease in operating assets was
primarily due to the following: a decrease of $41.6 million
in accounts receivable resulting from a lower level of
shipments, a decrease of $7.7 million in accrued liabilities due
to lower employee incentives and decreased deferred revenue, a
decrease of $14.6 million in accounts payable due to a
reduction in inventory purchases, and an increase of
$7.5 million in inventories attributable primarily to
initial production of new products and a slowdown of business
during 2001.

Cash provided by investing activities was
$0.5 million due primarily to net investment maturities of
$58.5 million. This was offset by an increase in restricted
cash investments of $48.3 million, capital expenditures of
$8.2 million, principally for network infrastructure and
capitalized costs of purchasing and implementing the
Companys ERP system, other investments and license
payments of $0.9 million, and a net cash payment of
$0.6 million related to the Statware acquisition.

Cash provided by financing activities was
comprised of $0.9 million from the sale of common stock
under employee stock plans. This was offset by net payments of
$0.2 million on short-term borrowings by the Companys
Japanese subsidiary and the repayment of a bank loan assumed by
the Company in connection with the Statware acquisition. The
Companys Japanese subsidiary has credit facilities with a
total borrowing capacity of approximately $2.9 million
(denominated in yen) with two Japanese banks. A
$2.0 million cash collateral was placed by the Company with
the U.S. branch of one of the Japanese banks to guarantee one of
the facilities. As of December 31, 2001, $1.2 million
was outstanding under these facilities (at the current bank
interest rate of 1.9% at December 31, 2001) which are used
by the Companys Japanese subsidiary to finance its working
capital requirements.

In March 1997, the Company entered into a
$12.0 million, five-year operating lease for approximately
21.5 acres of land in San Jose, California. In July 1998,
the lease agreement was amended to provide a construction
allowance. The lease agreement was further amended and,
effective June 2001, required a mandatory collateralization of
$48.3 million, which was included in other assets as
restricted cash. This amendment also included an adjustment to
the interest rate and certain restrictions on the repurchase of
the Companys common stock. The monthly lease payments are
based on the London Interbank Offering Rate (LIBOR). At current
interest rates, as amended, and based on the lease amount of
$48.3 million at December 31, 2001, the annual lease
payments are approximately $1.3 million. These interest
rates are sensitive to inflation and other economic factors, and
a significant increase in interest rates may have a negative
impact on the earnings of the Company. At December 31,
2001, the Company was in compliance with the restrictive
covenants contained in the lease agreement. At the end of the
lease term, the guaranteed residual payment on the lease is
approximately $41.1 million and the Company has the option
to purchase the land and buildings for approximately
$48.3 million. The Company believes that the
propertys fair value is greater than the guaranteed
residual value at December 31, 2001. Demand for the
Companys products fluctuate with the semiconductor
business cycles and is expected to continue to fluctuate from
period to period. These fluctuations could have a negative
impact on the Companys operating results. There can be no
assurance that the Company will continue to be in compliance
with certain restrictive covenants related to its facilities
lease. In the event of non-compliance, the Company has the
option of renegotiating the lease or purchasing the land and
buildings for approximately $48.3 million.

In January 2002, the Company entered into a
three-year operating lease for a 39,000 square foot
manufacturing facility in Singapore with annual lease payments
of approximately $402,000. The Company expects to spend
approximately $4.5 million in 2002 for leasehold
improvements and equipment to outfit this facility.

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The Companys principal source of liquidity
as of December 31, 2001 consisted of $86.8 million of
cash, cash equivalents, and short-term investments. The Company
also has $48.3 million in cash equivalents fully
collateralizing its lease commitment on its San Jose facility.
Historically, the Company has generated cash in an amount
sufficient to fund its operations. The Company anticipates that
its existing capital resources and cash flow generated from
future operations will enable it to maintain its current level
of operations, its planned operations and its planned capital
expenditures for the foreseeable future, including its
significant contractual obligations and commercial commitments
as shown in the table below:

|                               |                        |                        |        |        |  |                |       |           |  |              |        |        |  |   |       |       |  |   |     |     | 
|------------------------------ | ---------------------- | ---------------------- | ------ | ------ |  | -------------- | ----- | --------- |  | ------------ | ------ | ------ |  | - | ----- | ----- |  | - | --- | --- | 
|                               |                        |                       
|                               |                        | Payments Due by Period
|                               |                        |                       
|                               |                        | Total                  |        | 1 year |  | 2-3 years      |       | 4-5 years |  | Over 5 years
|                               |                        |                        |        |        |  |                |       |           |  |             
|                               |                        |                        |        |        |  |                |       |          
|                               |                        |                        |        |        |  | (In thousands) |       |          
|Operating leases               |                        | $                      | 9,556  |        |  | $              | 3,988 |           |  | $            | 3,795  |        |  | $ | 1,665 |       |  | $ | 108 |    
|Singapore facility lease       |                        |                        | 1,206  |        |  |                | 301   |           |  |              | 402    |        |  |   | 402   |       |  |   | 101 |    
|Singapore capital expenditure  |                        |                        | 4,500  |        |  |                | 4,500 |           |  |              |       |        |  |   |      |       |  |   |    |    
|San Jose lease at maturity     |                        |                        | 48,300 |        |  |                |      |           |  |              | 48,300 |        |  |   |      |       |  |   |    |    
|Inventory purchase commitments |                        |                        | 4,500  |        |  |                | 4,500 |           |  |              |       |        |  |   |      |       |  |   |    |    
|                               |                        |                        |        |        |  |                |       |           |  |              |        |        |  |   |       |       |  |   |     |    
|                               | Total cash obligations |                        | $      | 68,062 |  |                | $     | 13,289    |  |              | $      | 52,497 |  |   | $     | 2,067 |  |   | $   | 209 | 
|                               |                        |                        |        |        |  |                |       |           |  |              |        |        |  |   |       |       |  |   |     |    

Impact of Recently Issued Accounting
Pronouncements

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141 (SFAS 141), Business Combinations.
SFAS 141 essentially eliminates the pooling-of-interests
method of accounting for business combinations and further
clarifies the criteria to recognize intangible assets separately
from goodwill. The requirements of Statement 141 are
effective for any business combination accounted for by the
purchase method that is completed after June 30, 2001. The
adoption of SFAS 141 will not have an impact on the
Companys financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. Under
SFAS 142, goodwill and indefinitely lived intangible assets
are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of
SFAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. The Company amortized goodwill and other
intangibles for all of fiscal 2001. The Company adopted
SFAS 142 beginning January 1, 2002. At
December 31, 2001, the Company had unamortized intangible
assets of $0.3 million that will be transferred to goodwill
upon adoption of SFAS 142 and unamortized goodwill of
$1.8 million that will no longer be amortized. The Company
will perform a transitional impairment review of goodwill by the
end of the second quarter of fiscal 2002 and the impact, if any,
will be reported in that quarter. Not having to amortize
goodwill during fiscal 2002 will favorably impact the results of
operations by approximately $0.6 million.

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001.
SFAS 144 addresses the financial accounting and reporting
requirements for disposal of long-lived assets and discontinued
operations. SFAS 144 applies to all recorded long-lived
assets that are held for use or that will be disposed of, but
excludes goodwill and other intangible assets that are not
amortized. The Company plans to adopt this Standard in fiscal
2002.

Factors that May Affect Results and Financial
Condition

Semiconductor industry downturns adversely
affect Electroglas revenues and operating
results.The Companys business
largely depends on capital expenditures by semiconductor
manufacturers, which in turn depend on the current and
anticipated market demand for integrated circuits and products
that use integrated circuits. The semiconductor industry is
highly cyclical and has historically experienced periods of
oversupply resulting in significantly reduced demand for capital
equipment. The timing, length and severity of the up-and-

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down cycles are difficult to predict and affect
the Companys ability to accurately forecast future
revenues and expense levels. During a down cycle, the Company
must be in a position to adjust its cost and expense structure
to prevailing market conditions. Its ability to reduce expenses
may be limited by the need to invest in the engineering,
research and development, and marketing required to penetrate
targeted foreign markets and maintain extensive customer service
and support. During periods of rapid growth, the Company must be
able to increase manufacturing capacity and personnel to meet
customer demand. There can be no assurance that these objectives
can be met, which would likely materially and adversely affect
the Companys business and operating results.


Variability and uncertainty of quarterly
operating results.The Company has
experienced and expects to continue to experience significant
fluctuations in its quarterly results. The Companys
backlog at the beginning of each quarter does not necessarily
determine actual sales for any succeeding period. The
Companys sales will often reflect orders shipped in the
same quarter that they are received. Moreover, customers may
cancel or reschedule shipments, and production difficulties
could delay shipments. Other factors that may influence the
Companys operating results in a particular quarter include
the timing of the receipt of orders from major customers,
product mix, competitive pricing pressures, the relative
proportions of domestic and international sales, the
Companys ability to design, manufacture and introduce new
products on a cost-effective and timely basis, the delay between
expenses to further develop marketing and service capabilities
and the realization of benefits from those improved
capabilities, and the introduction of new products by the
Companys competitors. Accordingly, the Companys
results of operations are subject to significant variability and
uncertainty from quarter to quarter.

Dependence on new products and processes.Electroglas believes that its future
success will depend in part upon its ability to continue to
enhance existing products and to develop and manufacture new
products, particularly those related to implementation of the
Companys strategy to become a process management tool
provider. As a result, the Company expects to continue to make a
significant investment in engineering, research and development.
There can be no assurance that the Company will be successful in
the introduction, marketing and cost effective manufacture of
any of its new products; that the Company will be able to
develop and introduce new products in a timely manner; enhance
its existing products and processes to satisfy customer needs or
achieve market acceptance; or that the new markets for which the
Company is developing new products or expects to sell current
products, such as the market for 300mm wafer probers, markets
related to the growth in the use of flip chips, and the market
for process management software will develop sufficiently. To
develop new products successfully, the Company depends on close
relationships with its customers and the willingness of those
customers to share information with the Company. The failure to
develop products and introduce them successfully and in a timely
manner could adversely affect the Companys competitive
position and results of operations.

Dependence on principal customers.For the years ended December 31,
2001, 2000 and 1999, five of the Companys customers
accounted for 39%, 56% and 52%, respectively, of its net sales.
In 2001, STMicroelectronics accounted for 12% of net sales. In
2000, STMicroelectronics, Philips and Atmel accounted for 18%,
14% and 13% of net sales, respectively. In 1999,
STMicroelectronics and IBM accounted for 19% and 14% of net
sales, respectively. If one or more of the Companys major
customers ceased or significantly curtailed its purchases, it
would likely have a material adverse effect on the
Companys results of operations.

Highly competitive industry.The Companys major competitors
in the prober market segment are Tokyo Electron Limited
(TEL) and Tokyo Seimitsu (TSK). The
major competitor in the post fab inspection market segment is
August Technologies. The main competitors in the process
management software market segment are KLA-Tencor and HPL
Technologies. Some of the Companys competitors have
greater financial, engineering and manufacturing resources than
the Company as well as larger service organizations and
long-standing customer relationships. The Companys
competitors can be expected to continue to improve the design
and performance of their products and to introduce new products
with competitive price/ performance characteristics. Competitive
pressures may force price reductions that could adversely affect
the Companys results of operations. Although the Company
believes it has certain technological and other advantages over
its competitors, maintaining and capitalizing on these
advantages will require the Company to continue a high level of
investment in engineering, research and development,

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marketing, and customer service and support.
There can be no assurance that the Company will have sufficient
resources to continue to make these investments or that the
Company will be able to make the technological advances
necessary to maintain such competitive advantages. (See
Business  Competition.)


Japanese market segment and Japanese
competition.Electroglas believes that
competing Japanese companies in the prober market segment have a
competitive advantage because they dominate the Japanese market
segment (comprised of semiconductor fabrication facilities
located in Japan and those located outside Japan that are
controlled by Japanese companies). Electroglas has found it
difficult to penetrate the large and technically advanced
Japanese market, which represents a substantial percentage of
the worldwide wafer prober market. (See
Business  Competition.) While Japanese
semiconductor manufacturers in recent years have begun to build
semiconductor fabrication facilities outside Japan, Electroglas
has not yet had significant sales into such facilities. Further,
Japanese semiconductor manufacturers have extended their
influence outside Japan by licensing products and process
technologies to non-Japanese semiconductor manufacturers; these
licenses typically include a recommendation to use wafer probers
and other semiconductor equipment manufactured by Japanese
companies. In particular, Electroglas may be at competitive
disadvantage with respect to the Japanese semiconductor capital
equipment suppliers who have been engaged for some time in
collaborative efforts with Japanese semiconductor manufacturers.
There can be no assurance that Electroglas will be able to
establish a significant presence in or ever compete successfully
in the Japanese market segment. In addition, to the extent that
the slowdown in the Japanese market segment has left the
Companys Japanese competitors with excess inventory or
excess capacity, they may offer substantial discounts on their
products, increasing pricing pressure in both the Japanese
market segment and elsewhere. Furthermore, weakness of the yen
compared to the dollar may exacerbate this situation.

Lease agreement and
covenants.The Company has a five-year
operating lease on its headquarters location expiring in 2003 as
discussed in Note 10 of the consolidated financial statements.
This lease agreement, as amended, requires the Company to
maintain certain financial ratios and a minimum level of net
worth and requires a full mandatory cash collateralization of
$48.3 million. Demand for the Companys products
fluctuate with the semiconductor business cycles and is expected
to continue to fluctuate from period to period. These
fluctuations could have a negative impact on the Companys
operating results and there can be no assurance that the Company
will continue to be in compliance with certain restrictive
covenants. In the event of non-compliance, the Company has the
option of renegotiating the lease, seeking waivers from its
lenders, or purchasing the land and buildings for approximately
$48.3 million. The Company believes its lenders will
provide it with waivers, if necessary, or allow the Company to
renegotiate the lease. Expectations of future operating results
and continued compliance with the lease covenants cannot be
assured and the Companys lenders actions are not
controllable by the Company. If the Companys projections
of future operating results are not achieved and/or it is deemed
to have violated one of the lease covenants or declared to be in
default under the lease, the Company would experience a material
adverse impact on its reported financial position and results of
operations could be negatively impacted.

Patents and other intellectual property.The Companys success depends in
significant part on its intellectual property. While the Company
attempts to protect its intellectual property through patents,
copyrights and trade secrets, it believes that its success will
depend more upon innovation, technological expertise and
distribution strength. There can be no assurance that the
Company will successfully protect its technology or that
competitors will not be able to develop similar technology
independently. No assurance can be given that the claims allowed
on any patents held by the Company will be sufficiently broad to
protect the Companys technology. In addition, no assurance
can be given that any patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the
Company.

Some customers using certain products of
Electroglas have received a notice of infringement from
Technivison Corporation and the Lemelson Medical Education &
Research Foundation (Lemelson) alleging that the
manufacture of semiconductor products infringes certain patents
currently held by Lemelson. Certain of these customers have
notified Electroglas that, in the event it is subsequently
determined that the customer infringes certain of the Lemelson
patents, they may seek reimbursement from Electroglas for some
damages or expenses resulting from this matter. Electroglas has
in turn notified its suppliers that, in the event,

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it is subsequently determined that its customers
are determined to infringe and that Electroglas is responsible
for any associated costs and fees, that it may seek
reimbursement for the resultant costs and fees. Electroglas
believes that its products do not infringe the Lemelson patents.
Certain of the Companys customers are currently engaged in
litigation with Lemelson involving 17 of its patents, and the
validity of those patents has been placed in issue. In the
future, it is possible that the Companys participation in
the litigation may be required. Electroglas may incur costs with
respect to such participation and cannot predict the outcome of
this or similar litigation or the effect of such litigation upon
Electroglas. To the best of the Companys knowledge,
Lemelson has not asserted that the Company may be liable for
infringing its patents.


Dependence on certain suppliers.Electroglas uses numerous suppliers to
supply components and subassemblies for the manufacture and
support of its products and systems. While Electroglas makes
reasonable efforts to ensure that such components and
subassemblies are available from multiple suppliers, this is not
always possible. The Company may obtain certain key items from a
single supplier or a limited group of suppliers. Cognex
Corporation supplies substantially all of the machine vision
processor systems used in the Companys products. Although
Electroglas seeks to reduce its dependence on these limited
source suppliers, disruption or termination of certain of these
sources could occur and such disruptions could have at least a
temporary adverse effect on the Companys results of
operations and damage customer relationships. Moreover, a
prolonged inability to obtain certain components, or a
significant increase in the price of one or more of these
components, could have a material adverse effect on the
Companys business, financial condition and results of
operations.

International operations.International sales accounted for 51%,
53% and 38% of the Companys net sales for 2001, 2000 and
1999, respectively. The Company expects international sales to
continue to represent a significant percentage of net sales. A
number of factors may adversely affect the Companys
international sales and operations, including the imposition of
governmental controls, fluctuations in the U.S. dollar, which
could increase the foreign sales prices of the Companys
products in local currencies, export license requirements,
restrictions on the export of technology, political instability,
trade restrictions, changes in tariffs, and difficulties in
staffing and managing international operations. Although these
and similar regulatory, geopolitical and global economic factors
have not yet had a material adverse effect on the Companys
operations, there can be no assurance that such factors will not
adversely impact the Companys operations in the future or
require the Company to modify its current business practices. In
addition, the laws of certain foreign countries may not protect
the Companys intellectual property rights to the same
extent as do the laws of the United States.

Manufacturing probers in
Singapore.In January 2002, the
Company announced plans to move prober manufacturing to
Singapore to realize potential cost savings of 10% to 20% once
full production is reached. The Company expects to record a
restructuring charge of $1.0 to $1.5 million in the first
quarter of 2002 in connection with this move. There is no
assurance the Company will realize cost savings and that
expenses related to the move will not adversely affect operating
results.

Dependence on key employees.The future success of Electroglas
partly depends on its ability to retain key personnel. The
Company also needs to attract additional skilled personnel in
all areas to grow its business. While many of the Companys
current employees have many years of service with Electroglas,
there can be no assurance that the Company will be able to
retain its existing personnel or attract additional qualified
employees in the future.

Acquisitions.The
Company may pursue acquisitions of complementary product lines,
technologies or businesses such as the acquisitions of Knights
and Techné in 1997 and Statware in 2001. Acquisitions by
the Company may result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent
liabilities, and amortization expenses related to intangible
assets, which could materially adversely affect the
Companys profitability. In 1998, the Company recorded
asset impairment charges of $9.6 million, related
principally to acquired goodwill and other intangible assets in
connection with the Knights and Techné acquisitions. The
Company may experience similar charges related to future
acquisitions. Current or future acquisitions involve numerous
risks, including difficulties in the assimilation of the
operations, technologies and products of the acquired companies,
the diversion of managements attention from other business

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concerns, risks of entering markets in which the
Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. There
can be no assurances as to the effect thereof of these, or
future, acquisitions on the Companys business or operating
results.


Possible volatility of common stock price.The market price of Electroglas Common
Stock could fluctuate significantly in response to variations in
quarterly operating results and other factors such as
announcements of technological innovations or new products by
the Company or by the Companys competitors, government
regulations, developments in patent or other property rights,
and developments in the Companys relationships with its
customers. In addition, the stock market has in recent years
experienced significant price fluctuations. These fluctuations
often have been unrelated to the operating performance of the
specific companies whose stock is traded. Broad market
fluctuations, general economic conditions, and specific
conditions in the semiconductor industry may adversely affect
the market price of the Companys Common Stock.

Antitakeover provisions.The Companys Shareholders Rights
Plan and certain provisions of the Companys Certificate of
Incorporation and Delaware law could discourage potential
acquisition proposals and could delay or prevent a change in
control of Electroglas. Such provisions could diminish the
opportunities for a stockholder to participate in tender offers,
including tender offers at a price above the then current market
value of Electroglas Common Stock. Such provisions may also
inhibit fluctuations in the market price of Electroglas Common
Stock that could result from takeover attempts. In addition, the
Board of Directors, without further stockholder approval, may
issue additional series of preferred stock that could have the
effect of delaying, deterring or preventing a change in control
of Electroglas. The issuance of additional series of preferred
stock could also adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to
others. The Company has no current plans to issue any Preferred
Stock.






Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk


Interest Rate
Risk

At December 31, 2001, the Companys
cash equivalents, restricted cash, and short-term investments
consisted primarily of fixed income securities. The Company
maintains a strict investment policy, which ensures the safety
and the preservation of its invested funds by limiting default
risk, market risk and reinvestment risk. The portfolio includes
only marketable securities with active secondary or resale
markets. These securities are subject to interest rate risk and
may decline in value when interest rates change. The table below
presents notional amounts and related weighted-average interest
rates by year of maturity for the Companys investment
portfolio.

|                                     |              |      |   |                        |   |       |   |            |   |  |   |         |   |  |   |         | 
|------------------------------------ | ------------ | ---- | - | ---------------------- | - | ----- | - | ---------- | - |  | - | ------- | - |  | - | ------- | 
|                                     |              | 2002 |   | 2003                   |   | Total |   | Fair Value
|                                     |              |      |   |                        |   |       |   |           
|                                     |              |      |   |                        |   |      
|                                     |              |      |   | (Dollars in thousands) |   |      
|Cash equivalents and restricted cash |              |      |   |                        |   |       |   |            |   |  |   |         |   |  |   |        
|                                     | Fixed rate   |      | $ | 82,320                 |   |       | $ |           |   |  | $ | 82,320  |   |  | $ | 82,320  | 
|                                     | Average rate |      |   | 2.32                   | % |       |   |           |   |  |   | 2.32    | % |  |   |        | 
|Short-term investments               |              |      |   |                        |   |       |   |            |   |  |   |         |   |  |   |        
|                                     | Fixed rate   |      | $ | 30,988                 |   |       | $ | 14,810     |   |  | $ | 45,798  |   |  | $ | 46,219  | 
|                                     | Average rate |      |   | 5.19                   | % |       |   | 5.14       | % |  |   | 5.17    | % |  |   |        | 
|Total Investment Securities          |              |      |   |                        |   |       |   |            |   |  |   |         |   |  |   |        
|                                     | Fixed rate   |      | $ | 113,308                |   |       | $ | 14,810     |   |  | $ | 128,118 |   |  | $ | 128,539 | 
|                                     | Average rate |      |   | 3.10                   | % |       |   | 5.14       | % |  |   | 3.34    | % |  |   |        | 

Foreign
Currency Exchange Rate Risk

The current foreign exchange exposure in all
international operations is deemed to be immaterial. The Company
believes the impact of a 10% change in exchange rates would not
be material to the Companys financial condition and
results of operations. Accordingly, the Company does not use
derivative financial instruments to hedge its current foreign
exchange exposure. (See Note 1 to the Companys
Consolidated Financial Statements  Summary of
Significant Accounting Policies, Foreign currency accounting.)

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Item 8.     Financial
Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE

|                                                                                                              |  |       |    | 
|------------------------------------------------------------------------------------------------------------- |  | ----- | -- | 
|                                                                                                              |  | Pages
|                                                                                                              |  |      
|Consolidated financial statements:                                                                            |  |       |    | 
|Consolidated statements of operations 
	Years ended December 31, 2001, 2000 and 1999.                        |  |       | 24 | 
|Consolidated balance sheets 
	December 31, 2001 and 2000.                                                    |  |       | 25 | 
|Consolidated statements of stockholders
	equity  Years ended December 31, 2001, 2000 and
	1999.             |  |       | 26 | 
|Consolidated statements of cash flows 
	Years ended December 31, 2001, 2000 and 1999.                        |  |       | 27 | 
|Notes to consolidated financial statements                                                                    |  |       | 28 | 
|Report of Ernst & Young LLP, Independent
	Auditors                                                            |  |       | 43 | 
|Financial statement schedule:                                                                                 |  |       |    | 
|Schedule II  Consolidated
	valuation and qualifying accounts  Years ended
	December 31, 2001, 2000 and 1999 |  |       | 44 | 

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ELECTROGLAS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |        |        | 
|---------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                                 |                                       |                                      
|                                                                                                                 |                                       | Years Ended December 31,             
|                                                                                                                 |                                       |                                      
|                                                                                                                 |                                       | 2001                                  |         | 2000   |        | 1999
|                                                                                                                 |                                       |                                       |         |        |        |     
|                                                                                                                 |                                       |                                      
|                                                                                                                 |                                       | (In thousands, except per share data)
|Net sales (see Related Party Transactions
	Note 11)                                                              |                                       | $                                     | 84,662  |        |        | $    | 225,529 |        |        | $ | 126,695 |       
|Cost of sales (see Related Party Transactions
	Note 11)                                                          |                                       |                                       | 63,430  |        |        |      | 118,009 |        |        |   | 68,900  |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Gross profit                                                                                                     |                                       |                                       | 21,232  |        |        |      | 107,520 |        |        |   | 57,795  |       
|Operating expenses:                                                                                              |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                 | Engineering, research and development |                                       |         | 31,552 |        |      |         | 28,336 |        |   |         | 26,865 |       
|                                                                                                                 | Selling, general and administrative   |                                       |         | 38,890 |        |      |         | 42,430 |        |   |         | 29,667 |       
|                                                                                                                 | In-process research and development   |                                       |         | 281    |        |      |         |       |        |   |         |       |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                 |                                       | Total operating expenses              |         |        | 70,723 |      |         |        | 70,766 |   |         |        | 56,532 | 
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Operating income (loss)                                                                                          |                                       |                                       | (49,491 | )      |        |      | 36,754  |        |        |   | 1,263   |       
|Interest income                                                                                                  |                                       |                                       | 7,639   |        |        |      | 9,976   |        |        |   | 6,347   |       
|Other income (expense), net                                                                                      |                                       |                                       | 214     |        |        |      | (403    | )      |        |   | (176    | )     
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Income (loss) before income taxes                                                                                |                                       |                                       | (41,638 | )      |        |      | 46,327  |        |        |   | 7,434   |       
|Provision for income taxes                                                                                       |                                       |                                       | 16,431  |        |        |      | 3,854   |        |        |   | 1,858   |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Income (loss) before cumulative effect of
	change in accounting principle                                        |                                       |                                       | (58,069 | )      |        |      | 42,473  |        |        |   | 5,576   |       
|Cumulative effect of change in accounting
	principle, net of $0 tax                                              |                                       |                                       |        |        |        |      | (2,029  | )      |        |   |        |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Net income (loss)                                                                                                |                                       | $                                     | (58,069 | )      |        | $    | 40,444  |        |        | $ | 5,576   |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Basic net income (loss) per share before
	cumulative effect of change in accounting principle                    |                                       | $                                     | (2.78   | )      |        | $    | 2.06    |        |        | $ | 0.28    |       
|Cumulative effect of change in accounting
	principle                                                             |                                       |                                       |        |        |        |      | (0.10   | )      |        |   |        |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Basic net income (loss) per share                                                                                |                                       | $                                     | (2.78   | )      |        | $    | 1.96    |        |        | $ | 0.28    |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Diluted net income (loss) per share before
	cumulative effect of change in accounting principle                  |                                       | $                                     | (2.78   | )      |        | $    | 2.01    |        |        | $ | 0.27    |       
|Cumulative effect of change in accounting
	principle                                                             |                                       |                                       |        |        |        |      | (0.09   | )      |        |   |        |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Diluted net income (loss) per share                                                                              |                                       | $                                     | (2.78   | )      |        | $    | 1.92    |        |        | $ | 0.27    |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Shares used in basic calculations                                                                                |                                       |                                       | 20,910  |        |        |      | 20,616  |        |        |   | 19,591  |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|Shares used in diluted calculations                                                                              |                                       |                                       | 20,910  |        |        |      | 21,104  |        |        |   | 20,278  |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                
|Pro forma amounts assuming the accounting change
	for SAB 101 is applied retroactively (unaudited) (see Note 1): |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                 | Net income                            |                                       |         |        |        |      | $       | 42,473 |        |   | $       | 5,160  |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                 | Basic net income per share            |                                       |         |        |        |      | $       | 2.06   |        |   | $       | 0.26   |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       
|                                                                                                                 | Diluted net income per share          |                                       |         |        |        |      | $       | 2.01   |        |   | $       | 0.25   |       
|                                                                                                                 |                                       |                                       |         |        |        |      |         |        |        |   |         |       

See the accompanying notes to consolidated
financial statements.

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ELECTROGLAS, INC.

CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                            |                                            |        |         |         |  |        |         |         | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------- | ------- |  | ------ | ------- | ------- | 
|                                            |                                                                                                            |                                           
|                                            |                                                                                                            | December 31,                              
|                                            |                                                                                                            |                                           
|                                            |                                                                                                            | 2001                                       |        | 2000   
|                                            |                                                                                                            |                                            |        |        
|                                            |                                                                                                            |                                           
|                                            |                                                                                                            | (In thousands, except per                 
|                                            |                                                                                                            | share data)                               
|ASSETS                                     
|                                           
|Current assets:                             |                                                                                                            |                                            |        |         |         |  |        |        
|                                            | Cash and cash equivalents                                                                                  |                                            | $      | 40,565  |         |  | $      | 59,648  |        
|                                            | Short-term investments                                                                                     |                                            |        | 46,219  |         |  |        | 104,825 |        
|                                            | Accounts receivable, net of allowance for
	doubtful accounts of $423 and $489                              |                                            |        | 12,053  |         |  |        | 53,324  |        
|                                            | Inventories                                                                                                |                                            |        | 40,249  |         |  |        | 32,751  |        
|                                            | Prepaid expenses and other assets                                                                          |                                            |        | 1,572   |         |  |        | 8,513   |        
|                                            |                                                                                                            |                                            |        |         |         |  |        |        
|                                            |                                                                                                            | Total current assets                       |        |         | 140,658 |  |        |         | 259,061 | 
|Restricted cash                             |                                                                                                            |                                            | 48,300 |         |         |  |       |        
|Equipment and leasehold improvements, net   |                                                                                                            |                                            | 16,100 |         |         |  | 13,418 |        
|Other assets (see Notes 5 and 11)           |                                                                                                            |                                            | 8,813  |         |         |  | 18,951 |        
|                                            |                                                                                                            |                                            |        |         |         |  |        |        
|                                            |                                                                                                            | Total assets                               |        | $       | 213,871 |  |        | $       | 291,430 | 
|                                            |                                                                                                            |                                            |        |         |         |  |        |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY      
|                                           
|Current liabilities:                        |                                                                                                            |                                            |        |         |         |  |        |        
|                                            | Short-term borrowings                                                                                      |                                            | $      | 1,171   |         |  | $      | 1,232   |        
|                                            | Accounts payable (see Related Party Transactions
	Note 11)                                                 |                                            |        | 3,461   |         |  |        | 17,929  |        
|                                            | Accrued liabilities                                                                                        |                                            |        | 16,829  |         |  |        | 24,271  |        
|                                            |                                                                                                            |                                            |        |         |         |  |        |        
|                                            |                                                                                                            | Total current liabilities                  |        |         | 21,461  |  |        |         | 43,432  | 
|Non-current liabilities                     |                                                                                                            |                                            | 12,594 |         |         |  | 13,969 |        
|Commitments and contingencies (see Note 10) |                                                                                                            |                                            |        |         |         |  |        |        
|Stockholders equity:                       |                                                                                                            |                                            |        |         |         |  |        |        
|                                            | Preferred stock, $0.01 par value; authorized
	shares 1,000; none outstanding                               |                                            |        |        |         |  |        |        |        
|                                            | Common stock, $0.01 par value; authorized shares
	40,000; issued and outstanding shares: 21,236 and 21,006 |                                            |        | 212     |         |  |        | 210     |        
|                                            | Additional paid-in capital                                                                                 |                                            |        | 155,836 |         |  |        | 152,337 |        
|                                            | Retained earnings                                                                                          |                                            |        | 26,129  |         |  |        | 84,198  |        
|                                            | Accumulated other comprehensive loss                                                                       |                                            |        | (65     | )       |  |        | (420    | )      
|                                            | Cost of common stock in treasury; 155 shares                                                               |                                            |        | (2,296  | )       |  |        | (2,296  | )      
|                                            |                                                                                                            |                                            |        |         |         |  |        |        
|                                            |                                                                                                            | Total stockholders equity                 |        |         | 179,816 |  |        |         | 234,029 | 
|                                            |                                                                                                            |                                            |        |         |         |  |        |        
|                                            |                                                                                                            | Total liabilities and stockholders equity |        | $       | 213,871 |  |        | $       | 291,430 | 
|                                            |                                                                                                            |                                            |        |         |         |  |        |        

See the accompanying notes to consolidated
financial statements.

25



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##### Table of Contents



ELECTROGLAS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|---------------------------------------------------- |  | -------------- | ------ | ---------- |  | -------- | --- | ------------ |  | ------------- | ------- | -------------- |  | ------------- | ---- | ------ |  | ------ | ------- | - |  | - | ---- | - |  |  | ---- | - |  | - | ------ | - |  | - | ------- | -
|                                                     |  |                |        |            |  |          |     |              |  | Accumulated   |         |                |  |              
|                                                     |  | Common Stock   |        | Additional |  | Deferred |     |              |  | Other         |         | Treasury Stock |  | Total        
|                                                     |  |                |        | Paid-in    |  | Stock    |     | Retained     |  | Comprehensive |         |                |  | Stockholders
|                                                     |  | Shares         |        | Amount     |  | Capital  |     | Compensation |  | Earnings      |         | Income/(Loss)  |  | Shares        |      | Amount |  | Equity
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |       
|                                                     |  |               
|                                                     |  | (In thousands)
|Balance at January 1, 1999                           |  |                | 19,860 |            |  | $        | 199 |              |  | $             | 130,927 |                |  | $             | (688 | )      |  | $      | 38,178  |   |  | $ | (128 | ) |  |  | (62  | ) |  | $ | (821   | ) |  | $ | 167,667 |  
|Net income                                           |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        | 5,576   |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 5,576   |  
|Net unrealized losses on investments                 |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        |        |   |  |   | (350 | ) |  |  |     |   |  |   |       |   |  |   | (350    | )
|Net translation adjustments                          |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        |        |   |  |   | (123 | ) |  |  |     |   |  |   |       |   |  |   | (123    | )
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Total comprehensive income                           |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   | 5,103   |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Amortization of deferred compensation                |  |                |       |            |  |          |    |              |  |               |        |                |  |               | 295  |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 295     |  
|Issuance of common stock under employee stock
	plans |  |                | 381    |            |  |          | 3   |              |  |               | 5,230   |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 5,233   |  
|Tax benefit of stock option exercises                |  |                |       |            |  |          |    |              |  |               | 515     |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 515     |  
|Purchase of treasury stock                           |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  | (71  | ) |  |   | (1,029 | ) |  |   | (1,029  | )
|Settlement of escrow shares                          |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  | (22  | ) |  |   | (446   | ) |  |   | (446    | )
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Balance at December 31, 1999                         |  |                | 20,241 |            |  |          | 202 |              |  |               | 136,672 |                |  |               | (393 | )      |  |        | 43,754  |   |  |   | (601 | ) |  |  | (155 | ) |  |   | (2,296 | ) |  |   | 177,338 |  
|Net income                                           |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        | 40,444  |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 40,444  |  
|Net unrealized gains on investments                  |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        |        |   |  |   | 181  |   |  |  |     |   |  |   |       |   |  |   | 181     |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Total comprehensive income                           |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   | 40,625  |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Amortization of deferred compensation                |  |                |       |            |  |          |    |              |  |               |        |                |  |               | 393  |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 393     |  
|Issuance of common stock under employee stock
	plans |  |                | 765    |            |  |          | 8   |              |  |               | 11,522  |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 11,530  |  
|Tax benefit of stock option exercises                |  |                |       |            |  |          |    |              |  |               | 4,143   |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 4,143   |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2000                         |  |                | 21,006 |            |  |          | 210 |              |  |               | 152,337 |                |  |               |     |        |  |        | 84,198  |   |  |   | (420 | ) |  |  | (155 | ) |  |   | (2,296 | ) |  |   | 234,029 |  
|Net loss                                             |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        | (58,069 | ) |  |   |     |   |  |  |     |   |  |   |       |   |  |   | (58,069 | )
|Net unrealized gains on investments                  |  |                |       |            |  |          |    |              |  |               |        |                |  |               |     |        |  |        |        |   |  |   | 355  |   |  |  |     |   |  |   |       |   |  |   | 355     |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Total comprehensive loss                             |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   | (57,714 | )
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Issuance of common stock under employee stock
	plans |  |                | 68     |            |  |          |    |              |  |               | 930     |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 930     |  
|Acquisition of Statware                              |  |                | 162    |            |  |          | 2   |              |  |               | 2,569   |                |  |               |     |        |  |        |        |   |  |   |     |   |  |  |     |   |  |   |       |   |  |   | 2,571   |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2001                         |  |                | 21,236 |            |  | $        | 212 |              |  | $             | 155,836 |                |  | $             |     |        |  | $      | 26,129  |   |  | $ | (65  | ) |  |  | (155 | ) |  | $ | (2,296 | ) |  | $ | 179,816 |  
|                                                     |  |                |        |            |  |          |     |              |  |               |         |                |  |               |      |        |  |        |         |   |  |   |      |   |  |  |      |   |  |   |        |   |  |   |         |  

See the accompanying notes to consolidated
financial statements.

26



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##### Table of Contents



ELECTROGLAS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |        |         |  
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------------------------- | -------- | ------ | ------- | ---- | -------- | ------- | ------- | - | -------- | ------ | ------- | -
|                                                                                          |                                                                      |                                              
|                                                                                          |                                                                      | December 31,                                 
|                                                                                          |                                                                      |                                              
|                                                                                          |                                                                      | 2001                                          |          | 2000   |         | 1999
|                                                                                          |                                                                      |                                               |          |        |         |     
|                                                                                          |                                                                      |                                              
|                                                                                          |                                                                      | (In thousands)                               
|Cash flows from operating activities                                                      |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Net income (loss)                                                                         |                                                                      | $                                             | (58,069  | )      |         | $    | 40,444   |         |         | $ | 5,576    |       
|Adjustments to reconcile net income
	(loss) to net cash provided by operating activities: |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|                                                                                          | Depreciation                                                         |                                               |          | 5,483  |         |      |          | 5,838   |         |   |          | 6,903  |        
|                                                                                          | Amortization                                                         |                                               |          | 2,086  |         |      |          | 950     |         |   |          | 1,676  |        
|                                                                                          | Write-off of in-process research and development                     |                                               |          | 281    |         |      |          |        |         |   |          |       |        
|                                                                                          | Loss (gain) on disposal of fixed assets                              |                                               |          | 39     |         |      |          | 148     |         |   |          | (603   | )      
|                                                                                          | Deferred income taxes                                                |                                               |          | 18,925 |         |      |          | (19,431 | )       |   |          | (3     | )      
|                                                                                          | Deferred revenue  non-current                                       |                                               |          | (1,375 | )       |      |          | 2,672   |         |   |          | 1,813  |        
|                                                                                          | Changes in current assets and liabilities:                           |                                               |          |        |         |      |          |         |         |   |          |        |        
|                                                                                          |                                                                      | Accounts receivable                           |          |        | 41,587  |      |          |         | (24,332 | ) |          |        | (17,047 | )
|                                                                                          |                                                                      | Inventories                                   |          |        | (7,498  | )    |          |         | (18,956 | ) |          |        | (439    | )
|                                                                                          |                                                                      | Prepaid expenses and other current assets     |          |        | 370     |      |          |         | 988     |   |          |        | (876    | )
|                                                                                          |                                                                      | Accounts payable                              |          |        | (14,571 | )    |          |         | 8,855   |   |          |        | 6,336   |  
|                                                                                          |                                                                      | Accrued liabilities                           |          |        | (7,677  | )    |          |         | 21,234  |   |          |        | (925    | )
|                                                                                          |                                                                      | Income tax benefits from employee stock plans |          |        |        |      |          |         | 4,143   |   |          |        | 515     |  
|                                                                                          |                                                                      | Income taxes receivable/payable               |          |        | 12      |      |          |         | 1,280   |   |          |        | 9,840   |  
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|                                                                                          |                                                                      |                                               | (20,407  | )      |         |      | 23,833   |         |         |   | 12,766   |       
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Cash flows from investing activities                                                      |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Capital expenditures                                                                      |                                                                      |                                               | (8,192   | )      |         |      | (11,223  | )       |         |   | (3,148   | )     
|Purchases of investments, available-for-sale                                              |                                                                      |                                               | (117,574 | )      |         |      | (203,174 | )       |         |   | (223,957 | )     
|Maturities of investments, available-for-sale                                             |                                                                      |                                               | 176,094  |        |         |      | 178,794  |         |         |   | 243,747  |       
|Decrease (increase) in restricted cash                                                    |                                                                      |                                               | (48,300  | )      |         |      |         |         |         |   | 17,712   |       
|Minority investments and related license payments
	(see Notes 5 and 11)                   |                                                                      |                                               | (900     | )      |         |      | (500     | )       |         |   | (4,530   | )     
|Acquisition of Statware, net of cash acquired                                             |                                                                      |                                               | (561     | )      |         |      |         |         |         |   |         |       
|Other assets                                                                              |                                                                      |                                               | (15      | )      |         |      | 36       |         |         |   | 60       |       
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|                                                                                          |                                                                      |                                               | 552      |        |         |      | (36,067  | )       |         |   | 29,884   |       
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Cash flows from financing activities                                                      |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Net proceeds (payments) from short-term
	borrowings                                       |                                                                      |                                               | (221     | )      |         |      | (392     | )       |         |   | 1,058    |       
|Sales of common stock                                                                     |                                                                      |                                               | 930      |        |         |      | 11,530   |         |         |   | 5,233    |       
|Purchases of treasury stock                                                               |                                                                      |                                               |         |        |         |      |         |         |         |   | (1,029   | )     
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|                                                                                          |                                                                      |                                               | 709      |        |         |      | 11,138   |         |         |   | 5,262    |       
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Effect of exchange rate changes                                                           |                                                                      |                                               | 63       |        |         |      | 12       |         |         |   | (146     | )     
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Net increase (decrease) in cash and cash
	equivalents                                     |                                                                      |                                               | (19,083  | )      |         |      | (1,084   | )       |         |   | 47,766   |       
|Cash and cash equivalents at beginning of year                                            |                                                                      |                                               | 59,648   |        |         |      | 60,732   |         |         |   | 12,966   |       
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Cash and cash equivalents at end of year                                                  |                                                                      | $                                             | 40,565   |        |         | $    | 59,648   |         |         | $ | 60,732   |       
|                                                                                          |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|Supplemental cash flow disclosure:                                                        |                                                                      |                                               |          |        |         |      |          |         |         |   |          |       
|                                                                                          | Cash paid (received) during the year for
	income taxes               |                                               | $        | (2,616 | )       |      | $        | 8,401   |         |   | $        | (8,449 | )      
|                                                                                          | Common shares issued in connection with the
	acquisition of Statware |                                               |          | 2,571  |         |      |          |        |         |   |          |       |        

See the accompanying notes to consolidated
financial statements.

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##### Table of Contents



ELECTROGLAS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Note 1.     Summary
of Significant Accounting Policies

Principles of consolidation and basis of
presentation:The consolidated
financial statements include the accounts of the domestic and
foreign business operations of the Company for all periods.
Intercompany transactions have been eliminated.

Use of estimates:The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements.
Actual results could differ from those estimates.

Cash and cash equivalents:The Company considers all highly
liquid investments with minimum yield risks and maturities of
less than 90 days from the date of purchase to be cash
equivalents.

Investments:The
Company invests its excess cash in high-quality debt and equity
instruments. Management determines the appropriate
classification of the debt securities at the time of purchase as
either held-to-maturity or available-for-sale and re-evaluates
such designation as of each balance sheet date.
Available-for-sale securities are stated at fair market value,
with unrealized gains and losses reported in a separate
component of stockholders equity. Held-to-maturity
securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity.
Such amortization, as well as any interest on the securities, is
included in interest income.

Minority equity investments:The Company has certain minority
equity investments in non-publicly traded companies. These
investments are recorded at the original cost and included in
other assets. The Company periodically reviews these investments
for impairment based on evaluation of the market conditions,
offering prices, trends of earnings, price multiples, and other
key measures. When the Company believes such a decline to be
other-than-temporary, an impairment loss is recognized in the
current periods operating results to the extent of the
decline. For securities that do not have a readily determinable
market price, the Company compares the net carrying amount of
its cost method investments to similar equity securities with
quoted prices when possible after giving effect to differences
in risk premiums, estimated future cash flows, and other factors
influencing the market value of the securities. When comparisons
to quoted securities are not practical, the Company estimates
the fair value based on recent sales and purchases of similar
unquoted equity securities, independent appraisals, or
internally prepared appraisals to estimate the fair value.

Inventories:Inventories are stated at the lower of
cost or market using the first-in, first-out (FIFO) method.

Equipment and leasehold improvements:Equipment and leasehold improvements
are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives (three
to ten years) of assets. Leasehold improvements are amortized
over the life of the related assets or the life of the lease,
whichever is shorter.

Revenue recognition:The Company recognizes revenue on the
sale of semiconductor manufacturing equipment when persuasive
evidence of an arrangement exists, delivery has occurred or
services have been rendered, the sellers price is fixed or
determinable and collectibility is reasonably assured. Revenue
on product sales and spare parts is recognized upon shipment or
delivery depending on the shipping terms, except in the
following situations: (i) all equipment sales to Japan are
recognized upon signed customer acceptance; (ii) for
customers who have demonstrated a history of bargaining for
additional deliverables between the date of shipment and the
date of acceptance, revenue is recognized upon payment in full;
(iii) revenue on newly introduced products that are a
substantially different platform than legacy products is
recognized upon customer acceptance; (iv) product sales
with payment terms that are dependent on customer acceptance are
accounted for as multiple-element arrangements. The Company
recognizes a portion of the revenue (excluding the fair value of
the remaining installation obligations) upon shipment or
delivery, depending upon

28



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the shipping terms, with the balance recognized
on customer acceptance. Revenue related to maintenance and
service contracts is recognized ratably over the duration of the
contracts.

The Company previously recognized revenue on the
sale of semiconductor manufacturing equipment upon shipment,
except for newly introduced products, which were recognized upon
the successful completion of an evaluation period. In fiscal
year 2000, the Company adopted SEC Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition
in Financial Statements. Financial statements for the year
ended December 31, 2000 have been restated in accordance
with SAB 101. In accordance with guidance provided in
SAB 101, the Company recorded a non-cash charge of
$2.0 million, which included deferred revenue of
$4.2 million, to reflect the cumulative effect of the
accounting change as of the beginning of fiscal year 2000. Of
this amount, $2.9 million was recognized as revenue in 2000
and $1.3 million was recognized in 2001. The pro forma
amounts presented in the statement of operations were calculated
assuming the accounting change was retroactive to prior periods.

The Company also derives revenue from software
licenses and postcontract customer support (PCS).
Postcontract customer support includes telephone support, bug
fixes, and rights to upgrades on a when-and-if-available basis.
Revenue allocable to PCS is recognized on a straight-line basis
over the period the PCS is provided. In software arrangements
that include rights to multiple software products, specified
upgrades and PCS, the Company allocates the total arrangement
fee among each deliverable based on the relative fair value of
each of the deliverables determined based on vendor-specific
objective evidence. The Company recognizes the revenue allocable
to software licenses and specified upgrades upon delivery of the
software product or upgrade to the end user, unless the fee is
not fixed or determinable or collectibility is not probable. The
Company considers all arrangements with payment terms extending
beyond twelve months and other arrangements with payment terms
longer than normal not to be fixed or determinable. If the fee
is not fixed or determinable, revenue is recognized as payments
become due from the customer. If collectibility is not
considered probable, revenue is recognized when the fee is
collected. The Company may enter into licenses to provide
software to customers for a period of time, during which the
customer, for a single fee, is entitled to receive unspecified
products as well as maintenance and support until the end of the
contract term. For these contracts, total contract revenue is
recognized on a straight-line basis over the contract period.

At December 31, 2001, deferred revenue and
gross profit of $6.7 million was included in accrued
liabilities. This amount includes $3.0 million of
maintenance and subscription revenue that is being amortized
over the term of the agreements and $3.7 million of gross
profit of prober and inspection products shipped but not
recognizable as revenue per the Companys revenue
recognition policy. Also, non-current liabilities includes
$3.1 million of deferred software subscription revenue that
is being amortized over the term of the agreement extending into
2004.

Warranty:The
Company generally warrants its products for a period of
12 months from shipment for material and labor to repair
the product; accordingly, a provision for the estimated cost of
the warranty is recorded upon shipment.

Allowance for doubtful accounts:The Company sells its products
primarily to large, well financed semiconductor manufacturers.
Export sales are normally sold using letters of credit. The
Company monitors the collectibility of accounts receivable and
records a reserve for bad debts against specifically identified
amounts that it believes will not be collected.

Engineering, research and development
expenses:The Company is actively
engaged in basic technology and applied research programs
designed to develop new products and product applications. In
addition, substantial ongoing product and process improvement,
engineering and support programs relating to existing products
are conducted within engineering departments. Engineering,
research and development costs are charged to operations as
incurred.

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ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Foreign currency accounting:The United States dollar is the
functional currency for all foreign operations, excluding Japan.
The effect on the consolidated statements of operations of
transaction and translation gains and losses is insignificant
for all years presented. The Japanese yen is the functional
currency for the Companys Japanese subsidiary and
translation gains or losses related to this subsidiary are
included as a component of stockholders equity and
comprehensive income.

Reclassifications:Certain prior year amounts have been
reclassified to conform to the current year presentation.

Net income (loss) per share:The following table sets forth the
computation of basic and diluted net income (loss) per share:

|                                    |                                                                                         |                            |       |         |   |      |      |        |     |   |      |        |     | 
|----------------------------------- | --------------------------------------------------------------------------------------- | -------------------------- | ----- | ------- | - | ---- | ---- | ------ | --- | - | ---- | ------ | --- | 
|                                    |                                                                                         | 2001                       |       | 2000    |   | 1999
|                                    |                                                                                         |                            |       |         |   |     
|                                    |                                                                                         |                           
|                                    |                                                                                         | (In thousands)            
|Numerator:                          |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       
|                                    | Net income (loss)                                                                       |                            | $     | (58,069 | ) |      | $    | 40,444 |     |   | $    | 5,576  |    
|                                    |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       
|Denominator:                        |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       
|                                    | Denominator for basic net income (loss) per
	share  weighted average shares            |                            |       | 20,910  |   |      |      | 20,616 |     |   |      | 19,591 |    
|                                    | Effect of dilutive securities:                                                          |                            |       |         |   |      |      |        |     |   |      |        |    
|                                    |                                                                                         | Employee stock options     |       |         |  |      |      |        | 428 |   |      |        | 467 | 
|                                    |                                                                                         | Contingently issued shares |       |         |  |      |      |        | 60  |   |      |        | 220 | 
|                                    |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       
|                                    | Dilutive potential common shares                                                        |                            |       |        |   |      |      | 488    |     |   |      | 687    |    
|                                    | Denominator for diluted net income (loss) per
	share  adjusted weighted average shares |                            |       | 20,910  |   |      |      | 21,104 |     |   |      | 20,278 |    
|                                    |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       
|Basic net income (loss) per share   |                                                                                         | $                          | (2.78 | )       |   | $    | 1.96 |        |     | $ | 0.28 |       
|                                    |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       
|Diluted net income (loss) per share |                                                                                         | $                          | (2.78 | )       |   | $    | 1.92 |        |     | $ | 0.27 |       
|                                    |                                                                                         |                            |       |         |   |      |      |        |     |   |      |       

Options to purchase 3,747,667 shares of common
stock were outstanding at December 31, 2001, but were not
included in the computation of diluted net loss per share as the
effect would be anti-dilutive. There were 1,447,372 and
58,050 options outstanding at December 31, 2000 and
1999, respectively, that could potentially dilute basic net
income per share in the future which were not included in the
fully diluted net income earnings per share computation because
they would have been anti-dilutive for the periods presented. In
connection with previous acquisitions, 130,000 shares of
common stock were in escrow as of December 31, 2001. These
shares were subject to certain representations and warranties,
and were not included in the computation of diluted net loss per
share as the effect would be anti-dilutive.

Shipping and handling:The cost of shipping products to
customers is not material, and is included in selling, general
and administrative expenses.

Comprehensive income (loss):The following are the components of
accumulated other comprehensive income (loss), net of related
tax:

|                                         |  |                |      |      |  |      |      |   |  |   |      |  
|---------------------------------------- |  | -------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                         |  | 2001           |      | 2000 |  | 1999
|                                         |  |                |      |      |  |     
|                                         |  |               
|                                         |  | (In thousands)
|Unrealized gain (loss) on investments    |  | $              | 421  |      |  | $    | 117  |   |  | $ | (64  | )
|Foreign currency translation adjustments |  |                | (486 | )    |  |      | (537 | ) |  |   | (537 | )
|                                         |  |                |      |      |  |      |      |   |  |   |      |  
|                                         |  | $              | (65  | )    |  | $    | (420 | ) |  | $ | (601 | )
|                                         |  |                |      |      |  |      |      |   |  |   |      |  

30



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accounting for long-lived
assets:In accordance with Statement
of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets, the Company
reviews long-lived assets held and used by the Company for
impairment whenever events or changes in circumstances indicate
that assets may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amounts of those assets. Measurement of impairment
charges for long-lived assets to be held and used are based on
the excess of the carrying amount over the fair value of those
assets.

Impact of recently issued accounting
pronouncements:In July 2001, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations. SFAS 141 essentially
eliminates the pooling-of-interests method of accounting for
business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The
requirements of Statement 141 are effective for any
business combination accounted for by the purchase method that
is completed after June 30, 2001. The adoption of
SFAS 141 will not have an impact on the Companys
financial statements.

In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142 (SFAS 142),
Goodwill and Other Intangible Assets. Under
SFAS 142, goodwill and indefinitely lived intangible assets
are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful
lives (but with no maximum life). The amortization provisions of
SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. The Company amortized goodwill and
other intangibles for all of fiscal 2001. The Company adopted
SFAS 142 beginning January 1, 2002. At
December 31, 2001, the Company had unamortized intangible
assets of $0.3 million that will be transferred to goodwill
upon adoption of SFAS 142 and unamortized goodwill of
$1.8 million that will no longer be amortized. The Company
will perform a transitional impairment review of goodwill by the
end of the second quarter of fiscal 2002 and the impact, if any,
will be reported in that quarter. Not having to amortize
goodwill during fiscal 2002 will favorably impact the results of
operations by approximately $0.6 million.

In October 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for
fiscal years beginning after December 15, 2001.
SFAS 144 addresses the financial accounting and reporting
requirements for disposal of long-lived assets and discontinued
operations. SFAS 144 applies to all recorded long-lived
assets that are held for use or that will be disposed of, but
excludes goodwill and other intangible assets that are not
amortized. The Company plans to adopt this Standard in fiscal
2002.

Note 2.     Acquisition
of Statware

On January 12, 2001, the Company acquired
Statware, Inc. (Statware), a developer of process
optimization software technologies. The total purchase price, in
thousands of dollars, was $3,382 and consisted of:
cash, $600; common stock issued, $2,571
(161,940 shares); and acquisition costs, $211. In
connection with the acquisition, 70,262 shares of the
Companys common stock, included as consideration, were
deposited into escrow accounts of one to five years to indemnify
the Company for any breach of Statwares representations
and warranties. The acquisition was recorded under the purchase
method of accounting and, accordingly, the results of operations
of Statware are included in the Companys financial
statements subsequent to the acquisition. The operating results
of Statware were immaterial to the Companys operating
results in prior years.

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ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The purchase price was allocated, based on an
independent appraisal obtained by the Company, to the tangible
and intangible assets acquired and liabilities assumed based on
their respective fair values on the date of acquisition as
follows (in thousands):

|                                    |                      |   |       |     | 
|----------------------------------- | -------------------- | - | ----- | --- | 
|Cash                                |                      | $ | 39    |    
|Other assets, net                   |                      |   | 69    |    
|Identified intangibles:             |                      |   |       |    
|                                    | Developed technology |   |       | 705 | 
|                                    | Customer base        |   |       | 235 | 
|                                    | Assembled workforce  |   |       | 140 | 
|Deferred tax liability              |                      |   | (399  | )  
|Goodwill                            |                      |   | 2,312 |    
|In-process research and development |                      |   | 281   |    
|                                    |                      |   |       |    
|                                    |                      | $ | 3,382 |    
|                                    |                      |   |       |    

To determine the value of in-process research and
development of the acquired business, the Company considered,
among other factors, the stage of development of each project,
expected income, target markets, and associated risks.
Associated risks included inherent difficulties and
uncertainties in completing the project and, thereby, achieving
technical feasibility and risks related to the viability of and
potential changes in future target markets. In-process research
and development that had not reached technical feasibility and
did not have alternative future uses in the amount of $281,000
was expensed in the quarter ended March 31, 2001. To
determine the value of developed technology, the expected future
cash flows of each software product was discounted, taking into
account risks related to the characteristics and applications of
each product, existing and future markets, and assessments of
the life cycle stage of each product. This analysis resulted in
a valuation for completed software that had reached
technological feasibility and, therefore, was capitalizable.
Intangible assets will be amortized on a straight-line basis
over estimated useful lives ranging from three to five years.
Goodwill, which represents the excess of the purchase price of
an investment in an acquired business over the fair value of the
underlying net identifiable assets, is being amortized on a
straight line basis over its estimated remaining useful life of
five years. Intangible assets and goodwill, net of accumulated
amortization, are included in other assets.

Note 3.     Financial
Instruments

Concentration of credit risk:Financial instruments that potentially
subject the Company to concentration of credit risk consist
principally of cash equivalents, short-term investments and
trade receivables. The Company places its cash equivalents and
short-term investments with high credit-quality financial
institutions. The Company invests its excess cash in commercial
paper, readily marketable debt and equity instruments, and
collateralized funds of United States and state government
entities. The Company has established guidelines relative to
credit ratings, diversification and maturities that seek to
maintain safety and liquidity. The Company sells its systems to
semiconductor manufacturers throughout the world. The Company
performs ongoing credit evaluations of its customers
financial condition and requires collateral such as letters of
credit whenever deemed necessary. The write-off of uncollectable
amounts has been insignificant. Accounts receivable from
customers in Asia were $1.4 million and $9.9 million
at December 31, 2001 and 2000, respectively.

Fair value of financial instruments:The Company has evaluated the
estimated fair value of financial instruments. The amounts
reported for cash and cash equivalents, accounts receivable,
short-term borrowings, accounts payable, and accrued expenses
approximate the fair value due to their short maturities.
Investment

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ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

securities are reported at their estimated fair
value based on quoted market prices. Realized gains and losses
from the Companys investments are insignificant.

Investments:The
following is a summary of the Companys investments for the
years ended:

|                                       |                                                       |                    |        |                |   |            |     |           |  |   |   |   |  |   |        |        |  
|-------------------------------------- | ----------------------------------------------------- | ------------------ | ------ | -------------- | - | ---------- | --- | --------- |  | - | - | - |  | - | ------ | ------ | -
|                                       |                                                       |                   
|                                       |                                                       | Available-for-Sale
|                                       |                                                       |                   
|                                       |                                                       |                    |        | Gross          |   | Gross      |     | Estimated
|                                       |                                                       | Amortized          |        | Unrealized     |   | Unrealized |     | Fair     
|                                       |                                                       | Cost               |        | Gains          |   | Losses     |     | Value    
|                                       |                                                       |                    |        |                |   |            |     |          
|                                       |                                                       |                    |        |                |   |           
|                                       |                                                       |                    |        | (In thousands) |   |           
|2001                                   |                                                       |                    |        |                |   |            |     |           |  |   |   |   |  |   |        |       
|Corporate obligations                  |                                                       | $                  | 21,220 |                |   | $          | 256 |           |  | $ |  |   |  | $ | 21,476 |       
|Repurchase agreements and master notes |                                                       |                    | 8,400  |                |   |            |    |           |  |   |  |   |  |   | 8,400  |       
|U.S. agencies                          |                                                       |                    | 1,999  |                |   |            | 1   |           |  |   |  |   |  |   | 2,000  |       
|Market auction preferred notes         |                                                       |                    | 3,000  |                |   |            |    |           |  |   |  |   |  |   | 3,000  |       
|Corporate notes                        |                                                       |                    | 7,537  |                |   |            | 73  |           |  |   |  |   |  |   | 7,610  |       
|Corporate bonds                        |                                                       |                    | 2,005  |                |   |            | 4   |           |  |   |  |   |  |   | 2,009  |       
|Medium term notes                      |                                                       |                    | 5,018  |                |   |            | 55  |           |  |   |  |   |  |   | 5,073  |       
|Foreign debt securities                |                                                       |                    | 5,019  |                |   |            | 32  |           |  |   |  |   |  |   | 5,051  |       
|                                       |                                                       |                    |        |                |   |            |     |           |  |   |   |   |  |   |        |       
|                                       | Total available-for-sale                              |                    |        | 54,198         |   |            |     | 421       |  |   |   |  |  |   |        | 54,619 |  
|                                       | Less amounts classified as cash and cash
	equivalents |                    |        | (8,400         | ) |            |     |          |  |   |   |  |  |   |        | (8,400 | )
|                                       |                                                       |                    |        |                |   |            |     |           |  |   |   |   |  |   |        |       
|                                       |                                                       | $                  | 45,798 |                |   | $          | 421 |           |  | $ |  |   |  | $ | 46,219 |       
|                                       |                                                       |                    |        |                |   |            |     |           |  |   |   |   |  |   |        |       

|                               |  |                    |         |                |  |            |     |           |  |   |     |   |  |   |         | 
|------------------------------ |  | ------------------ | ------- | -------------- |  | ---------- | --- | --------- |  | - | --- | - |  | - | ------- | 
|                               |  |                   
|                               |  | Available-for-Sale
|                               |  |                   
|                               |  |                    |         | Gross          |  | Gross      |     | Estimated
|                               |  | Amortized          |         | Unrealized     |  | Unrealized |     | Fair     
|                               |  | Cost               |         | Gains          |  | Losses     |     | Value    
|                               |  |                    |         |                |  |            |     |          
|                               |  |                    |         |                |  |           
|                               |  |                    |         | (In thousands) |  |           
|2000                           |  |                    |         |                |  |            |     |           |  |   |     |   |  |   |         | 
|Commercial paper               |  | $                  | 82,092  |                |  | $          | 130 |           |  | $ | (24 | ) |  | $ | 82,198  | 
|U.S. agencies                  |  |                    | 18,016  |                |  |            | 21  |           |  |   | (10 | ) |  |   | 18,027  | 
|Floating rate notes            |  |                    | 2,600   |                |  |            |    |           |  |   |    |   |  |   | 2,600   | 
|Market auction preferred notes |  |                    | 2,000   |                |  |            |    |           |  |   |    |   |  |   | 2,000   | 
|                               |  |                    |         |                |  |            |     |           |  |   |     |   |  |   |         | 
|                               |  | $                  | 104,708 |                |  | $          | 151 |           |  | $ | (34 | ) |  | $ | 104,825 | 
|                               |  |                    |         |                |  |            |     |           |  |   |     |   |  |   |         | 

The following is a summary of amortized costs and
estimated fair values of debt securities by contractual maturity:

|                                                   |                                                       |                    |        |            |   |   |        |        |  
|-------------------------------------------------- | ----------------------------------------------------- | ------------------ | ------ | ---------- | - | - | ------ | ------ | -
|                                                   |                                                       |                   
|                                                   |                                                       | Available-for-Sale
|                                                   |                                                       |                   
|                                                   |                                                       | Amortized          |        | Estimated 
|                                                   |                                                       | Cost               |        | Fair Value
|                                                   |                                                       |                    |        |           
|                                                   |                                                       |                   
|                                                   |                                                       | (In thousands)    
|2001                                               |                                                       |                    |        |            |   |   |        |       
|Amounts maturing within one year                   |                                                       | $                  | 31,716 |            |   | $ | 31,790 |       
|Amounts maturing after one year, within five years |                                                       |                    | 22,482 |            |   |   | 22,829 |       
|                                                   |                                                       |                    |        |            |   |   |        |       
|                                                   | Total available-for-sale                              |                    |        | 54,198     |   |   |        | 54,619 |  
|                                                   | Less amounts classified as cash and cash
	equivalents |                    |        | (8,400     | ) |   |        | (8,400 | )
|                                                   |                                                       |                    |        |            |   |   |        |       
|                                                   |                                                       | $                  | 45,798 |            |   | $ | 46,219 |       
|                                                   |                                                       |                    |        |            |   |   |        |       

33



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4.     Balance
Sheet Components

The following is a summary of balance sheet
components by major category:

|                |  |                |        |      |  |   |        | 
|--------------- |  | -------------- | ------ | ---- |  | - | ------ | 
|                |  | 2001           |        | 2000
|                |  |                |        |     
|                |  |               
|                |  | (In thousands)
|Inventories     |  |                |        |      |  |   |        | 
|Raw materials   |  | $              | 23,812 |      |  | $ | 18,330 | 
|Work in process |  |                | 7,075  |      |  |   | 10,712 | 
|Finished goods  |  |                | 9,362  |      |  |   | 3,709  | 
|                |  |                |        |      |  |   |        | 
|                |  | $              | 40,249 |      |  | $ | 32,751 | 
|                |  |                |        |      |  |   |        | 

The Company periodically reviews the carrying
value of its inventories by evaluating material usage and
requirements to determine inventory obsolescence and excess
quantities, and reduces the value when appropriate. As a result,
the Company wrote down inventories by $6.7 million and
$2.7 million in 2001 and 2000, respectively.

|                                                           |  |                |         |      |  |   |         |  
|---------------------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------- | -
|                                                           |  | 2001           |         | 2000
|                                                           |  |                |         |     
|                                                           |  |               
|                                                           |  | (In thousands)
|Equipment and leasehold improvements                       |  |                |         |      |  |   |         |  
|Equipment                                                  |  | $              | 25,418  |      |  | $ | 20,435  |  
|Leasehold improvements                                     |  |                | 4,529   |      |  |   | 3,269   |  
|Office furniture and equipment                             |  |                | 17,449  |      |  |   | 15,706  |  
|                                                           |  |                |         |      |  |   |         |  
|                                                           |  |                | 47,396  |      |  |   | 39,410  |  
|Accumulated depreciation and amortization                  |  |                | (31,296 | )    |  |   | (25,992 | )
|                                                           |  |                |         |      |  |   |         |  
|                                                           |  | $              | 16,100  |      |  | $ | 13,418  |  
|                                                           |  |                |         |      |  |   |         |  
|Accrued liabilities                                        |  |                |         |      |  |   |         |  
|Accrued compensation and related compensation
	liabilities |  | $              | 4,283   |      |  | $ | 7,910   |  
|Warranty reserves                                          |  |                | 1,839   |      |  |   | 3,179   |  
|Deferred revenue and gross profit                          |  |                | 6,682   |      |  |   | 8,823   |  
|Other                                                      |  |                | 4,025   |      |  |   | 4,359   |  
|                                                           |  |                |         |      |  |   |         |  
|                                                           |  | $              | 16,829  |      |  | $ | 24,271  |  
|                                                           |  |                |         |      |  |   |         |  

Note
5.     Investment in Cascade Microtech,
Inc.

In the second quarter of 1999, the Company
entered into an agreement to purchase a minority equity interest
in Cascade Microtech, Inc. (Cascade) for
approximately $3.0 million, which represented less than a
10% equity interest. In addition, the Company entered into an
agreement to license certain technology from Cascade for
approximately $2.0 million, which is being amortized to
engineering expense on a straight-line basis over five years. In
2001, an additional $0.4 million payment was made in order
to extend the exclusivity of the license agreement, which is
being amortized to engineering expense on a straight-line basis
over the remaining estimated useful life of the original
investment. These amounts, net of accumulated amortization, are
included in other assets. The Companys Chairman and Chief
Executive Officer is a director of Cascade. (See Related Party
Transactions Note 11).

34



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
6.     Short-term Borrowings

The Companys Japanese subsidiary has credit
facilities with a total borrowing capacity of approximately
$2.9 million (denominated in yen) with two Japanese banks.
A $2.0 million cash collateral was placed by the Company
with the U.S. branch of one of the Japanese banks to
guarantee one of the facilities. As of December 31, 2001,
$1.2 million was outstanding under these facilities (at the
current bank interest rate of 1.9% at December 31, 2001)
which are used by the Companys Japanese subsidiary to
finance its working capital requirements.

Note
7.     Stockholders
Equity

Preferred stock:The
Board of Directors has the authority, without any further vote
or action by the stockholders, to provide for the issuance of
1,000,000 shares of preferred stock from time to time in one or
more series with such designation, rights preferences and
limitations as the Board of Directors may determine, including
the consideration received therefore, the number of shares
comprising each series, dividend rates, redemption provisions,
liquidation preferences, redemption fund provisions, conversion
rights, and voting rights, all without the approval of the
holders of common stock.

Rights agreement:In
February 1999, the Company amended its Shareholder Rights Plan
(Rights Agreement) that was adopted on November 19, 1997.
Pursuant to the Rights Agreement, rights were distributed at the
rate of one right for each share of Common Stock owned by the
Companys stockholders of record on December 5, 1997.
The rights expire on December 4, 2007, unless extended or
earlier redeemed or exchanged by the Company. Under the Rights
Agreement, each right entitles the registered holder to purchase
one-hundredth of a Series A Preferred share of the Company
at a price of $140. The rights will become exercisable only if a
person or group acquires beneficial ownership of 15% or more of
the Companys common stock or commences a tender offer or
exchange offer upon consummation of which such person or group
would beneficially own 15% or more of the Companys common
stock.

Stock repurchase program:In May 1998, the Board of Directors
authorized the repurchase of 1,000,000 shares of the
Companys stock beyond the initial program to reduce the
dilution resulting from its employee stock option and stock
purchase plans. The Company purchased 71,000 and 62,000 shares
of common stock at costs of $1.0 million and
$0.8 million in 1999 and 1998, respectively.

Stock option plans:In May 2001, the Company adopted the
2001 Non-Officer Employee Stock Incentive Plan (2001 Plan) and
reserved 1,300,000 shares for issuance. During 2001, 2000 and
1999, the Companys stockholders approved amendments to the
1997 Stock Incentive Plan (1997 Plan) to increase the number of
shares reserved for issuance by 700,000, 1,000,000 and 300,000,
respectively. At December 31, 2001, the Company had
1,331,584 options available for grant under its 2001 Plan and
1997 Plan for grant issuance to eligible employees and to
provide for certain automatic grants of stock options to
non-employee directors. Options under these plans are granted at
fair market value, expire ten years from the date of grant and
generally vest in quarterly installments, commencing one year
from the date of grant.

35



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes stock option
activity and related information for the years ended:

|                                |  |         |       |                              |  |         |       |          |  |         |       |          |  |   |       |  |  |  |       |   |  |   |       | 
|------------------------------- |  | ------- | ----- | ---------------------------- |  | ------- | ----- | -------- |  | ------- | ----- | -------- |  | - | ----- |  |  |  | ----- | - |  | - | ----- | 
|                                |  |         |       |                              |  |        
|                                |  | 2001    |       | 2000                         |  | 1999   
|                                |  |         |       |                              |  |        
|                                |  |         |       | Weighted                     |  |         |       | Weighted |  |         |       | Weighted
|                                |  |         |       | Average                      |  |         |       | Average  |  |         |       | Average 
|                                |  |         |       | Exercise                     |  |         |       | Exercise |  |         |       | Exercise
|                                |  | Options |       | Price                        |  | Options |       | Price    |  | Options |       | Price   
|                                |  |         |       |                              |  |         |       |          |  |         |       |         
|                                |  |         |       |                              |  |        
|                                |  |         |       | (Share amounts in thousands) |  |        
|Outstanding  beginning of year |  |         | 2,694 |                              |  | $       | 18.04 |          |  |         | 2,607 |          |  | $ | 15.50 |  |  |  | 2,432 |   |  | $ | 15.15 | 
|Granted                         |  |         | 1,215 |                              |  | $       | 15.22 |          |  |         | 917   |          |  | $ | 23.48 |  |  |  | 669   |   |  | $ | 16.71 | 
|Exercised                       |  |         | (11   | )                            |  | $       | 12.93 |          |  |         | (671  | )        |  | $ | 15.03 |  |  |  | (262  | ) |  | $ | 14.27 | 
|Cancelled                       |  |         | (150  | )                            |  | $       | 22.43 |          |  |         | (159  | )        |  | $ | 19.94 |  |  |  | (232  | ) |  | $ | 16.67 | 
|                                |  |         |       |                              |  |         |       |          |  |         |       |          |  |   |       |  |  |  |       |   |  |   |       | 
|Outstanding  end of year       |  |         | 3,748 |                              |  | $       | 16.99 |          |  |         | 2,694 |          |  | $ | 18.04 |  |  |  | 2,607 |   |  | $ | 15.50 | 
|                                |  |         |       |                              |  |         |       |          |  |         |       |          |  |   |       |  |  |  |       |   |  |   |       | 

The following table summarizes information about
outstanding options at December 31, 2001:

|                         |  |                              |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 
|------------------------ |  | ---------------------------- | ----- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                         |  |                              |       |                    
|                         |  | Options Outstanding          |       | Options Exercisable
|                         |  |                              |       |                    
|                         |  |                              |       | Weighted            |  | Weighted |      |             |  | Weighted
|                         |  |                              |       | Average             |  | Average  |      |             |  | Average 
|                         |  |                              |       | Remaining           |  | Exercise |      |             |  | Exercise
|Range of Exercise Prices |  | Outstanding                  |       | Contractual Life    |  | Price    |      | Exercisable |  | Price   
|                         |  |                              |       |                     |  |          |      |             |  |         
|                         |  |                             
|                         |  | (Share amounts in thousands)
|$ 2.06 - $12.98          |  |                              | 640   |                     |  |          | 6.54 |             |  | $        | 12.54 |  |  |  | 195   |  |  | $ | 11.85 | 
|$13.06 - $14.25          |  |                              | 605   |                     |  |          | 5.31 |             |  | $        | 13.90 |  |  |  | 452   |  |  | $ | 14.01 | 
|$14.45 - $15.50          |  |                              | 617   |                     |  |          | 6.73 |             |  | $        | 15.18 |  |  |  | 501   |  |  | $ | 15.25 | 
|$15.51 - $15.75          |  |                              | 13    |                     |  |          | 6.37 |             |  | $        | 15.74 |  |  |  | 10    |  |  | $ | 15.75 | 
|$16.02 - $16.02          |  |                              | 684   |                     |  |          | 6.41 |             |  | $        | 16.02 |  |  |  |      |  |  | $ | 16.02 | 
|$16.15 - $19.13          |  |                              | 476   |                     |  |          | 6.76 |             |  | $        | 17.87 |  |  |  | 284   |  |  | $ | 17.67 | 
|$20.00 - $24.88          |  |                              | 580   |                     |  |          | 8.00 |             |  | $        | 23.97 |  |  |  | 243   |  |  | $ | 23.22 | 
|$25.72 - $38.94          |  |                              | 133   |                     |  |          | 8.12 |             |  | $        | 32.21 |  |  |  | 74    |  |  | $ | 31.06 | 
|                         |  |                              |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 
|                         |  |                              | 3,748 |                     |  |          | 6.66 |             |  | $        | 16.99 |  |  |  | 1,759 |  |  | $ | 16.72 | 
|                         |  |                              |       |                     |  |          |      |             |  |          |       |  |  |  |       |  |  |   |       | 

In addition, the Company issued 100,000 shares of
restricted stock in April 1996 under the 1993 Long Term Stock
Incentive Plan. The Company recorded a deferred compensation
charge equal to the fair value of the restricted stock at the
time of issuance of $1.4 million. The deferred compensation
charge was fully amortized at December 31, 2000.

Employee stock purchase plan (ESPP):The Companys 1998 Employee Stock
Purchase Plan and 1993 Employee Stock Purchase Plan provide that
eligible employees may purchase stock at 85% of its fair value
on specified dates through payroll deductions. At
December 31, 2001, the Company had 116,706 shares reserved
for future issuance under these plans. The Company sold 57,000,
94,000 and 119,000 shares to employees in 2001, 2000 and 1999,
respectively.

Stock based compensation:As permitted under Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (SFAS 123), the Company
has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), in accounting for stock-based
awards to employees. Under APB 25, the Company generally
recognizes no compensation expense with respect to such awards.
The weighted average grant date fair value of options and stock
purchase rights granted during 2001, 2000 and 1999 was $9.43 and
$5.90, $12.66 and $7.50, and $8.49 and $4.61, respectively.

36



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Pro forma information regarding net income
(loss) and net income (loss) per share is required by
SFAS 123 for awards granted after December 31, 1995,
as if the Company had accounted for its stock-based awards to
employees under the fair value method of SFAS 123. The fair
value of the Companys stock-based awards to employees was
estimated using a Black-Scholes option pricing model. This model
was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected
stock price volatility. Because the Companys stock-based
awards to employees have characteristics significantly different
from those of traded options, and because changes in subjective
input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock-based awards to employees. The fair value of the
Companys stock-based awards to employees was estimated
using the following assumptions:

|                                |  |         |      |      |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|------------------------------- |  | ------- | ---- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                |  |         |      |     
|                                |  | Options |      | ESPP
|                                |  |         |      |     
|                                |  | 2001    |      | 2000 |  | 1999 |      | 2001 |  | 2000 |      | 1999
|                                |  |         |      |      |  |      |      |      |  |      |      |     
|Expected dividend yield         |  |         | 0.0  | %    |  |      | 0.0  | %    |  |      | 0.0  | %    |  |  | 0.0  | % |  |  | 0.0  | % |  |  | 0.0  | %
|Expected stock price volatility |  |         | 62.0 | %    |  |      | 61.0 | %    |  |      | 54.0 | %    |  |  | 62.0 | % |  |  | 61.0 | % |  |  | 54.0 | %
|Risk-free interest rate         |  |         | 6.0  | %    |  |      | 6.5  | %    |  |      | 6.5  | %    |  |  | 6.0  | % |  |  | 6.5  | % |  |  | 5.6  | %
|Expected life (years)           |  |         | 4.0  |      |  |      | 4.0  |      |  |      | 4.0  |      |  |  | 0.5  |   |  |  | 0.5  |   |  |  | 0.5  |  

For pro forma purposes, the estimated fair value
of the Companys stock-based awards to employees is
amortized over the options vesting period (for options)
and the six-month purchase period (for stock purchases under the
ESPP). The Companys as reported and pro forma information
follows:

|                                    |  |             |         |                                          |  |             |         |           |  |             |        |           |  |   |        |  |  |   |       |  |  |   |       | 
|----------------------------------- |  | ----------- | ------- | ---------------------------------------- |  | ----------- | ------- | --------- |  | ----------- | ------ | --------- |  | - | ------ |  |  | - | ----- |  |  | - | ----- | 
|                                    |  | As Reported |         | Pro Forma                                |  | As Reported |         | Pro Forma |  | As Reported |        | Pro Forma
|                                    |  | 2001        |         | 2001                                     |  | 2000        |         | 2000      |  | 1999        |        | 1999     
|                                    |  |             |         |                                          |  |             |         |           |  |             |        |          
|                                    |  |             |         |                                          |  |            
|                                    |  |             |         | (In thousands, except per share amounts) |  |            
|Net income (loss)                   |  | $           | (58,069 | )                                        |  | $           | (63,009 | )         |  | $           | 40,444 |           |  | $ | 35,336 |  |  | $ | 5,576 |  |  | $ | 1,687 | 
|Basic net income (loss) per share   |  | $           | (2.78   | )                                        |  | $           | (3.01   | )         |  | $           | 1.96   |           |  | $ | 1.71   |  |  | $ | 0.28  |  |  | $ | 0.09  | 
|Diluted net income (loss) per share |  | $           | (2.78   | )                                        |  | $           | (3.01   | )         |  | $           | 1.92   |           |  | $ | 1.67   |  |  | $ | 0.27  |  |  | $ | 0.08  | 

Incentive plans:The
Company has adopted an Employee Incentive Plan and a Savings
Plan covering substantially all of its employees who reside in
the United States. The Board of Directors determines annually a
formula for setting aside amounts into a profit sharing pool
based upon performance targets to pay bonuses to employees. The
charge to operations for these plans during 2001, 2000 and 1999
was $0, $3.3 million and $0.5 million, respectively.

37



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 8.     Income
Taxes

Significant components of the provision (benefit)
for income taxes are as follows for the years ended:

|         |          |                                  |        |        |        |      |        |        |       |  |       |       |       | 
|-------- | -------- | -------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ----- |  | ----- | ----- | ----- | 
|         |          | 2001                             |        | 2000   |        | 1999
|         |          |                                  |        |        |        |     
|         |          |                                 
|         |          | (In thousands)                  
|Federal: |          |                                  |        |        |        |      |        |        |       |  |       |      
|         | Current  |                                  | $      | (3,105 | )      |      | $      | 11,192 |       |  | $     | 1,108 |      
|         | Deferred |                                  |        | 16,064 |        |      |        | (6,980 | )     |  |       |      |      
|         |          |                                  |        |        |        |      |        |        |       |  |       |      
|         |          |                                  | 12,959 |        |        |      | 4,212  |        |       |  | 1,108 |      
|State:   |          |                                  |        |        |        |      |        |        |       |  |       |      
|         | Current  |                                  |        | 60     |        |      |        | 250    |       |  |       | 25    |      
|         | Deferred |                                  |        | 3,119  |        |      |        | (3,152 | )     |  |       |      |      
|         |          |                                  |        |        |        |      |        |        |       |  |       |      
|         |          |                                  | 3,179  |        |        |      | (2,902 | )      |       |  | 25    |      
|Foreign: |          |                                  |        |        |        |      |        |        |       |  |       |      
|         | Current  |                                  |        | 551    |        |      |        | 2,385  |       |  |       | 728   |      
|         | Deferred |                                  |        | (258   | )      |      |        | 159    |       |  |       | (3    | )    
|         |          |                                  |        |        |        |      |        |        |       |  |       |      
|         |          |                                  | 293    |        |        |      | 2,544  |        |       |  | 725   |      
|         |          |                                  |        |        |        |      |        |        |       |  |       |      
|         |          | Total provision for income taxes |        | $      | 16,431 |      |        | $      | 3,854 |  |       | $     | 1,858 | 
|         |          |                                  |        |        |        |      |        |        |       |  |       |      

The tax benefits associated with exercises of
nonqualified stock options and disqualifying dispositions of
stock acquired through incentive stock options and the employee
stock purchase plan reduce taxes currently payable for 2001,
2000 and 1999, as shown above by $0 million,
$4.1 million and $0.5 million, respectively. Such
benefits are credited to additional paid-in capital when
realized. Pretax income (loss) from foreign operations was
$(2.5) million, $5.7 million and $0.1 million for
2001, 2000, and 1999, respectively. Upon repatriation of foreign
earnings, residual United States taxes would be immaterial.

The reconciliation of income tax computed at the
U.S. federal statutory rates to income tax expense is as follows
for the years ended:

|                                            |  |        |         |                                   |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |   |  |  |       |  
|------------------------------------------- |  | ------ | ------- | --------------------------------- |  | ------ | ----- | ------- |  | ------ | ------ | ------- |  |  | ----- | - |  | - | ------ | - |  |  | ----- | -
|                                            |  |        |         |                                   |  |       
|                                            |  | 2001   |         | 2000                              |  | 1999  
|                                            |  |        |         |                                   |  |       
|                                            |  | Amount |         | Percent                           |  | Amount |       | Percent |  | Amount |        | Percent
|                                            |  |        |         |                                   |  |        |       |         |  |        |        |        
|                                            |  |        |         |                                   |  |       
|                                            |  |        |         | (In thousands except percentages) |  |       
|Tax computed at U.S. statutory rate         |  | $      | (14,573 | )                                 |  |        | (35.0 | )%      |  | $      | 15,504 |         |  |  | 35.0  | % |  | $ | 2,602  |   |  |  | 35.0  | %
|State income taxes (net of federal benefit) |  |        | 2,066   |                                   |  |        | 5.0   |         |  |        | (1,886 | )       |  |  | (4.3  | ) |  |   | 16     |   |  |  | 0.2   |  
|Tax exempt investment income                |  |        |        |                                   |  |        |      |         |  |        | (5     | )       |  |  |      |   |  |   | (295   | ) |  |  | (4.0  | )
|Research and development credit             |  |        | (900    | )                                 |  |        | (2.2  | )       |  |        | (1,000 | )       |  |  | (2.3  | ) |  |   |       |   |  |  |      |  
|Foreign taxes                               |  |        | 1,344   |                                   |  |        | 3.2   |         |  |        | 1,469  |         |  |  | 3.3   |   |  |   | 671    |   |  |  | 9.0   |  
|In-process research and development         |  |        | 98      |                                   |  |        | 0.2   |         |  |        |       |         |  |  |      |   |  |   |       |   |  |  |      |  
|Intangibles  goodwill                      |  |        | 162     |                                   |  |        | 0.4   |         |  |        |       |         |  |  |      |   |  |   | (156   | ) |  |  | (2.1  | )
|Alternative minimum tax (credit)            |  |        |        |                                   |  |        |      |         |  |        | (981   | )       |  |  | (2.2  | ) |  |   | 1,126  |   |  |  | 15.2  |  
|Valuation allowance                         |  |        | 28,174  |                                   |  |        | 67.7  |         |  |        | (7,902 | )       |  |  | (17.8 | ) |  |   | (2,148 | ) |  |  | (28.9 | )
|Tax exempt foreign sales corporation        |  |        |        |                                   |  |        |      |         |  |        | (848   | )       |  |  | (1.9  | ) |  |   | (47    | ) |  |  | (0.6  | )
|Other, net                                  |  |        | 60      |                                   |  |        | 0.2   |         |  |        | (497   | )       |  |  | (1.1  | ) |  |   | 89     |   |  |  | 1.2   |  
|                                            |  |        |         |                                   |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |   |  |  |       |  
|Provision for income taxes                  |  | $      | 16,431  |                                   |  |        | 39.5  | %       |  | $      | 3,854  |         |  |  | 8.7   | % |  | $ | 1,858  |   |  |  | 25.0  | %
|                                            |  |        |         |                                   |  |        |       |         |  |        |        |         |  |  |       |   |  |   |        |   |  |  |       |  

38



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys deferred tax accounts are as follows for the
years ended:

|                        |                          |                           |   |        |         |   |        |       |        |  
|----------------------- | ------------------------ | ------------------------- | - | ------ | ------- | - | ------ | ----- | ------ | -
|                        |                          | 2001                      |   | 2000  
|                        |                          |                           |   |       
|                        |                          |                          
|                        |                          | (In thousands)           
|Deferred tax assets:    |                          |                           |   |        |         |   |        |      
|                        | Intangible assets        |                           |   | 12,490 |         |   |        | 6,141 |       
|                        | Warranty reserves        |                           |   | 1,032  |         |   |        | 1,079 |       
|                        | Inventories              |                           |   | 4,190  |         |   |        | 3,335 |       
|                        | Depreciable assets       |                           |   | 510    |         |   |        | 3,297 |       
|                        | Deferred revenue         |                           |   | 2,308  |         |   |        | 4,712 |       
|                        | Net operating losses     |                           |   | 14,617 |         |   |        | 759   |       
|                        | Tax credit carryforwards |                           |   | 9,181  |         |   |        | 5,021 |       
|                        | Other                    |                           |   | 1,477  |         |   |        | 2,644 |       
|                        |                          |                           |   |        |         |   |        |      
|                        |                          | Total deferred tax assets |   |        | 45,805  |   |        |       | 26,988 |  
|                        |                          | Less: Valuation allowance |   |        | (45,805 | ) |        |       | (7,664 | )
|                        |                          |                           |   |        |         |   |        |      
|Net deferred tax assets |                          | $                         |  |        |         | $ | 19,324 |      
|                        |                          |                           |   |        |         |   |        |      

Realization of the deferred tax assets is
dependent on the Company generating sufficient taxable income in
future years in appropriate tax jurisdictions to obtain benefit
from the reversal of temporary differences and from net
operating loss and tax credit carryforwards. The Company has
provided a valuation allowance amount equal to its total
deferred tax assets of $45.8 million at December 31,
2001 due to uncertainties surrounding realization of its
deferred tax assets. The valuation allowance increased by
$38.1 million in 2001 and decreased by $9.8 million in
2000.

As of December 31, 2001, the Company had
federal net operating losses attributable to the Knights
acquisition of $2.2 million. The utilization of these
acquired net operating losses is significantly limited due to
change of ownership rules, and the losses will expire in varying
amounts between 2002 and 2006. The federal net operating loss
carryforward at December 31, 2001 of $38.9 million,
which is not related to acquisitions, will expire in 2021. The
federal research and development credit carryforwards of
$4.7 million will expire in varying amounts between 2018
and 2021. The federal minimum tax credit carryforward of
$1.3 million has no expiration date. For state tax
purposes, as of December 31, 2001, the Company had net
operating loss and research and development tax credit
carryforwards of approximately $12.8 million and
$4.9 million, respectively. The state net operating loss
carryforward will expire in 2006. The California research and
development credit carryforwards have no expiration dates.

Note 9.     Segment
Information

The Company has three operating segments
comprising its prober products, inspection products, and EGsoft
businesses. The Companys management has determined the
operating segments based upon how the business is managed and
operated. The Company evaluates performance and allocates
resources based on operating income (loss), excluding unusual or
infrequently occurring items. There are no significant
inter-segment sales or transfers.

The aggregated prober products and inspection
products businesses are the only segments that are reportable
based on the quantitative guidelines provided in the Statement
of Financial Accounting Standard No. 131 (SFAS 131).
The EGsoft business is outside the quantitative guidelines in
SFAS 131 and is included with certain corporate charges and
expenses under the heading All Other.

39



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of the Companys
operating segments for the years ended:

|                                |  |                |         |           |  |              |        |   |  |   |         |  
|------------------------------- |  | -------------- | ------- | --------- |  | ------------ | ------ | - |  | - | ------- | -
|                                |  | Prober and     |         |           |  |             
|                                |  | Inspection     |         |           |  |             
|                                |  | Products       |         | All Other |  | Consolidated
|                                |  |                |         |           |  |             
|                                |  |               
|                                |  | (In thousands)
|2001                            |  |                |         |           |  |              |        |   |  |   |         |  
|Sales to unaffiliated customers |  | $              | 76,161  |           |  | $            | 8,501  |   |  | $ | 84,662  |  
|Operating income (loss)         |  | $              | (43,600 | )         |  | $            | (5,891 | ) |  | $ | (49,491 | )
|Identifiable assets             |  | $              | 207,733 |           |  | $            | 6,138  |   |  | $ | 213,871 |  
|2000                            |  |                |         |           |  |              |        |   |  |   |         |  
|Sales to unaffiliated customers |  | $              | 217,043 |           |  | $            | 8,486  |   |  | $ | 225,529 |  
|Operating income (loss)         |  | $              | 43,490  |           |  | $            | (6,736 | ) |  | $ | 36,754  |  
|Identifiable assets             |  | $              | 286,635 |           |  | $            | 4,795  |   |  | $ | 291,430 |  
|1999                            |  |                |         |           |  |              |        |   |  |   |         |  
|Sales to unaffiliated customers |  | $              | 116,796 |           |  | $            | 9,899  |   |  | $ | 126,695 |  
|Operating income (loss)         |  | $              | 2,096   |           |  | $            | (833   | ) |  | $ | 1,263   |  
|Identifiable assets             |  | $              | 196,649 |           |  | $            | 5,542  |   |  | $ | 202,191 |  

The following is a summary of the Companys
geographic operations for the years ended:

|                                |  |        |         |                |  |        |        |              |  |   |        |   |  |   |         |  
|------------------------------- |  | ------ | ------- | -------------- |  | ------ | ------ | ------------ |  | - | ------ | - |  | - | ------- | -
|                                |  | United |         |                |  |        |        |             
|                                |  | States |         | Asia           |  | Europe |        | Consolidated
|                                |  |        |         |                |  |        |        |             
|                                |  |        |         |                |  |       
|                                |  |        |         | (In thousands) |  |       
|2001                            |  |        |         |                |  |        |        |              |  |   |        |   |  |   |         |  
|Sales to unaffiliated customers |  | $      | 62,815  |                |  | $      | 414    |              |  | $ | 21,433 |   |  | $ | 84,662  |  
|Operating income (loss)         |  | $      | (43,261 | )              |  | $      | (5,773 | )            |  | $ | (457   | ) |  | $ | (49,491 | )
|Identifiable assets             |  | $      | 199,229 |                |  | $      | 3,547  |              |  | $ | 11,095 |   |  | $ | 213,871 |  
|2000                            |  |        |         |                |  |        |        |              |  |   |        |   |  |   |         |  
|Sales to unaffiliated customers |  | $      | 165,091 |                |  | $      | 1,845  |              |  | $ | 58,593 |   |  | $ | 225,529 |  
|Operating income (loss)         |  | $      | 35,644  |                |  | $      | (4,583 | )            |  | $ | 5,693  |   |  | $ | 36,754  |  
|Identifiable assets             |  | $      | 263,641 |                |  | $      | 2,920  |              |  | $ | 24,869 |   |  | $ | 291,430 |  
|1999                            |  |        |         |                |  |        |        |              |  |   |        |   |  |   |         |  
|Sales to unaffiliated customers |  | $      | 100,946 |                |  | $      | 2,706  |              |  | $ | 23,043 |   |  | $ | 126,695 |  
|Operating income (loss)         |  | $      | 4,180   |                |  | $      | (3,374 | )            |  | $ | 457    |   |  | $ | 1,263   |  
|Identifiable assets             |  | $      | 189,044 |                |  | $      | 2,494  |              |  | $ | 10,653 |   |  | $ | 202,191 |  

Sales between geographic areas are at prices that
the Company believes are at arms length. International
sales represented 51%, 53% and 38% of the Companys net
sales in 2001, 2000 and 1999, respectively. These sales
represent the combined total of export sales made by United
States operations and all sales made by foreign operations.
Export sales made by United States operations were 25% of net
sales in 2001 (20% to Asia, 5% to other), 26% of net sales in
2000 (23% to Asia, 3% to other) and 18% of net sales in 1999
(15% to Asia, 3% to other). Sales to customers in France
included in international sales represented 14%, 20% and 11% of
the Companys net sales in 2001, 2000 and 1999,
respectively. In 2001, STMicroelectronics accounted for 12% of
net sales. In 2000, STMicroelectronics, Philips and Atmel
accounted for 18%, 14% and 13% of net sales, respectively. In
1999, STMicroelectronics and IBM accounted for 19% and 14% of
net sales, respectively.

40



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note
10.     Commitments and
Contingencies

The Company leases its facilities and certain
equipment under noncancelable operating leases. As of
December 31, 2001, the minimum annual rental commitments
and sublease income are as follows:



|           |  |                |       |          |  |               |      |   |  |   |       | 
|---------- |  | -------------- | ----- | -------- |  | ------------- | ---- | - |  | - | ----- | 
|           |  | Operating      |       | Sublease |  | Net Operating
|           |  | Leases         |       | Income   |  | Leases       
|           |  |                |       |          |  |              
|           |  |               
|           |  | (In thousands)
|2002       |  | $              | 3,988 |          |  | $             | (324 | ) |  | $ | 3,664 | 
|2003       |  |                | 2,699 |          |  |               |     |   |  |   | 2,699 | 
|2004       |  |                | 1,096 |          |  |               |     |   |  |   | 1,096 | 
|2005       |  |                | 888   |          |  |               |     |   |  |   | 888   | 
|2006       |  |                | 777   |          |  |               |     |   |  |   | 777   | 
|Thereafter |  |                | 108   |          |  |               |     |   |  |   | 108   | 
|           |  |                |       |          |  |               |      |   |  |   |       | 
|           |  | $              | 9,556 |          |  | $             | (324 | ) |  | $ | 9,232 | 
|           |  |                |       |          |  |               |      |   |  |   |       | 

Rent expense was approximately $5.1 million,
$5.8 million and $3.3 million for the years 2001, 2000
and 1999, respectively.

Legal matters:In
the ordinary course of business, various lawsuits and claims are
filed against the Company. While the outcome of these matters is
currently not determinable, management believes that the
ultimate resolution of these matters will not have a material
adverse effect on the Companys financial statements.

Tax matters:In
connection with the formation of the Company in 1993, the
Company agreed to share with its former parent certain tax
benefits arising from the increase in the aggregate tax basis of
the assets transferred. The accompanying financial statements
reflect an accrual of approximately $9.5 million, which is
based on the Companys best estimate of the amount payable
under the agreement. However, the actual amount payable and the
timing of the payment are dependent on the ultimate tax benefits
realized and the timing of the realization of these tax benefits.

Lease agreement:In
March 1997, the Company entered into a $12.0 million,
five-year operating lease for approximately 21.5 acres of
land in San Jose, California. In July 1998, the lease
agreement was amended to provide a construction allowance. The
lease agreement was further amended and, effective June 2001,
required a mandatory collateralization of $48.3 million,
which was included in other assets as restricted cash. This
amendment also included an adjustment to the interest rate and
certain restrictions on the repurchase of the Companys
common stock. The monthly lease payments are based on the London
Interbank Offering Rate (LIBOR). At current interest rates, as
amended, and based on the lease amount of $48.3 million at
December 31, 2001, the annual lease payments are
approximately $1.3 million. These interest rates are
sensitive to inflation and other economic factors, and a
significant increase in interest rates may have a negative
impact on the earnings of the Company. At December 31,
2001, the Company was in compliance with the restrictive
covenants contained in the lease agreement. At the end of the
lease term, the guaranteed residual payment on the lease is
approximately $41.1 million and the Company has the option
to purchase the land and buildings for approximately
$48.3 million. The Company believes that the
propertys fair value is greater than the guaranteed
residual value at December 31, 2001. Demand for the
Companys products fluctuate with the semiconductor
business cycles and is expected to continue to fluctuate from
period to period. These fluctuations could have a negative
impact on the Companys operating results. There can be no
assurance that the Company will continue to be in compliance
with certain restrictive covenants related to its facilities
lease. In the event of non-compliance, the Company has the
option of renegotiating the lease or purchasing the land and
buildings for approximately $48.3 million.

41



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##### Table of Contents



ELECTROGLAS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 11.     Related
Party Transactions

Sanmina Corporation:In the third quarter of 1999, the
Company entered into an agreement with Sanmina Corporation
whereby Sanmina agreed to provide ongoing contract manufacturing
services to the Company. In connection with the agreement, the
Company also sold certain inventory and fixed assets to Sanmina
in 1999 for $7.4 million. The Company purchased inventory
from Sanmina of $4.9 million, $58.5 million and
$14.2 million in 2001, 2000 and 1999, respectively. As of
December 31, 2001 and 2000, the Company had
$0.2 million and $5.2 million, respectively, in
accounts payable with Sanmina. The agreement with Sanmina was
terminated in December 2000. One of the Companys directors
is also a director of Sanmina Corporation.

Cascade Microtech, Inc.:The Company purchased inventory from
Cascade of $0.2 million, $0.1 million and $0 and sold
prober products of $0.5 million, $0 and $0, in 2001, 2000
and 1999, respectively. As of December 31, 2001 and 2000,
there were no balances in accounts payable and accounts
receivable with Cascade. The Companys Chairman and Chief
Executive Officer is a director of Cascade. (See Investment in
Cascade Microtech, Inc. Note 5)

Note
12.     Subsequent Event
(unaudited)

In January 2002, the Company announced plans to
move the manufacturing of wafer probers from San Jose,
California, to Singapore. Initial production is anticipated to
begin mid-year 2002, with full production for all released
probers by mid-year 2003. In January 2002, the Company entered
into a three-year operating lease for a 39,000 square foot
manufacturing facility in Singapore with annual lease payments
of approximately $402,000.

42



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

Electroglas, Inc.


We have audited the accompanying consolidated
balance sheets of Electroglas, Inc. as of December 31, 2001
and 2000, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2001. Our audits
also included the financial statement schedule listed in the
index at Item 14(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Electroglas, Inc. at
December 31, 2001 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth herein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

San Jose, California

January 21, 2002


43



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##### Table of Contents



ELECTROGLAS, INC.

SCHEDULE II  CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS

|                                                                      |                  |                |   |                   |  |               |   |            |  |  |   |     |  |  |   |     | 
|--------------------------------------------------------------------- | ---------------- | -------------- | - | ----------------- |  | ------------- | - | ---------- |  |  | - | --- |  |  | - | --- | 
|                                                                      |                  | Balance at     |   | Additions Charged |  |               |   | Balance at
|                                                                      |                  | Beginning of   |   | to Costs and      |  |               |   | End of    
|Description                                                           |                  | Period         |   | Expenses          |  | Deductions(a) |   | Period    
|                                                                      |                  |                |   |                   |  |               |   |           
|                                                                      |                  |               
|                                                                      |                  | (In thousands)
|Allowance for doubtful accounts (deducted from
	accounts receivable): |                  |                |   |                   |  |               |   |            |  |  |   |     |  |  |   |    
|                                                                      | Year ended 2001. |                | $ | 489               |  |               | $ | 36         |  |  | $ | 102 |  |  | $ | 423 | 
|                                                                      | Year ended 2000. |                |   | 459               |  |               |   | 54         |  |  |   | 24  |  |  |   | 489 | 
|                                                                      | Year ended 1999. |                |   | 448               |  |               |   | 11         |  |  |   |    |  |  |   | 459 | 



---



|    |                                   
|--- | ----------------------------------
|(a) | Includes write-offs and reversals.

44



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##### Table of Contents








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

Not applicable.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

The information required by this item is included
under the heading Election of Directors and
Other Matters in the Companys Proxy Statement
to be filed in connection with its 2001 Annual Meeting of
Stockholders and is incorporated herein by reference.




Item 11.     Executive
Compensation

The information required by this item is included
under the heading Executive Compensation and Other
Information in the Companys Proxy Statement to be
filed in connection with its 2001 Annual Meeting of Stockholders
and is incorporated herein by reference.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is included
under the heading Security Ownership of Certain Beneficial
Owners and Management in the Companys Proxy
Statement to be filed in connection with its 2001 Annual Meeting
of Stockholders and is incorporated herein by reference.




Item 13.     Certain
Relationships and Related Transactions

The information required by this item is included
under the heading Certain Relationships and Related
Transactions in the Companys Proxy Statement to be
filed in connection with its 2001 Annual Meeting of Stockholders
and is incorporated herein by reference.




PART IV




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

(a) Documents filed as a part of this
Report:



| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Index to Financial
	Statements The financial statements included in
	Part II, Item 8 of this document are filed as part of
	this Report.                                                                                                                                                                                        
|
| | (2) Financial Statement
	Schedules The financial statement schedule
	included in Part II, Item 8 of this document is filed
	as part of this Report. All of the other schedules are omitted
	as the required information is inapplicable or the information
	is presented in the consolidated financial statements or related
	notes.
|
| | (3) Exhibits See Index to
	Exhibits on page 47.                                                                                                                                                                                                                                                                                     

(b) Reports on
Form 8-K No reports on Form 8-K were
filed during the last quarter of the period covered by this
Report.

45



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##### Table of Contents






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.



| |                  
| | -----------------
| | ELECTROGLAS, INC.



| |     |                                                                                      
| | --- | -------------------------------------------------------------------------------------
| | By: | /s/ CURTIS S. WOZNIAK 
	 _______________________________________ 
	 Curtis S. Wozniak

| |                                      
| | -------------------------------------
| | Chairman and Chief Executive
	Officer

Date: March 13, 2002

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

|                                               |  |                                                                                                                          |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------------
|Signature                                      |  | Title                                                                                                                    |  | Date          
|                                               |  |                                                                                                                          |  |               
|                                              
|/s/ CURTIS S. WOZNIAKCurtis S. Wozniak         |  | Chairman and Chief Executive Officer
	(Principal Executive Officer)                                                      |  | March 13, 2002
|                                              
|/s/ THOMAS E. BRUNTONThomas E. Brunton         |  | Vice President, Finance,
	Chief Financial Officer,
	Treasurer and Secretary(Principal Financial and
	Accounting Officer) |  | March 13, 2002
|                                              
|/s/ NEIL R. BONKENeil R. Bonke                 |  | Director                                                                                                                 |  | March 13, 2002
|                                              
|/s/ ROGER D. EMERICKRoger D. Emerick           |  | Director                                                                                                                 |  | March 13, 2002
|                                              
|/s/ ROBERT J. FRANKENBERGRobert J. Frankenberg |  | Director                                                                                                                 |  | March 13, 2002
|                                              
|/s/ MEL FRIEDMANMel Friedman                   |  | Director                                                                                                                 |  | March 13, 2002

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##### Table of Contents



INDEX TO EXHIBITS

|        |        |          |  |                                                                                                                                                                                                                                                                                                                                                                                             
|------- | ------ | -------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |         
|Number  |        | Exhibits
|        |        |         
|        | 3.1    |          |  | Certificate of Incorporation of Electroglas,
	Inc., as amended.(1)                                                                                                                                                                                                                                                                                                                          
|        | 3.2    |          |  | By-laws of Electroglas, Inc., as amended.(2)                                                                                                                                                                                                                                                                                                                                                
|        | 3.3    |          |  | Certificate of Designation for Electroglas,
	Inc.(2)                                                                                                                                                                                                                                                                                                                                        
|        | 4.1    |          |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                                                                                                                  
|        | 4.2    |          |  | Specimen Common Stock Certificate of Electroglas,
	Inc., a Delaware corporation.(1)                                                                                                                                                                                                                                                                                                         
|        | 10.1*  |          |  | Electroglas, Inc. 1993 Long-Term Incentive
	Plan.(3)                                                                                                                                                                                                                                                                                                                                        
|        | 10.2*  |          |  | Change of Control Agreement between Electroglas,
	Inc. and Armand J. Stegall dated as of June 9, 1995.(4)                                                                                                                                                                                                                                                                                   
|        | 10.3*  |          |  | Electroglas, Inc. Restricted Stock Bonus
	Agreement Between Electroglas, Inc. and Curtis S. Wozniak.(5)                                                                                                                                                                                                                                                                                     
|        | 10.4*  |          |  | Change of Control Agreement between Electroglas,
	Inc. and Curtis S. Wozniak dated as of April 4, 1996.(5)                                                                                                                                                                                                                                                                                  
|        | 10.5*  |          |  | Electroglas Officers Retirement Medical and
	Dental Coverage Policy.(6)                                                                                                                                                                                                                                                                                                                    
|        | 10.6   |          |  | Lease Agreement between BNP Leasing Corporation
	and Electroglas, Inc. dated March 31, 1997.(7)                                                                                                                                                                                                                                                                                             
|        | 10.7   |          |  | Rights Agreement between Electroglas, Inc., and
	BankBoston, N.A., as rights agent dated as of November 18,
	1997.(8)                                                                                                                                                                                                                                                                       
|        | 10.8*  |          |  | Electroglas, Inc. 1997 Stock Incentive Plan.(9)                                                                                                                                                                                                                                                                                                                                             
|        | 10.9*  |          |  | Form of Change of Control Agreement between the
	Company and each of Timothy J. Boyle, Conor P. OMahoney,
	Joseph A. Savarese, William J. Haydamack, Wayne Woodard, Jeffrey
	R. Hintzke, Joseph LaChapelle and Thomas E. Brunton as of
	June 9, 1995, June 9, 1995, June 9, 1995,
	December 12, 1997, April 5, 1999, July 19, 1999,
	April 5, 1999 and December 22, 2000, respectively.(10)
|        | 10.10  |          |  | Construction Funding Agreement (First Amendment
	to Lease) Between BNP Leasing Corporation and Electroglas, Inc.
	dated July 1, 1998.(11)                                                                                                                                                                                                                                                   
|        | 10.11* |          |  | Electroglas, Inc. 1998 Employee Stock Purchase
	Plan.(12)                                                                                                                                                                                                                                                                                                                                   
|        | 10.12* |          |  | Electroglas, Inc. 2001 Non-Officer Employee Stock
	Incentive Plan.                                                                                                                                                                                                                                                                                                                          
|        | 10.13  |          |  | Second Amendment to Lease Agreement between BNP
	Leasing Corporation and Electroglas, Inc.                                                                                                                                                                                                                                                                                                  
|        | 10.14  |          |  | Third Amendment to Lease Agreement between BNP
	Leasing Corporation and Electroglas, Inc.                                                                                                                                                                                                                                                                                                   
|        | 21.1   |          |  | List of subsidiaries of registrant.                                                                                                                                                                                                                                                                                                                                                         
|        | 23.1   |          |  | Consent of Ernst & Young LLP, Independent
	Auditors.                                                                                                                                                                                                                                                                                                                                        



---



|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the identically
	numbered exhibit to the Companys Registration Statement on
	Form S-1 (Commission File No. 33-61528), which became
	effective on June 23, 1993.    
|   
|(2) | Incorporated by reference to the identically
	numbered exhibit to the Companys Annual Report on
	Form 10-K, filed with the Securities and Exchange
	Commission on March 30, 1998.               
|   
|(3) | Incorporated by reference to the identically
	numbered exhibit to the Companys Registration Statement on
	Form S-1 (Commission File No. 33-74860), which became
	effective on February 23, 1994.
|   
|(4) | Incorporated by reference to the identically
	numbered exhibit of the Companys Annual Report on
	Form 10-K, filed with the Securities and Exchange
	Commission on March 31, 1996.               
|   
|(5) | Incorporated by reference to the identically
	numbered exhibit of the Companys Quarterly Report on
	Form 10-Q, for the quarter ended June 30, 1996.                                             
|   
|(6) | Incorporated by reference to Exhibit 10.12
	of the Companys Quarterly Report on Form 10-Q, for
	the quarter ended September 31, 1996.                                                           

47



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##### Table of Contents





|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(7) | Incorporated by reference to Exhibit 10.1 of
	the Companys Quarterly Report on Form 10-Q, for the
	quarter ended March 31, 1997.                                                                      
|   
|(8) | Incorporated by reference to Exhibit 1 of
	the Companys Registration Statement on Form 8-A12G
	(Commission File No. 0-21626), filed with the Securities
	and Exchange Commission on November 19, 1997.
|   
|(9) | Incorporated by reference to Exhibit 10.18
	of the Companys Annual Report on Form 10-K, filed
	with the Securities and Exchange Commission on March 30, 1998.                                         



|     |                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Exhibit 10.19
	of the Companys Annual Report on Form 10-K, filed
	with the Securities and Exchange Commission on March 30, 1998.
|    
|(11) | Incorporated by reference to Exhibit 10.1 of
	the Companys Quarterly Report on Form 10-Q, for the
	quarter ended June 30, 1998.                              
|    
|(12) | Incorporated by reference to Exhibit 10.2 of
	the Companys Quarterly Report on Form 10-Q, for the
	quarter ended June 30, 1998.                              



|  |                                                                      
|- | ---------------------------------------------------------------------
|* | Management contracts, or Company compensatory
	plans or arrangements.

48