**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


_______________________




**FORM
      10-K**


_______________________




(Mark
                one)[X]
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d)**
                **OF
                  THE SECURITIES EXCHANGE ACT OF 1934****For
                  the Fiscal Year Ended May 31, 2007**[   ]
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR**
                **15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934****For
                  The Transition Period From ____ To _______**




**Commission
      File Number: 0-21626**


**ELECTROGLAS, INC.**


*(Exact
      Name of Registrant as Specified in its Charter)*





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





**5729
                Fontanoso Way,****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:**




**Common
      Stock, $0.01 par value**




*(Title
      of Class)*




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




Indicate
        by
        check mark if the registrant is a well-known seasoned issuer, as defined
        in Rule
        405 of the Securities Act of 1933, as amended.  Yes
        [    ]     No [ X ]
  Indicate
        by
        check mark if the registrant is not required to file reports pursuant to
        Section
        13 or Section 15(d) of the Securities Act of 1934, as amended.  Yes
        [    ]     No [ X ]
  Indicate
        by
        check mark whether the Registrant (1) has filed all reports required to be
        filed
        by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.  Yes [ X ]     No [
 ]
  Indicate
        by
        check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
        S-K is not contained herein, and will not be contained, to the best of
        Registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K.  [ X ]
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of "accelerated
        filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
                    accelerated filer   [ ]
                Accelerated
                    filer   [X]
                Non-accelerated
                    filer   [
                    ]
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes __     No
X




As
      of
      December 1, 2006, the aggregate market value of the voting and non-voting common
      equity held by non-affiliates of the Registrant was approximately $73,000,000
      million based on the closing sale price as reported on the Nasdaq Global 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 July
      2, 2007, the Registrant had 26,466,000 outstanding shares of Common
      Stock.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the Registrant’s Proxy Statement in connection with the Annual Meeting of
      Stockholders, to be held on October 17, 2007, are incorporated by reference
      into
      Part III of this Form 10-K.

















**Electroglas,
      Inc.**





**Form
      10K**


**For
      the Year Ended May 31, 2007**







Index
              
              PagesForward-Looking
                  Statements
              
              4Part
                  I
              
              6Item
                  1.  Business
              
              6Item
                  1A.  Risk Factors
              
              11Item
                  1B.  Unresolved Staff Comments.
              
              14Item
                  2.  Properties
              
              15Item
                  3.  Legal Proceedings
              
              15Item
                  4.  Submission of Matters to a Vote of Security
                  Holders
              
              15Part
                  II
              
              15Item
                  5.  Market for the Registrant’s Common Equity, Related
                  Stockholder Matters and Issuer Purchases of Equity
                  Securities
              
              15Item
                  6.  Selected Financial Data
              
              17Item
                  7.  Management’s Discussion and Analysis of Financial Condition
                  and Results of Operations
              
              18Item
                  7A.  Quantitative and Qualitative Disclosures about Market
                  Risk
              
              28Item
                  8.  Financial Statements and Supplementary Data
              
              29Item
                  9.  Changes in and Disagreements with Accountants on Accounting
                  and Financial Disclosure
              
              55Item
                  9A.  Controls and Procedures
              
              55Item
                  9B.  Other Information
              
              57Part
                  III
              
              57Item
                  10.  Directors and Executive Officers of the
                  Registrant
              
              57Item
                  11.  Executive Compensation
              
              57Item
                  12.  Security Ownership of Certain Beneficial Owners and
                  Management and Related Stockholder Matters
              
              57Item
                  13.  Certain Relationships and Related Transactions and Director
                  Independence
              
              57Item
                  14.  Principal Accountant Fees and Services.
              
              57Part
                  IV
              
              58Item
                  15.  Exhibits and Financial Statement Schedules
              
              58Signatures
              
              61




2




**Forward-Looking
      Statements**




The
      following discussion should be read in conjunction with our accompanying
      Financial Statements and the related notes thereto.  This Annual
      Report on Form 10-K contains 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.  The forward-looking
      statements include, without limitation, statements regarding:





•
            Our
                expectation to continue to invest in research and development of
                our wafer
                prober products and software;


•
            Our
                belief that continued, rapid development of new products and enhancements
                to existing products is necessary to maintain our competitive
                position;


•
            Our
                belief that alternative sources of our components and subassemblies
                included in our products that are obtained from a single source exist
                or
                can be developed, if required;


•
            Our
                belief that our products compete favorably with respect to product
                performance, reliability, price, service and technical support, product
                improvements, established relationships with customers, and product
                familiarity;


•
            Our
                belief that the success of our business depends more on the technical
                competence, creativity and marketing abilities of our employees,
                rather
                than on patents, trademarks and
                copyrights;


•
            Our
                intention to retain any future earnings to fund the development and
                growth
                of our business;


•
            Our
                belief that to stay competitive, grow our business over the long
                term,
                improve our gross margins, and generate operating cash flows, we
                must
                continue to invest in new technologies and product enhancements and
                at the
                same time, as necessary, rapidly adjust our expense structure during
                the
                hard to predict cyclical semiconductor equipment demand
                cycles;


•
            Our
                expectation that international sales will continue to represent a
                significant percentage of net sales and fluctuate as a percentage
                of total
                sales;


•
            Our
                intention to control discretionary expenses and continue investing
                in our
                new product programs during the current business
                cycle;


•
            Our
                intention not to repatriate earnings from foreign subsidiaries and
                the
                effect of any repatriation of foreign earnings on income
                taxes;


•
            Our
                cash contractual obligations as of May 31,
                2007;


•
            Our
                anticipation that our future cash from operations, available cash
                and cash
                equivalents, and proceeds from our line of credit  at May 31,
                2007 should be sufficient to meet our anticipated needs for working
                capital and capital expenditures to support planned activities through
                fiscal 2008;


•
            Our
                expectation that external financing vehicles will continue to be
                available
                to us;


•
            Our
                belief that future sales will be impacted by our ability to succeed
                in new
                product evaluations;


•
            Our
                belief that we have and can maintain certain technological and other
                advantages over our competitors;


•
            Our
                belief that our success depends in significant part on our intellectual
                property;


•
            Our
                belief that our future success partly depends on our ability to hire
                and
                retain key personnel and the ability to attract additional skilled
                personnel in all areas to grow our
                business;


•
            Our
                current intention not to issue any preferred
                stock;


•
            Our
                belief that we currently have adequate internal controls over financial
                reporting;


•
            Our
                expectation with respect to continuing to incur expenses and to devote
                management resources to Section 404
                compliance;


•
            Our
                belief that our current foreign exchange exposure in all international
                operations is not material to our consolidated financial statements
                because we primarily transact business in United States
                dollars;


•
            Our
                belief that the impact of a 10% change in exchange rates would not
                be
                material to our financial condition and results of
                operations;


•
            Our
                belief that it is improbable that we will be required to pay any
                amounts
                for indemnification under our software license
                agreements;


•
            Our
                statements relating to outstanding restructuring charges and the
                timing of
                payment of such charges;


•
            The
                anticipated performance of our EG6000
                products;


•
            Our
                assertion that sales often reflect orders shipped in the same quarter
                as
                they are received;


•
            Our
                intention to emphasize outsourcing in functional areas where it is
                cost
                effective and increases the Company’s competitive
                position;


•
            Our
                belief that in order to become profitable, our market share for our
                products must improve; and


•
            Our
                intention to continue to emphasize reduction of our utilization of
                cash,
                improving gross margins on sales, and maintaining spending
                controls.







3




The
      forward-looking statements are subject to risks and uncertainties that could
      cause actual results to differ materially from those stated or implied by the
      forward-looking statements.




These
      risks and uncertainties include but are not limited to:




•
            An unanticipated lack of resources to continue to make investments
                in
                technological advances necessary to maintain competitive
                advantages;


•    Unanticipated
      product performance failures and the lack of market acceptance of our EG6000
      products;


•    Unanticipated
      problems encountered in our manufacturing outsourcing and other outsourcing
      efforts;


•
            An unanticipated lack of resources sufficient to invest in selective
                new
                wafer prober development programs;


•    Continued
      cyclicality in the semiconductor industry;


•    The
      ability to secure additional funding, if needed;


•    The
      ability to achieve broad market acceptance of existing and future products;
      and


•    The
      loss of one or more of our customers.





For
      a
      detailed description of these and other risks associated with our business
      that
      could cause actual results to differ from those stated or implied in such
      forward-looking statements, see the disclosure contained under the heading
“Risk
      Factors” in this Annual Report on Form 10-K.  All forward-looking
      statements included in this document are made as of the date hereof, based
      on
      information available to us as of the date hereof, and we assume no obligation
      to update any forward-looking statement or statements. The reader should also
      consult the cautionary statements and risk factors listed in our other reports
      filed from time to time with the Securities and Exchange
      Commission.






4




**Part
      I**





**Item
      1*.  Business***





**Overview**





We
      are a
      supplier of semiconductor manufacturing equipment and software to the global
      semiconductor industry. We were incorporated in Delaware in April 1993, to
      succeed the wafer prober business conducted by the Electroglas division of
      General Signal Corporation, our former parent. Immediately prior to the closing
      of the initial public offering of our Common Stock in July 1993, we assumed
      the
      assets and liabilities of the Electroglas division in an asset transfer. We
      have
      been in the semiconductor equipment business for more than 40 years and our
      installed base is one of the largest in the industry, with over 15,000 wafer
      probers sold.





Our
      primary product line is automated wafer probing equipment and related network
      software to manage information from that equipment. In conjunction with
      automated test systems from other suppliers, our semiconductor manufacturing
      customers use our wafer probers and network software to quality test
      semiconductor wafers.




In
                January 2001, we acquired Statware Inc., of Corvallis, Oregon, to
                further
                expand our network software product offerings in the test management
                area.
                Today, the Statware technology is the basis for our web-based applications
                that allow our customers to monitor and control probers from any
                location,
                as well as collect, analyze, and report critical test process information
                and automatically direct corrective action.
              
              Starting
                  in 2003, we changed our corporate strategy and refocused the Company
                  back
                  to its core competency of wafer probing and extending  wafer
                  probing technologies throughout the back-end of the semiconductor
                  manufacturing process. In 2003 we sold our Design for Manufacturing
                  (“DFM”) and Fab Solutions software product lines and our Optical
                  Inspection product line. This new focus allows us to spend more
                  time
                  developing and delivering innovative products to help our customers
                  overcome their most critical semiconductor test challenges. In
                  2004, we
                  introduced a new extended performance 200mm wafer prober, the 4090μ+, and
                  in January 2005 a new 300mm prober, the EG6000, that represents
                  a major
                  advancement in prober design and automation and is focused on providing
                  better performance than our competitor’s products.
              Additional
                    information about Electroglas is available on our web site
                    (www.electroglas.com). Electroglas makes available free of charge
                    on our website Reports filed pursuant to Section 13(a) or 15(d)
                    of the
                    Securities Exchange Act of 1934, as amended, as soon as reasonably
                    practicable after we electronically file them with or furnish
                    them to the
                    SEC. The public may read and copy any materials that we file
                    with the SEC
                    at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
                    20549. The public may obtain information by calling the SEC at
                    1-800-SEC-0330. Our filings also are available at the SEC’s website at
                    http://www.sec.gov .





**Industry
      Background**





Semiconductor
      devices are fabricated by repeating a series of complex process steps on a
      substrate, or wafer, which is usually made of silicon. 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” or “chip”, the
      number of which depends on the area of the circuits and the size of the wafer.
      These wafers measure from 75mm to 300mm, or 3 to 12 inches, in diameter.
      Manufacturers have increasingly utilized larger diameter wafers to achieve
      more
      cost-effective production. The move to 300mm (12-inch) wafers, a significant
      trend for equipment manufacturers, began in 2000. The manufacture of
      semiconductor devices is very capital intensive. A typical state of the art
      facility, usually called a “wafer fab”, can cost more than $2.0 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 requires significant expenditures
      by semiconductor manufacturers.





5




***Wafer
      Probing***





A
      wafer
      prober successively positions each die on the wafer so that the electrical
      contact points, or 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 device
      being tested, is connected to a test system, also supplied by other suppliers,
      which performs the required parametric or functional test. Parametric testing
      is
      typically performed during the wafer fabrication process, referred to as
“in-line testing,” to measure electrical parameters of the device being
      fabricated. 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 commonly called “wafer
      sort.” Wafers often go through several wafer probing steps during the
      manufacturing process.




Wafer
        probing requires sophisticated machine vision and software capabilities to
        align
        each die on a wafer — often to accuracies as tight as 2.5μm — to pins on a probe
        card connected to a tester that measures electrical
        performance.







Wafer
      probing requires sophisticated machine vision and software capabilities to
      align
      each die on a wafer — often to accuracies as tight as 2.5μm — to pins on a probe
      card connected to a tester that measures electrical performance.





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. Positioning accuracy is a key requirement
      of an automatic wafer prober.  As manufacturers continue to shrink
      their device sizes, the manufacturing equipment accuracy must continue to keep
      pace with reduced feature sizes.  Throughput is another key prober
      feature, because allowing more devices to be tested in a given amount of time
      reduces the overall cost of test.  Similarly, wafer probers are
      required to be reliable, easy to use, portable, and very robust at handling
      the
      test process without failure or interruption, since these cause loss of
      throughput for the entire test cell. Recently, new device manufacturing
      processes, such as the use of copper for the metal layers and the use of very
      soft, delicate dielectric layers, have required a new level of control over
      the
      speed and accuracy with which probes are brought into contact with the pads
      to
      prevent damage and yield loss.





Wafer
      probers are also used during in-line parametric testing. In-line testing
      requires special equipment features such as clean room compatibility and
      low-noise electrical measurement capability, as tests are carried out during
      the
      fabrication process. This testing is done to verify the quality of 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. We estimate based
      upon our experience that wafer sort applications represent as much as 85%-90%
      of
      the market for automatic wafer probers. The remainder is divided between in-line
      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, commonly
      called “test houses”, perform the wafer testing service and often provide
      assembly and packaging 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 may require from 20 to over 100 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.





6




***Test
      Floor Management***





Process
      management software plays an important role in Integrated Circuit (IC)
      manufacturing. Capital and operating costs of a fabrication facility are very
      high so semiconductor manufacturers seek ways to improve overall equipment
      efficiency (OEE) and optimize their processes. Test houses and Integrated Device
      Manufacturers look to reduce the cost of test and improve quality through
      software monitoring, analysis, and the automation of their test
      floors.  In wafer sort, network software is increasingly being used to
      manage wafer information to speed the identification of yield shortfalls and
      to
      reduce reprobe rates by collecting wafer maps from multiple passes for all
      systems and storing the files in a common database for viewing, analyzing and
      archiving. Other uses include prior step verification to insure that wafers
      accurately flow through a pre-defined set of steps and are not tested if they
      have not completed the previous step in the process and, product file management
      capabilities that allow the user to save a master template for product file
      set-up that can be accessed by all test systems on the test floor.





**Our
      Strategy**





We
      are a
      major supplier of wafer probers due to a combination of strengths, including
      a
      large installed base, 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 capabilities, our strategy is comprised of the following
      key
      elements:





•
            *Focus
                on supplying high-speed tools for high-volume semiconductor testing
                that
                meet our customers’ requirements for accuracy, reliability, and
                production-worthiness.* We have refocused our efforts on our core
                technology, wafer probing. We have invested in research and development
                to
                add features and functionality to our 200mm wafer prober products,
                as well
                as to improve and expand our advanced 300mm wafer probing platform.
                In
                addition, we have developed advanced test floor management software
                and
                applications to allow our wafer prober customers to more effectively
                manage their test floor operations. We expect to continue to invest
                in
                research and development of our wafer prober products and software
                to
                anticipate and address technological advances in semiconductor
                processing.





•
            *Maintain
                customer relationships based on trust and dependability and good
                service.* We have long-standing relationships with our customers and
                we seek to strengthen our existing customer relationships by providing
                high levels of service and support. Our development of products and
                product enhancements is market-driven. Marketing, engineering, sales
                and
                management personnel collaborate with customer counterparts to determine
                customers’ needs and specifications, partnering with them to develop solid
                solutions for wafer probing and test floor management to drive greater
                efficiencies in their wafer testing
                processes.





•
            *Emphasize
                quality products.*  We believe in providing high-quality
                products that are dependable tools for our customer’s manufacturing
                processes. We have received quality awards from our customers and
                the
                SEMATECH Partnering for Total Quality award. We have a company-wide
                quality program, and we received International Organization for
                Standardization (ISO) 9002 Certification in 1997 and ISO 9001
                Certification in 2000. Our Singapore manufacturing facility was ISO
                Certified in 2002 to the new ISO 9001/2000 Standard and ISO 14001/1996
                Environmental Standard.





•
            *Emphasize
                outsourcing in functional areas where we believe it is cost effective
                and
                increases the Company’s competitive position.*We are in discussions
                with a contract manufacturer to outsource our Singapore manufacturing
                to
                China.  We also are in discussions with a number of distributors
                in Asia to sell our products.  We cannot assure you that these
                discussions will result in our successful transition to a
                manufacturing-outsourcing model or that we will achieve the expected
                cost
                efficiencies and increase in
                competitiveness.





**Products**




***Wafer
      Probers***





*Horizon
      4000 Series:*The 4090μ+ (4090 Micro Plus) was introduced in Q4
      2004 and is our new extended performance wafer prober system for 200mm wafers.
      The 4090μ+ addresses the demands of testing fine pitch devices, semiconductors
      with copper interconnects and low k dielectric processes, and other advanced
      applications. Employing MicroTouchTM, a feature that decreases the impact force
      as the probe pins contact the bond pads, the 4090μ+ reduces touchdown damage
      that can occur when testing fragile copper and low k devices or when pads are
      located over active circuit geometry. The 4090μ+ increases test cell
      availability and throughput while simultaneously reducing test cost by making
      improvements in how probe-to-pad alignment is maintained in varying temperature
      environments. In addition, the 4090μ+ has simplified and fully automated
      operations for high volume manufacturing applications, such as those that exist
      in integrated device manufacturer (IDM) and contract test
      facilities.  Customers who want to use the latest high productivity
      200mm probing solution from Electroglas can also cost-effectively upgrade
      existing Electroglas 4080, 4090 and 4090μ prober systems with 4090μ+
      technology.





7




*The
      EG6000:*Developed in 2004 and introduced in January 2005, the
      new EG6000 300mm probing system from Electroglas is the only 300mm prober that
      employs precision direct-drive technology to enable it to achieve the highest
      positioning accuracy currently available. Designed for advanced applications
      such as copper and low k dielectrics, the system employs a proprietary stage
      and
      control technology enabling highly accurate positioning of the test devices
      while moving devices into contact with the probes for test. MicroTouch adds
      the
      ability to control the impact forces while probing on delicate devices. In
      addition, patent pending active vibration cancellation technology reduces
      internally and externally generated vibrations while maintaining the integrity
      of the connection between devices under test and the probe pins, which can
      improve test yield.  It also allows the prober to have higher
      throughput in typical test applications with raised test floors that are subject
      to vibration. The EG6000 features the new Advanced Vision System for better
      accuracy, robustness and speed in aligning devices to the probe card for test.
      It also features a sophisticated system for automatically measuring and
      compensating for thermal changes in the system components while testing at
      hot
      or cold temperatures. The EG6000 features a broader range of application
      capabilities as well as many refinements and improvements in accuracy,
      throughput, automation, portability, and reliability. This allows the EG6000
      to
      address customer’s needs for high volume production wafer test which is the
      majority of the 300mm prober market.  During 2007, the Company has
      successfully completed a number of customer evaluations against its competition,
      particularly in the SOC area.





*Parametric
      Probers:*The EG6000e*,*introduced in December 2005 is
      targeted at the parametric test (“e-test”) segment of the wafer probe market.
      This system incorporates patented technology licensed from, 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.








***Test
      Floor Management Software Products***





*SORTmanager:*
      Bridging the gap between raw data and genuine process improvement is the
      difference between data overload and real productivity gains. Electroglas’
SORTmanager provides that bridge, enabling a secure, web-based environment
      for
      the analysis, reporting and control of sort-floor processes. Data about test
      results, binning, prober performance and throughput can be collected from all
      *SORTmanager*-connected wafer probers, and this information can then be
      delivered via dynamic and interactive web pages that allow users to view the
      underlying data or perform additional analysis.  Powerful web
      publishing capabilities allow web reports to be created and distributed
      throughout an enterprise.  *SORTmanager*’s flexible data-access
      and information viewing capabilities, combined with a comprehensive suite of
      pre-built applications and a scripting language for fine tuning applications
      to
      customer needs, makes *SORTmanager* a unique and powerful test floor
      management tool.





**Engineering,
      Research and Development**





The
      market
      for semiconductor manufacturing equipment is characterized by continuous
      technological development and a high rate of product innovation. We believe
      that
      continued, rapid development of new products and enhancements to existing
      products is necessary to maintain our competitive position. For example, we
      devote a significant portion of our personnel and financial resources to
      engineering, research and development programs to continue development of our
      EG6000 300mm platform. We use our close relationships with our key customers
      to
      make product improvements that respond to our customers’ needs.





Engineering,
      research and development expenses were $11.1 million $11.5 million, $5.5
      million, and $16.2 million for the fiscal years ended May 31, 2007 and 2006,
      the
      five month period ending May 31, 2005, and the fiscal year ended December 31,
      2004, respectively, or 25%, 26%, 49%, and 26%, of net sales.





**Marketing,
      Sales and Service**





We
      sell
      our products directly to end-users through a direct sales force and
      distributors. We generally sell products to customers on net 30 to 60 day terms
      from shipment or acceptance. Other, primarily Asian customers are required
      to
      deliver a letter of credit typically payable upon product delivery. We generally
      warrant our products for a period of 13 months from the date of shipment for
      material and labor repair. Installation and certain training are customarily
      included in the price of the product. Customers may enter into repair and
      maintenance service contracts covering our products. Our field engineers provide
      customers (with products not under warranty or service contracts) with call
      out
      repair and maintenance services. We also train our customers’ employees to
      perform routine service for a fee.





8




We
      maintain sales and service personnel throughout the United States and Europe
      in
      strategic locations to meet our customers’ needs. In Asia we maintain sales and
      service offices in the People’s Republic of China, Singapore and
      Taiwan.





**Customers**





We
      sell
      our products to leading semiconductor manufacturers and contract test companies
      throughout the world. Customers that accounted for more than 10% of our net
      sales were NXP Semiconductors for the fiscal year ended May 31, 2007, ST
      Microelectronics for the fiscal year ended May 31, 2006 and the five month
      period ended May 31, 2005, and Atmel and ST Microelectronics for the fiscal
      year
      ended December 31, 2004. International sales represented 56%, 58%, 73%, and
      63%,
      of our net sales for the fiscal years ended May 31, 2007 and 2006, the five
      month period ended May 31, 2005, and the fiscal year ended December 31, 2004,
      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**





Our
      assembly equipment manufacturing activities consist primarily of integrating
      components and subassemblies to create finished probers and spares and upgrades
      configured to customer specifications. We schedule production based on firm
      customer commitments and anticipated orders during the planning cycle. In
      December 2002, we completed our move of equipment manufacturing from San Jose,
      California to Singapore to reduce production costs. The Company is negotiating
      a
      five year Manufacturing Services Agreement (“Agreement”) with a contract
      manufacturer to outsource its Singapore manufacturing to China.  We
      believe through outsourcing our manufacturing we can achieve cost efficiencies
      and volume flexibility.  However, we cannot assure we will be
      successful in transitioning to a manufacturing-outsourcing model or that we
      will
      achieve the expected cost efficiencies and volume flexibility. It is anticipated
      that this project will be implemented in two phases. The first phase of
      approximately six months will transfer the Company’s 8 inch probers, the 4090
      product lines, and the second phase, also of approximately six months of
      duration, will transfer the Company’s 12 inch probers, the EG6000 product lines.
      We expect this agreement will require the Company to submit rolling unit
      forecasts, allow the Company to reschedule and modify the forecasts within
      certain period guidelines, and in certain circumstances allow the Company to
      share the benefits of cost reduction projects.  In addition to rapid
      product innovation, the wafer prober market is subject to significant price
      competition and product cost reductions are required. Certain of our components
      and subassemblies included in our products are obtained from a single source.
      We
      believe that alternative sources exist or can be developed, if required. Quality
      control is maintained throughout the assembly and test process, with documented
      instructions and test procedures and final inspection for all manufactured
      equipment prior to shipment. We train many of our employees in basic quality
      skills and regularly participate in quality sharing meetings with other
      equipment manufacturers and customer quality audits of procedures and personnel.
      We are ISO 9001/2000 and ISO 14001/1996 Certified.





**Backlog**





Our
      backlog was $7.6 million and $9.1 million as of May 31, 2007 and 2006,
      respectively. Our backlog consists of product orders for which a customer
      purchase order has been received and which is scheduled for shipment or is
      to be
      earned within the next twelve months. Orders are subject to cancellation or
      rescheduling by the customer, sometimes with a cancellation charge. Due to
      timing of order placement and product lead times, changes in product delivery
      schedules and cancellations, and because sales will often reflect orders shipped
      in the same quarter received, our backlog at any particular date is not
      necessarily indicative of sales for the succeeding period. Backlog also includes
      deferred revenue comprised of products shipped (but not recognizable as revenue
      per our revenue recognition policy), maintenance revenue that is being amortized
      over twenty-four 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, price,
      service and technical support, product improvements, established relationships
      with customers, and product familiarity. We believe that our products compete
      favorably with respect to these factors. Our major competitors in the prober
      market are Tokyo Electron Limited (“TEL”) and Tokyo Seimitsu (“TSK”), both of
      which are based in Japan. In this market, these competitors have greater
      financial, engineering and manufacturing resources than we have, as well as
      larger service organizations and long-standing customer relationships. We cannot
      assure you that levels of competition will not intensify or that our
      technological advantages will be reduced or lost as a result of technological
      advances by competitors or changes in semiconductor processing technology.
      For a
      more detailed discussion of the competition we face, see “Factors that May
      Affect Results and Financial Condition.”





9




**Patents,
      Trademarks, Copyrights and Other Intellectual Property**





We
      believe
      that the success of our business depends more on the technical competence,
      creativity and marketing abilities of our employees, rather than on patents,
      trademarks and copyrights. Nevertheless, we have a policy of seeking patents
      when appropriate on inventions concerning new products and improvements as
      part
      of our ongoing research, development and manufacturing activities. We own over
      30 patents and have applied for additional patent protection in the United
      States and abroad for the technology in our products. We also have several
      registered United States and international trademarks. We maintain unregistered
      copyrights on our software and typically maintain the source code for our
      products as a trade secret. We also rely on trade secret protection for our
      confidential and proprietary information. We routinely enter into
      confidentiality agreements with our employees. There can be no assurance;
      however, that others will not independently gain information and techniques
      or
      otherwise gain access to our trade secrets or that we can meaningfully protect
      our trade secrets. For a more detailed discussion regarding risks related to
      our
      intellectual property, see “Factors that May Affect Results and Financial
      Condition.”





**Employees**





As
      of May
      31, 2007, we employed 219 people. Many of our employees are highly skilled,
      and
      our success will depend in part upon our ability to attract and retain such
      employees, who are in great demand. We have never had a work stoppage or strike,
      and there are no employees represented by a labor union or covered by a
      collective bargaining agreement. We consider our employee relations to be
      good.





**Item
      1A.  *Risk Factors***




*Semiconductor
      industry downturns adversely affect our revenues and operating results*. Our
      business largely depends on capital expenditures by semiconductor manufacturers
      and semiconductor test companies, 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. During a down cycle, we must be in a
      position to adjust our cost and expense structure to prevailing market
      conditions. Our ability to reduce expenses may be limited by our need to invest
      in the engineering, research and development and marketing required to penetrate
      targeted markets and maintain extensive customer service and support. During
      periods of rapid growth, we must be able to rapidly increase manufacturing
      capacity and personnel to meet customer demand. We cannot assure our investors
      that these objectives can be met, which would likely have a material and adverse
      effect on our business and operating results.






*Our
      historical financial results
      have been, and our future financial results are anticipated to be, subject
      to
      substantial fluctuations.**If we do not
      meet our forecasts and
      additional capital is unavailable, we may have insufficient capital available
      to
      us to support our business activities and****continue
      to operate our business
      pursuant to our current business plan.*Total revenues were
      $44.6 million, $44.3
      million, $11.2 million, and $63.0 million, respectively, for the years ended
      May
      31, 2007 and 2006, the five months ended May 31, 2005 and the year ended
      December 31, 2004. We incurred operating losses of $17.9 million, $15.7 million,
      $11.5 million, and $15.8 million for the years ended May 31, 2007 and 2006,
      the
      five months ended May 31, 2005, and the year ended December 31, 2004,
      respectively. The demand for our products follows the semiconductor test
      markets, which remain highly cyclical and difficult to forecast. Another
      economic slowdown and/or changes in demand for our products and services and
      other factors could continue to adversely affect our business in the near term,
      and we may experience additional declines in revenue and increases in operating
      losses. We cannot assure our investors that we will be able to return to
      operating profitability or that, if we do, we will be able to sustain it. Our
      cash, cash equivalents and short-term investments totaled $30.8 million at
      May
      31, 2007.  Our cash used in operating activities was $11.3 million during
      the year ended May 31, 2007.We currently anticipate
      that our future
      cash from operations, available cash and cash equivalents, and our available
      credit facilities at May 31, 2007 should be sufficient to meet our anticipated
      needs for working capital and capital expenditures through the next twelve
      months.Although we are
      committed to the successful execution of our operating plan and will take
      further action as necessary to align our operations and reduce expenses, there
      can be no assurance that our cash utilization will remain at or be reduced
      below
      its current level or that we will have sufficient capital available to us to
      support our business activities andcontinue to operate our
      business
      pursuant to our current business plan.We cannot assure you
      that additional
      financingif
      neededwill be available on
      terms favorable to us, or at all.If adequate funds are
      not available or
      are not available on terms favorable to us, we may not be able to continue
      to
      operate our business pursuant to our current business plan and our ability
      to
      run our business would be negatively impacted.






10




*Our
      operating results are subject to variability and uncertainty, which could
      negatively impact our stock price.*  We have experienced and
      expect to continue to experience significant fluctuations in our
      results.  Our backlog at the beginning of each period does not
      necessarily determine actual sales for any succeeding period.  Our
      sales have often reflected orders shipped in the same period that they were
      received.  Customers may cancel or reschedule shipments, and
      production difficulties could delay shipments.  For the years ended
      May 31, 2007 and 2006, and December 31, 2004, five of our customers accounted
      for 42%, 51%, and 63%, respectively, of our net sales.  If one or more
      of our major customers delayed, ceased or significantly curtailed its purchases,
      it could cause our quarterly results to fluctuate and would likely have a
      material adverse effect on our results of operations.  Other factors
      that may influence our 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,
      our 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 our
      competitors.  Accordingly, our results of operations are subject to
      significant variability and uncertainty from quarter to quarter, which could
      adversely affect our stock price.




*If
      we
      do not continue to develop and successfully market new products, our business
      will be negatively affected.*We believe that our future success
      will depend in part upon our ability to continue to enhance existing products
      and to develop and manufacture new products. As a result, we expect to continue
      investing in selective new wafer prober development programs. There can be
      no
      assurance that we will be successful in the introduction, marketing and cost
      effective manufacture of any of our new products; that we will be able to
      develop and introduce new products in a timely manner; enhance our existing
      products and processes to satisfy customer needs or achieve market acceptance;
      or that the new markets for which we are developing new products or expect
      to
      sell current products will develop sufficiently. To develop new products
      successfully, we depend on close relationships with our customers and the
      willingness of those customers to share information with us. The failure to
      develop products and introduce them successfully and in a timely manner could
      adversely affect our competitive position and results of operations. For
      example, our 300mm wafer probers have not yet achieved broad market acceptance
      due to the lateness of the introduction of a production prober, which has
      resulted in a significant loss in overall market share.  Additionally,
      the customer evaluation process for our new 300mm prober products can be lengthy
      and can consume significant Company resources.  Our future sales will
      be impacted by our ability to successfully complete these new product
      evaluations.




*If
      we
      do not successfully compete in the markets in which we do business, our business
      and results of operations will be negatively affected*.  Our major
      competitors in the prober market are Tokyo Electron Limited (“TEL”) and Tokyo
      Seimitsu (“TSK”), both of which are based in Japan. In the prober market, these
      competitors have greater financial, engineering and manufacturing resources
      than
      we do as well as larger service organizations and long-standing customer
      relationships. Our 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 our operating results. Although we
      believe we have certain technological and other advantages over our competitors,
      maintaining and capitalizing on these advantages will require us to continue
      a
      high level of investment in engineering, research and development, marketing,
      and customer service. We cannot assure you that we will have sufficient
      resources to continue to make these investments or that we will be able to
      make
      the technological advances necessary to maintain such competitive
      advantages




*We
      have incurred substantial indebtedness as a result of the sale of convertible
      Notes.*As of May 31, 2007 the Company had $8.5 million of 5.25%
      Notes which become due on June 15, 2007. In March 2007, the Company completed
      a
      $25.75 million private placement of 6.25% Notes (“6.25% Notes”). The Company
      used part of  the 6.25% Notes proceeds to repay in June the $8.5
      million of 5.25% Notes which matured. These 6.25% Notes obligations are due
      in
      2027; however, the holders have the right in March 2011 and on various other
      dates prior to maturity to demand repayment in full. Additionally, one of the
      covenants of our debenture agreement with respect to the 6.25% Notes can be
      interpreted such that if we are late with any of our required filings under
      the
      Securities Act of 1934, as amended (“1934 Act”), and if we fail to effect a cure
      within 60 days, the holders of the 6.25% Notes can put the 6.25% Notes back
      to the Company, whereby the 6.25% Notes become immediately due and payable.
      As a
      result of our restructuring efforts, the Company has fewer employees to perform
      the day-to-day controls, processes and activities which increases the risk
      that
      we will be unable to make timely filings in accordance with the 1934 Act.These
      6.25% Notes could materially and adversely affect our ability to obtain
      additional debt financing for working capital, acquisitions or other purposes,
      limit our flexibility in planning for or reacting to changes in our business,
      reduce funds available for use in our operations and could make us more
      vulnerable to industry downturns and competitive pressures. We expect holders
      of
      the 6.25% Notes to convert their notes or require us to purchase our outstanding
      6.25% Notes in March, 2011, the earliest date allowed by the terms of the 6.25%
      Notes. Our ability to meet our debt service obligations will be dependent upon
      our future performance, which will be subject to financial, business and other
      factors affecting our operations, some of which are beyond our
      control.






11




*If
      we
      do not successfully protect our intellectual property, our business could be
      negatively impacted*.  Our success depends in significant part on
      our intellectual property. While we attempt to protect our intellectual property
      through patents, copyrights and trade secrets, we believe that our success
      will
      depend more upon innovation, technological expertise and distribution strength.
      There can be no assurance that we will successfully protect our technology
      or
      that competitors will not be able to develop similar technology. No assurance
      can be given that the claims allowed on any patents we hold will be sufficiently
      broad to protect our technology. In addition, we cannot assure you that any
      patents issued to us will not be challenged, invalidated or circumvented, or
      that the rights granted thereunder will provide us with competitive
      advantages.




*Our
      dependence on contract manufacturers and sole source suppliers and our
      transition to a completely outsourced manufacturing model may prevent us from
      delivering our products on time, may damage our customer relations, and may
      harm
      our business.*  The Company is negotiating a five year
      Manufacturing Services Agreement (“Agreement”) with a contract manufacturer to
      outsource its Singapore manufacturing to China. .  We believe through
      outsourcing our manufacturing we can achieve cost efficiencies and volume
      flexibility.  However, we cannot assure we will be successful in
      transitioning to a manufacturing-outsourcing model or that we will achieve
      the
      expected cost efficiencies and volume flexibility.  It is anticipated
      that this project will be implemented in two phases. The first phase of
      approximately six months will transfer the Company’s 8 inch probers, the 4090
      product lines, and the second phase, also of approximately six months of
      duration, will transfer the Company’s 12 inch probers, the EG6000 product lines.
      We expect this agreement will require the Company to submit rolling unit
      forecasts, allow the Company to reschedule and modify the forecasts within
      certain period guidelines, and in certain circumstances allow the Company to
      share the benefits of cost reduction projects. Reliance on a third-party
      manufacturer exposes us to significant risks, especially inadequate capacity,
      late delivery, substandard quality and high costs. Moreover, because our
      products are complex to manufacture, transitioning manufacturing activities
      from
      one location to another is complicated. We cannot be certain that existing
      or
      future contract manufacturers will be able to manufacture our products on a
      timely and cost-effective basis, or to our quality and performance
      specifications. Should our contract manufacturer be unable to meet our
      manufacturing requirements in a timely manner, whether as a result of
      transitional issues or otherwise, our ability to ship orders and to realize
      the
      related revenues when anticipated could be materially impacted.





We
      also
      use numerous suppliers to supply components and subassemblies for the
      manufacture and support of our products and systems. While we make reasonable
      efforts to ensure that such components and subassemblies are available from
      multiple suppliers, this is not always possible.  Although we seek to
      reduce our 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 our 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 our business, financial
      condition and results of operations.




*If
      we
      do not successfully address the challenges inherent in conducting international
      sales and operations, our business and results of operations will be negatively
      impacted*.  We have experienced fluctuations in our international
      sales and operations.  International sales accounted for 56%, 58%,
      73%, and 63% of our net sales for the years ended May 31, 2007 and 2006, five
      months ended May 31, 2005, and year ended December 31, 2004,
      respectively.  We expect international sales to continue to represent
      a significant percentage of net sales.  We are subject to certain
      risks inherent in doing business in international markets, one or more of which
      could adversely affect our international sales and operations,
      including:






•          the
      imposition of government controls on our business and/or business
      partners;


•          fluctuations
      in the United States dollar, which could increase our foreign sales prices
      in
      local currencies;


•          export
      license requirements;


•          restrictions
      on the export of technology;


•          changes
      in tariffs;


•          legal
      and cultural differences in the conduct of business;


•          difficulties
      in staffing and managing international operations;


•          strikes;


•          longer
      payment cycles;


•          difficulties
      in collecting accounts receivable in foreign countries;


•          withholding
      taxes that limit the repatriation of earnings;


•          trade
      barriers and restrictions;


•          immigration
      regulations that limit our ability to deploy employees;


•          political
      instability;


•          war
      and acts of terrorism;






12




•          natural
      disasters; and


•          variations
      in effective income tax rates among countries where we conduct
      business.




Although
      these and similar regulatory, geopolitical and global economic factors have
      not
      yet had a material adverse effect on our operations, there can be no assurance
      that such factors will not adversely impact our operations in the future or
      require us to modify our current business practices. In addition, the laws
      of
      certain foreign countries where we do business may not protect our intellectual
      property rights to the same extent as do the laws of the United States. Further,
      we have found it difficult to penetrate the large Japanese market, which
      represents a significant percentage of the worldwide wafer prober
      market.  Our past sales in Japan have not been
      significant.




In
      addition, an increasing portion of our products and the products we purchase
      from our suppliers are sourced or manufactured in foreign locations, including
      China, and a large portion of the devices our products test are fabricated
      and
      tested by foundries and subcontractors in Taiwan, Singapore, China and other
      parts of Asia. As a result, we are subject to a number of economic and other
      risks, particularly during times of political or financial instability in these
      regions. Disruption of manufacturing or supply sources in these international
      locations could materially adversely impact our ability to fill customer orders
      and potentially result in lost business.




*Our
      business will be harmed if we cannot hire and retain key
      employees*.  Our future success partly depends on our ability to
      hire and retain key personnel. We also need to attract additional skilled
      personnel in all areas to grow our business. While many of our current employees
      have many years of service with us, there can be no assurance that we will
      be
      able to retain our existing personnel or attract additional qualified employees
      in the future. Our Common Stock is currently trading at a price below the
      exercise price of most of our outstanding stock options.




*Our
      outsource providers and distributors may fail to perform as we
      expect.*Outsource providers have played and will play key roles
      in our manufacturing operations and in many of our transactional and
      administrative functions, such as information technology, facilities management,
      and certain elements of our finance organization.  Also, we rely on
      distributors in certain geographies to sell our products.  Although we
      aim at selecting reputable providers and secure their performance on terms
      documented in written contracts, it is possible that one or more of these
      providers could fail to perform as we expect and such failure could have an
      adverse impact on our business.  In addition, the expansive role of
      outsource providers has required and will continue to require us to implement
      changes to our existing operations and to adopt new procedures to deal with
      and
      manage the performance of the outsource providers.  Any delay or
      failure in the implementation of our operational changes and new procedures
      could adversely affect our customer relationships and/or have a negative effect
      on our operating results.




*Our
      Charter documents and Shareholders Rights Plan, as well as Delaware Law, could
      make it difficult for a third party to acquire us*.  Our
      Shareholders Rights Plan and certain provisions of our Certificate of
      Incorporation and Delaware law could discourage potential acquisition proposals
      and could delay or prevent a change in our control. 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 our
      Common Stock. Such provisions may also inhibit fluctuations in the market price
      of our 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 our control. 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.  We have
      no current plans to issue any Preferred Stock.




*We
      are
      continuously exposed to risks from recent legislation requiring companies to
      evaluate those internal controls*. Section 404 of the Sarbanes-Oxley Act of
      2002 requires our management to report on, and our independent auditors to
      attest to, the effectiveness of our internal control structure and procedures
      for financial reporting each year. We expect to continue to incur expenses
      and
      to devote management resources to Section 404 compliance. In the event that
      our
      chief executive officer, chief financial officer or independent registered
      public accounting firm determine that our internal controls over financial
      reporting are not effective as defined under Section 404, investor perceptions
      of Electroglas may be adversely affected and could cause a decline in the market
      price of our stock.




**Item
      1B**.  ***Unresolved Staff
      Comments***





None.






13




**Item
      2*.  Properties***





In
      February 2005, we entered into an agreement with 5729 Fontanoso Way, LLC to
      lease 78,000 square feet for our corporate headquarters. This facility includes
      most of the Company’s engineering, marketing, and general and administrative
      functions. The term of this lease is five years with an option to renew for
      an
      additional five years. In January 2002, we entered into a three-year operating
      lease for a 39,000 square foot manufacturing facility in Singapore. This lease
      was renewed in December 2004 for two additional years and during the third
      quarter, 2007, we renewed this lease for two more years at prevailing market
      of
      $0.5 million annually.  Our Singapore factory operates one shift and
      uses overtime as required to meet customer commitments, especially at quarter
      end.





**Item
      3.*Legal Proceedings***





We
      are not
      currently involved in any legal actions that we believe are material. From
      time
      to time, however, we 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 could be trebled.





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





No
      matters
      were submitted to a vote of our security holders during the fourth quarter
      ended
      May 31, 2007.





**Part
      II**





**Item
      5.  *Market for the Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities***





**Market
      Prices for Common Stock**





Our
      common
      stock is traded on the Nasdaq Global Market under the symbol “EGLS”. The
      following table sets forth for the periods indicated the closing high and low
      sales prices per share.





**Quarter**
            
            **Year
                ended**
              **May
                31, 2007**
            
            **Year  ended**
              **May
                31, 2006****High**
            **Low**
            
            **High**
            **Low**1st
            
            $3.81
            $2.29
            
            $4.49
            $2.792nd
            
            $3.22
            $2.39
            
            $4.25
            $2.883rd
            
            $2.99
            $2.29
            
            $4.83
            $2.884th
            
            $2.55
            $1.92
            
            $5.92
            $3.30








On
      July
      20, 2007, the closing price of our common stock was $2.49. We have never
      declared or paid cash dividends and we do not anticipate paying cash dividends
      in the foreseeable future. Also, the terms of the Company’s 6.25% Notes restrict
      the Company from paying dividends. We currently intend to retain any future
      earnings to fund the development and growth of our business. As of July 16,
      2007, we had approximately 4,119 stockholders of record.





The
      following graph compares the cumulative 53-month total return of holders of
      Electroglas, Inc.'s common stock with the cumulative total returns of the NASDAQ
      Composite index and the RDG Semiconductor Composite index. The graph tracks
      the
      performance of a $100 investment in our common stock and in each of the indexes
      (with the reinvestment of all dividends) from December 31, 2002 to May 31,
      2007.






14













**12/02**
            **12/03**
            **12/04**
            **5/05**
            **5/06**
            **5/07****Electroglas,
                Inc.**
            
            **100.00**
            **237.01**
            **305.84**
            **226.62**
            **225.97**
            **140.91****NASDAQ
                Composite**
            
            **100.00**
            **148.91**
            **164.04**
            **155.16**
            **167.17**
            **202.25****RDG
                Semiconductor Composite**
            
            **100.00**
            **193.67**
            **154.67**
            **161.22**
            **160.09**
            **175.55**







*The
      stock price performance included in this graph is not necessarily indicative
      of
      future stock price performance.*





15




Item
      6.*Selected Financial Data*












**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Years
                  ended December 31,****In
                  thousands, except per share data**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002**Net
                  sales
              
              $
              44,624
              
              
              $
              44,317
              
              
              $
              11,223
              
              
              $
              63,004
              
              
              $
              44,967
              
              
              $
              57,135Gross
                  profit (loss) (1)
              
              
              9,483
              
              
              
              12,303
              
              
              
              1,109
              
              
              
              22,810
              
              
              
              220
              
              
              
              (3,223
              )Engineering,
                  research and development
              
              
              11,073
              
              
              
              11,510
              
              
              
              5,524
              
              
              
              16,194
              
              
              
              21,785
              
              
              
              31,552Sales,
                  general and administrative (2)
              
              
              16,593
              
              
              
              16,153
              
              
              
              7,038
              
              
              
              17,182
              
              
              
              33,559
              
              
              
              39,180Restructuring
                  charges
              
              
              129
              
              
              
              239
              
              
              
              -
              
              
              
              979
              
              
              
              3,909
              
              
              
              4,613Impairment
                  charges
              
              
              -
              
              
              
              89
              
              
              
              86
              
              
              
              4,251
              
              
              
              6,254
              
              
              
              2,407Indemnification
                  release
              
              
              (459
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Gains
                  on sales of product lines
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (7,872
              )
              
              
              -Operating
                  (loss)
              
              
              (17,853
              )
              
              
              (15,688
              )
              
              
              (11,539
              )
              
              
              (15,796
              )
              
              
              (57,415
              )
              
              
              (80,975
              )Interest
                  income (expense), net
              
              
              (487
              )
              
              
              (982
              )
              
              
              (499
              )
              
              
              (2,077
              )
              
              
              (2,822
              )
              
              
              907Gain
                  on revaluation of warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,264Gain
                  on sale of long term investment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,545
              
              
              
              -
              
              
              
              -Gain
                  on settlement of long term liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,273
              
              
              
              -
              
              
              
              -Debt
                  conversion expense
              
              
              -
              
              
              
              (17,603
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Loss
                  on mark to market of financial instrumentrelated
                  to convertible debt
              
              
              (154
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
                  income (expense), net
              
              
              (280
              )
              
              
              (385
              )
              
              
              (350
              )
              
              
              (260
              )
              
              
              112
              
              
              
              32Net
                  (loss) before income taxes
              
              
              (18,774
              )
              
              
              (34,658
              )
              
              
              (12,388
              )
              
              
              (6,315
              )
              
              
              (60,125
              )
              
              
              (77,772
              )Provision
                  (benefit) for income taxes
              
              
              9
              
              
              
              (628
              )
              
              
              5
              
              
              
              57
              
              
              
              (1,153
              )
              
              
              (4,141
              )Net
                  (loss)
              
              
              (18,783
              )
              
              
              (34,030
              )
              
              
              (12,393
              )
              
              
              (6,372
              )
              
              
              (58,972
              )
              
              
              (73,631
              )Basic
                  and diluted net (loss) per share
              
              $
              (0.71
              )
              
              $
              (1.53
              )
              
              $
              (0.57
              )
              
              $
              (0.30
              )
              
              $
              (2.76
              )
              
              $
              (3.49
              )Shares
                  used in basic and diluted calculations
              
              
              26,285
              
              
              
              22,178
              
              
              
              21,762
              
              
              
              21,534
              
              
              
              21,343
              
              
              
              21,068Working
                  capital
              
              $
              33,559
              
              
              $
              32,524
              
              
              $
              54,433
              
              
              $
              69,865
              
              
              $
              43,463
              
              
              $
              76,985Total
                  assets
              
              $
              65,834
              
              
              $
              62,672
              
              
              $
              83,990
              
              
              $
              95,619
              
              
              $
              110,155
              
              
              $
              172,772Convertible
                  notes
              
              $
              31,337
              
              
              $
              8,330
              
              
              $
              32,413
              
              
              $
              34,123
              
              
              $
              33,630
              
              
              $
              33,169Total
                  stockholders' equity
              
              $
              15,503
              
              
              $
              33,182
              
              
              $
              32,432
              
              
              $
              44,662
              
              
              $
              50,265
              
              
              $
              108,045




(1)
            Gross
                profit for 2007 includes a $2.8 million inventory provision due to
                a
                reduced forecast for the strip handler product line, net of $0.6
                million
                of that reserved inventory which was subsequently sold. The Company
                also
                recorded a $0.7 million provision for excess inventory related to
                its 2001
                product line and $0.4 million for other inventory
                provisions


Gross
      profit for 2003 includes $3.2 million for inventory provisions, $3.7 million
      in
      write-offs of unreserved inventories, and $2.7 million in warranty charges.
      Gross profit for 2002 includes a $2.2 million for inventory provisions and
      $5.9
      million in write offs of unreserved inventories.


(2)
            Sales,
                general and administrative expenses for 2002 include a $2.8 million
                charge
                for lease impairment.





16




**Quarterly
      Consolidated Financial Data (Unaudited)**





Effective
      July 2005, Electroglas changed its fiscal year-end from December 31 to May
      31
      retroactive to May 31, 2005.  The Company’s fiscal quarters are every
      13 weeks and end on a Saturday. In the fiscal years ended December 31, our
      quarters ended on the Saturday nearest the end of the calendar
      quarter.




**Quarters
                  ended****2007,
                  in thousands, expect per share data**
              
              **May
                  31 2007**
              
              
              **March
                  3, 2007**
              
              
              **December
                  2, 2006**
              
              
              **September
                  2, 2006**Net
                  Sales
              
              $
              8,701
              
              
              $
              9,809
              
              
              $
              12,581
              
              
              $
              13,533Gross
                  profit (1)
              
              $
              529
              
              
              $
              3,080
              
              
              $
              3,891
              
              
              $
              1,983Net
                  loss
              
              $
              (6,609
              )
              
              $
              (3,123
              )
              
              $
              (3,226
              )
              
              $
              (5,825
              )Basic
                  and diluted net loss per share
              
              $
              (0.25
              )
              
              $
              (0.12
              )
              
              $
              (0.12
              )
              
              $
              (0.22
              )**Quarters
                  ended****2006,
                  in thousands, expect per share data**
              
              **May
                  31, 2006**
              
              
              **March
                  4, 2006**
              
              
              **December
                  3, 2005**
              
              
              **September
                  3, 2005**Net
                  Sales
              
              $
              13,449
              
              
              $
              11,305
              
              
              $
              9,879
              
              
              $
              9,685Gross
                  profit
              
              $
              4,998
              
              
              $
              3,368
              
              
              $
              1,809
              
              
              $
              2,129Net
                  loss (2)
              
              $
              (20,599
              )
              
              $
              (4,224
              )
              
              $
              (5,300
              )
              
              $
              (3,907
              )Basic
                  and diluted net loss per share
              
              $
              (0.89
              )
              
              $
              (0.19
              )
              
              $
              (0.24
              )
              
              $
              (0.18
              )






(1)
            Gross
                profit for 2007 includes: in the first quarter – a $3.4 million inventory
                provision due to a reduced forecast for the strip handler product
                line; in
                the second quarter - $0.6 million of a reversal of inventory reserve
                from
                the sale of strip handler products. During Q4 2007, the Company recorded
                a
                $0.7 million provision for excess inventory related to its 2001 product
                line and $0.4 million for other inventory
                provisions.


(2)
            Net
                loss for 2006 includes: in the fourth quarter - debt conversion expense
                of
                $17.6 million; in the second quarter - restructuring charges due
                to
                headcount reductions of $0.2 million and an impairment charge of
                $0.1
                million.





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





**Executive
      Overview**





We
      are a
      supplier of semiconductor manufacturing equipment and software to the global
      semiconductor industry. Our primary product line is automated wafer probing
      equipment and related network software to manage information from that
      equipment. In conjunction with automated test systems from other suppliers,
      our
      semiconductor manufacturing customers use our wafer probers and network software
      to quality test semiconductor wafers. Electroglas’ installed base is one of the
      largest in the industry, with over 15,000 wafer probers sold.





Starting
      in 2003, we changed our corporate strategy and refocused the Company back to
      its
      core competency of wafer probers and extending its wafer probing technologies
      throughout the back-end of the semiconductor manufacturing process. In December
      2004, we introduced a new extended performance 200mm wafer prober, the 4090μ+.
      In January 2005, we introduced a new 300mm prober, the EG6000, that represents
      a
      major advancement in prober design and automation and is focused on providing
      better performance than currently available from competitors’
products.





Our
      customers include both chip manufacturers and contract test companies. The
      demand for our products follows the semiconductor test markets, which remain
      highly cyclical and difficult to forecast. In addition, our 300mm wafer probers
      have not yet achieved broad market acceptance, which has resulted in a
      significant loss in overall market share. Our initial 300mm product, the 5|300,
      served the small market for 300mm parametric and process development
      applications but did not adequately meet customers’ requirements for high volume
      production test which is the large majority of the 300mm prober market. The
      new
      300mm prober, the EG6000, was developed to serve this much larger production
      test market. To stay competitive, grow our business over the long term, improve
      our gross margins, and generate operating cash flows, we must continue to invest
      in new technologies and product enhancements and at the same time, as necessary,
      rapidly adjust our expense structure during the hard to predict cyclical
      semiconductor equipment demand cycles.





Due
      to the
      cyclicality of the semiconductor equipment industry and the resulting market
      pressures, we are focusing our efforts in the following areas:





17


•
            Controlling
                and aligning our costs and revenues to move to break-even and then
                profitable levels of operation, including positive operating cash
                flows;


•
            Developing
                successful products and services to meet market windows in our target
                markets;


•
            Successfully
                completing the outsourcing of our
                manufacturing;


•
            Successfully
                completing new customer evaluations of our 300mm products;
                and


•
            Preparing
                ourselves for increases in customer demand while at the same time
                maintaining expense control and limiting increases in our cost
                structure.





There
      can
      be no assurances that these efforts will be successful. In order to become
      profitable, our market share for our products must improve.





Additional
      information about Electroglas is available on our website
      (www.electroglas.com) . Electroglas makes available free of charge on our
      website our Reports filed pursuant to Section 13(a) or 15(d) of the Securities
      Exchange Act of 1934, as amended, as soon as reasonably practicable after we
      electronically file them with the Securities Exchange Commission (“SEC”). The
      public may read and copy any materials that we file with the SEC at the SEC’s
      Public Reference Room (1-800-SEC-0330) at 100 F Street, NE, Washington, D.C.
      20549. Our filings are also available at the SEC’s website at
http://www.sec.gov.





**Critical
      Accounting Policies and Estimates**





*General:*Our
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United
      States.





*Use
      of
      Estimates:* The preparation of our 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,
      allowance for doubtful accounts, guarantee obligations, tax allowances and
      reserves, stock based compensation, valuation of long-lived assets, and accruals
      for such items as restructuring reserves.  We base our estimates on
      historical experience and on various other assumptions that we believe to be
      reasonable under the circumstances, the results of which form the basis for
      our
      judgments about the carrying values of assets and liabilities.  Actual
      results may differ materially from these estimates under different assumptions
      or conditions.





We
      believe
      the following critical accounting policies affect our more significant judgments
      or estimates used in the preparation of our consolidated financial statements.
      Senior management has discussed the development and selection of these critical
      accounting policies and estimates with the audit committee.





*Revenue
      recognition:*Revenue is recognized on the sale of the Company’s equipment
      when a customer purchase order or contract has been received, when the products
      or services have been delivered, when the total purchase price can be assured
      without making significant concessions, and when the Company’s ability to
      collect from its customer has been assured.  In recognizing revenue
      the Company makes certain assumptions and estimates, namely: (i) the Company
      considers a new system routinely accepted in the marketplace when three to
      five
      successful installations, based on our acceptance criteria, have been put into
      customer production; (ii) the Company considers systems delivered separately
      from options to have value to our customers on a stand alone basis if the
      options have a unique price assigned and are not significant to the total amount
      of the order and the options are not fundamental to the functionality of the
      system; (iii) the Company considers systems delivered separately from
      installation and training to have value to its  customers on a
      stand-alone basis because the equipment can readily be sold by the customer,
      customers are capable of installing the systems without the support of our
      installers, installation and training are routine and inconsequential to the
      total value of the transaction, and these services are routinely sold on a
      stand-alone basis; and (iv) for most customers the Company assumes that, based
      on past history, it will continue to collect its receivables from them without
      payment or product concessions, despite the fact that they have larger financial
      size relative to the Company and despite its dependence on them in a heavily
      concentrated industry. In an arrangement with multiple deliverables, such as
      training, installation and services, the delivered items are considered a
      separate unit of accounting if all of the following criteria are met: (i) the
      delivered items have value to the customer on a stand-alone basis, (ii) vendor
      specific objective evidence (VSOE) of fair value exists, which is based on
      the
      average price charged when each element is sold separately, and (iii) if the
      arrangement includes a general right of return relative to a delivered item,
      or
      if performance of the undelivered item is considered probable and substantially
      in the control of the Company.  If the Company cannot objectively
      determine the fair value of any undelivered element include in a multiple
      element arrangement, the Company defers revenue until all elements are delivered
      and service have been performed, or until fair value can be objectively
      determined for any remaining undelivered elements.  Revenue related to
      maintenance and service contracts is recognized ratably over the duration of
      the
      contracts.






18




*Inventory
      valuation:* Inventories are stated at lower of cost or market (estimated net
      realizable value) using the first-in, first-out (FIFO) method.  We
      periodically review the carrying value of inventories and non-cancelable
      purchase commitments by reviewing sales forecasts, material usage requirements,
      and by reviewing the impact of changes in technology on our products (including
      engineering design changes). These forecasts of changes in technology, future
      sales, and pricing are estimates. We may record charges to write down
      inventories based on these reviews and forecasts. If there is weak demand in
      the
      semiconductor equipment markets and orders fall below our forecasts, additional
      write downs of inventories may be required which will negatively impact gross
      margins. Inventory impairment charges are considered to permanently establish
      a
      new cost basis for inventory and are not subsequently reversed to income even
      if
      circumstances later suggest that increased carrying amounts are recoverable,
      except when the associated inventory is disposed of or sold.





*Warranty:*We generally warrant our products for a period of thirteen months from
      the
      date of shipment and we accrue a current liability for the estimated cost of
      warranty.  For our established 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 are made for specific technical
      problems.  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.  Estimates have historically approximated actual
      results.





*Allowance
      for doubtful accounts:*We closely monitor the collection of our
      accounts receivable and record a general allowance for doubtful accounts against
      aged accounts and a specific reserve for identified amounts that we believe
      are
      not recoverable. We sell primarily to large, well-established semiconductor
      manufacturers and semiconductor test companies and we have not experienced
      significant accounts receivable losses in the past. We have, however, from
      time
      to time experienced slowdowns in receivable collections, especially during
      semiconductor equipment down cycles, as customers extend their payment schedules
      to conserve their cash balances. If our customers continue to experience down
      cycles or if their financial conditions deteriorate, we may be required to
      increase our allowance for doubtful accounts. If a customer demonstrates a
      pattern of renegotiating terms or requesting concessions prior to payment,
      we
      would defer revenue until the price was considered fixed and determinable.
      Estimates have historically approximated actual results.





*Tax
      valuation allowances and reserves:*We establish estimates for
      these allowances and reserves based on historical experience and other
      assumptions.  It is our policy to accrue for tax exposures or to
      release tax reserves in the period in which the facts and circumstances arise
      that suggest that the valuation allowances or reserves should be
      modified.





When
      establishing the manufacturing facility in Singapore, the Company received
      a
      five-year exemption from income taxes beginning March 1, 2003 under the
      condition that certain capital investment and expenditure milestones are reached
      by March 1, 2008.  As a result of the Company’s strategic initiatives,
      which include outsourcing of the manufacturing function, the Company may be
      exposed to a liability for the taxes that otherwise would have been due during
      the first four years of the tax exemption period totaling approximately $2.7
      million.  As a result, during 2007, the Company initiated negotiations
      with the Singapore government to end the tax exemption period retroactively
      to
      February 28, 2007, and eliminate the remaining investment milestones, in
      exchange for a four-year tax exemption. If the Singapore government does not
      agree to shorten the exemption period and waive the remaining investment
      milestones, the Company could be required to meet the remaining investment
      milestones or pay the estimated $2.7 million retroactive tax
      liability.  This amount has not been accrued in the financial
      statements as the Company has the wherewithal to meet the investment milestones
      and management would invest in additional capital equipment in lieu of paying
      this tax should the Singapore government decide not to revise the tax exemption
      agreement.




*Long-lived
      assets:*  We evaluate the carrying value of long-lived assets,
      consisting primarily of equipment and leasehold improvements, whenever certain
      events or changes in circumstances indicate that the carrying amount of these
      assets may not be recoverable.  In assessing the recoverability of
      long-lived assets, we compare the carrying value to the undiscounted future
      cash
      flows the assets are expected to generate.  If the total of the
      undiscounted future cash flows is less than the carrying amount of the assets,
      the assets are written down to their estimated fair
      value.  Significant judgments and assumptions are required in the
      forecast of future operating results used in the preparation of the estimated
      future cash flows, including long-term forecasts of overall market conditions
      and our market share.  Changes in these estimates and business
      divestures could have a material adverse effect on the assessment of the
      long-lived assets, thereby requiring us to record additional asset write-downs
      in the future.****Charges related to asset impairments are
      recorded in accordance with Statement of Financial Accounting Standards (SFAS)
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets”.






19




*Stock
      based**c**ompensation**expense**:* We
      estimate the value of employee stock options on the date of grant using the
      Black-Sholes model and amortize these costs on a straight-line basis over the
      requisite service periods of the awards.  Under SFAS 123(R), the
      determination of fair value of share-based payment awards on the date of grant
      using an option-pricing model is affected by our stock price as well as
      assumptions regarding a number of highly complex and subjective variables.
      (See
      Note 15 - Stockholders' Equity)




Expected
      volatility – historical volatility of the Company’s stock
      price.


Expected
      term – historical data on employee exercises and post-vesting
      employment termination behavior.


Risk
      free
      interest rate – an implied yield currently based on United States Treasury
      rates.


Estimated
      forfeitures – historical option forfeitures over a given
      period.







**Results
      of Operations**










**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****Percentage
                  of net sales**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Net
                  sales
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
                  of sales
              
              
              78.7
              
              
              
              72.2
              
              
              
              63.8
              
              
              
              90.1
              
              
              
              64.0Gross
                  profit
              
              
              21.3
              
              
              
              27.8
              
              
              
              36.2
              
              
              
              9.9
              
              
              
              36.0Operating
                  expenses:Engineering,
                  research and development
              
              
              24.8
              
              
              
              26.0
              
              
              
              25.7
              
              
              
              49.2
              
              
              
              26.1Sales,
                  general and administrative
              
              
              37.2
              
              
              
              36.5
              
              
              
              27.3
              
              
              
              62.7
              
              
              
              28.6Restructuring
                  charges
              
              
              0.3
              
              
              
              0.5
              
              
              
              1.6
              
              
              
              -
              
              
              
              -Impairment
                  charges
              
              
              -
              
              
              
              0.2
              
              
              
              6.7
              
              
              
              0.8
              
              
              
              -Indemnification
                  release
              
              
              (1.0
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
                  operating expenses
              
              
              61.3
              
              
              
              63.2
              
              
              
              61.3
              
              
              
              112.7
              
              
              
              54.7Operating
                  (loss)
              
              
              (40.0
              )
              
              
              (35.4
              )
              
              
              (25.1
              )
              
              
              (102.8
              )
              
              
              (18.7
              )Interest
                  income
              
              
              1.4
              
              
              
              2.7
              
              
              
              0.5
              
              
              
              4.7
              
              
              
              0.4Interest
                  expense
              
              
              (2.5
              )
              
              
              (4.9
              )
              
              
              (3.8
              )
              
              
              (9.1
              )
              
              
              (3.9
              )Gain
                  on sale of long term investment
              
              
              -
              
              
              
              -
              
              
              
              5.6
              
              
              
              -
              
              
              
              -Gain
                  on settlement of long term liability
              
              
              -
              
              
              
              -
              
              
              
              13.1
              
              
              
              -
              
              
              
              -Debt
                  conversion expense
              
              
              -
              
              
              
              (39.7
              )
              
              
              -
              
              
              
              -
              
              
              
              -Loss
                  on mark to market of financial snstrumentsrelated
                  to convertible debt
              
              
              (0.4
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
                  income (expense), net
              
              
              (0.6
              )
              
              
              (0.9
              )
              
              
              (0.3
              )
              
              
              (3.1
              )
              
              
              (0.7
              )Loss
                  before income taxes
              
              
              (42.1
              )
              
              
              (78.2
              )
              
              
              (10.0
              )
              
              
              (110.3
              )
              
              
              (22.9
              )Provision
                  (benefit) for income taxes
              
              
              -
              
              
              
              (1.4
              )
              
              
              0.1
              
              
              
              0.1
              
              
              
              (0.2
              )Net
                  loss
              
              
              (42.1
              )%
              
              
              (76.8
              )%
              
              
              (10.1
              )%
              
              
              (110.4
              )%
              
              
              (23.1
              )%





20




**Net
      Sales**





Net
      sales
      are comprised of prober systems, software, and aftermarket sales, consisting
      primarily of services, spare parts, upgrades, refurbished systems and training.
      Service revenue, included in aftermarket prober products and service was 11%
      of
      net sales for the year ended May 31, 2007, 10% of net sales for the year ended
      May 31, 2006, 12% of net sales for the five months ended May 31, 2005 and less
      than 10% of net sales during the year ended December 31, 2004 and the five
      months ended May 31, 2004. Net sales of our products are as
      follows:




**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Prober
                  systems and software
              
              $
              26,084
              
              
              $
              27,074
              
              
              $
              44,480
              
              
              $
              6,988
              
              
              $
              16,794Aftermarket
                  prober products and service
              
              
              18,540
              
              
              
              17,243
              
              
              
              18,524
              
              
              
              4,235
              
              
              
              8,935$
              44,624
              
              
              $
              44,317
              
              
              $
              63,004
              
              
              $
              11,223
              
              
              $
              25,729




Net
      sales
      were up slightly in 2007 as compared to 2006.  Net sales were down 30%
      in 2006 from 2004.  This decrease was primarily due to a 46% decrease
      in the volume of prober system sales due to slow customer qualification and
      acceptance of the new 300mm prober product, partially offset by a 14% increase
      in average selling prices. Net sales were down 56% for the five months ended
      May
      31, 2005 versus the prior year.  These decreases were primarily due to
      69% lower system sales, largely our 200mm prober product lines, as customers
      delayed orders in the first five months of 2005 and Electroglas was in a major
      product transition as customers began evaluation of our new 200mm and 300mm
      products. This decrease in volume was partially offset by 31% higher average
      selling prices period over period. The demand for our products follows the
      semiconductor test markets, which remain highly cyclical and difficult to
      forecast. As a result of uncertainties in this market environment, any
      rescheduling or cancellation of planned capital purchases by our customers
      will
      cause our sales to fluctuate. Sales to related parties are priced in the same
      manner as sales to other customers. (see Note 21 – Related Party
      Transactions)





Net
      sales
      amounts and as a percentage of sales were as follows:




**Years
                  ended**
              
              
              **Five
                  months ended****In
                  thousands**
              
              **May
                  31, 2007**
              
              
              **May
                  31, 2006**
              
              
              **December
                  31, 2004**
              
              
              **May
                  31, 2005**
              
              
              **May
                  29, 2004****(unaudited)**Europe
              
              $
              11,355
              
              
              
              25
              %
              
              $
              9,804
              
              
              
              22
              %
              
              $
              18,396
              
              
              
              29
              %
              
              $
              4,522
              
              
              
              40
              %
              
              $
              8,182
              
              
              
              32
              %Asia
              
              
              13,704
              
              
              
              31
              
              
              
              15,924
              
              
              
              36
              
              
              
              21,520
              
              
              
              34
              
              
              
              3,700
              
              
              
              33
              
              
              
              8,537
              
              
              
              33International
              
              
              25,059
              
              
              
              56
              
              
              
              25,728
              
              
              
              58
              
              
              
              39,916
              
              
              
              63
              
              
              
              8,222
              
              
              
              73
              
              
              
              16,719
              
              
              
              65North
                  America
              
              
              19,565
              
              
              
              44
              
              
              
              18,589
              
              
              
              42
              
              
              
              23,088
              
              
              
              37
              
              
              
              3,001
              
              
              
              27
              
              
              
              9,010
              
              
              
              35$
              44,624
              
              
              
              100
              %
              
              $
              44,317
              
              
              
              100
              %
              
              $
              63,004
              
              
              
              100
              %
              
              $
              11,223
              
              
              
              100
              %
              
              $
              25,729
              
              
              
              100
              %






We
      expect
      international sales to continue to represent a significant percentage of net
      sales and fluctuate as individual manufacturers and semiconductor test companies
      address their capacity needs at differing stages of the semiconductor demand
      cycle. During 2004 through 2007, we experienced weakness in sales across all
      of
      our major geographic regions due to industry conditions and slow customer
      acceptance of our 300mm products.





**Gross
      Profit**






**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Gross
                  Profit
              
              $
              9,483
              
              
              $
              12,303
              
              
              $
              22,810
              
              
              $
              1,109
              
              
              $
              9,264Gross
                  profit as a % of net sales
              
              
              21.3
              %
              
              
              27.8
              %
              
              
              36.2
              %
              
              
              9.9
              %
              
              
              36.0
              %




The
      decline in gross profit in 2007 compared to 2006 was primarily due to by higher
      inventory provisions of $2.8 million due to a reduced forecast for the strip
      test handler product line, net of $0.6 million of that reserved inventory which
      was subsequently sold.  The decline in gross profit in 2006 compared
      to 2004 was primarily due to a 46% decrease in the volume of prober system
      sales.  The decrease in gross profit in the five months ended May 31,
      2005 compared to the same period in 2004 was primarily due to lower unit sales
      volumes despite higher average selling prices.  Also included in gross
      profit for the five month period ended May 2004 was a one-time warranty
      provision benefit of $0.9 million.






21




We
      periodically review the carrying value of our inventories and noncancelable
      inventory purchase commitments by evaluating material usage and manufacturing
      requirements to determine inventory obsolescence and excess quantities, and
      we
      reduce the carrying value of these inventories when appropriate.





We
      believe
      that our gross profit will continue to be affected by a number of factors,
      including changes in demand for semiconductors, competitive pressures on average
      selling prices, product mix, and excess manufacturing capacity costs. Continued
      weak demand and changes in market conditions may cause orders to be below
      forecasts, which may result in additional excess inventory, which would cause
      additional write-downs of inventories and would negatively impact our gross
      profit margins.





**Engineering,
      Research and Development Expenses (ER&D)**






**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**ER&D
              
              $
              11,073
              
              
              $
              11,510
              
              
              $
              16,194
              
              
              $
              5,524
              
              
              $
              6,728ER&D
                  as a % of net sales
              
              
              24.8
              %
              
              
              26.0
              %
              
              
              25.7
              %
              
              
              49.2
              %
              
              
              26.1
              %





In
      2007
      versus 2006, the decrease in ER&D was mainly due to reduced payroll and
      related personnel charges of $0.6 million as well as lower infrastructure and
      facility costs of $0.3 million, partially offset by higher development and
      evaluation costs for the EG6000 product line of $0.6 million.  In 2006
      versus 2004, the decrease in ER&D was primarily due to decreased spending on
      materials combined with a 16% reduction in headcount following the completion
      of
      certain new product development programs. As a percentage of net sales, ER&D
      expense was flat in 2006 versus 2004 due to lower net sales despite lower
      spending.  In the five months ended May 31, 2005 versus 2004, the
      decrease in expenses in absolute dollars was primarily due to reduced employee
      headcount and related costs as a result of restructuring efforts. As a
      percentage of net sales, ER&D expenses increased for the five month period
      ended May 2005 versus 2004 as a result of lower net sales despite lower
      spending.





During
      these hard to predict cyclical semiconductor equipment demand cycles, we intend
      to control discretionary expenses and continue investing in our new product
      programs. Engineering, research and development expenses consist primarily
      of
      salaries, project materials, consultant fees, and other costs associated with
      our ongoing efforts in product development and enhancement.





**Selling,
      General and Administrative Expenses (SG&A)**




**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**SG&A
              
              $
              16,593
              
              
              $
              16,153
              
              
              $
              17,182
              
              
              $
              7,038
              
              
              $
              7,346SG&A
                  as a % of net sales
              
              
              37.2
              %
              
              
              36.5
              %
              
              
              27.3
              %
              
              
              62.7
              %
              
              
              28.6
              %







In
      2007
      versus 2006, the increase in absolute dollars was primarily due to increased
      new
      product evaluation costs of $0.9 million and audit fees of $0.4 million, offset
      by lower payroll and related personnel charges of $0.6 million and decreased
      infrastructure and facility costs of $0.2 million.  In 2006 versus
      2004 the decrease in absolute dollars was primarily due to reduced SG&A
      costs for Sarbanes-Oxley consulting and audit fees. As a percentage of sales,
      SG&A increased in 2006 as a result of lower net sales despite lower spending
      versus 2004.  In the five months ended May 31, 2005 versus 2004, the
      decrease in expenses was primarily due to reduced facilities costs as a result
      of the sale of our San Jose, California campus in January 2005. In addition,
      the
      Company recorded a one-time benefit of $0.3 million in 2005, which was 3.0%
      of
      sales in the five month period ended May 31, 2005, as a result of the settlement
      of a royalty obligation. As a percentage of net sales, SG&A expenses
      increased for the five month period ended May 2005 as a result of lower net
      sales.





SG&A
      expenses consist primarily of employee salaries and benefits, travel expenses,
      advertising and other promotion expenses, facilities expenses, legal expenses
      and other infrastructure costs.





22




**Restructuring
      Charges**





During
      2007 the net restructuring amount was $0.1 million. We recorded a restructuring
      charge of $0.3 million related to a reduction in workforce. This was offset
      by a favorable $0.2 million benefit related to the early termination of a
      facility lease previously restructured in 2004. During 2006, we recorded a
      $0.2 million restructuring charge related to workforce reductions. During 2004,
      we recorded a restructuring charge of $1.0 million related to office space
      reductions and severance packages.




**Impairment
      Charges**




We
      performed impairment tests as of December 31, 2006, 2005 and 2004, which
      compared currently utilized property and equipment and non-current assets net
      book values with the expected undiscounted cash flows from these assets. The
      estimated undiscounted cash flows of the assets were sufficient to recover
      the
      net book value of these assets. In 2006, we recorded a $0.1 million impairment
      charge on fixed assets no longer in use.





In
      December 2004, we entered into an agreement to sell our San Jose campus to
      Integrated Device Technology for approximately $29.0 million and we recorded
      a
      $4.1 million impairment charge based on sales price, net of closing costs.
      In
      addition, we recorded a $0.1 million impairment charge on fixed assets no longer
      in use.





The
      semiconductor industry is highly cyclical and the severity of these cycles
      is
      difficult to predict. During a down cycle, we must be in a position to adjust
      our cost and expense structure to prevailing market conditions, which could
      affect our net sales and the sufficiency of estimated future cash
      flows.  If the estimated cash flows are not sufficient to recover the
      net book value of our assets we would be required to record additional
      impairment charges.





**Indemnification
      release**





In
      January
      2005, the Company sold its San Jose campus facility. The agreement covering
      this
      sale included a provision that allowed for a two year period for the buyer
      to
      make indemnification claims up to a maximum amount of $3.5 million for breaches
      of the agreement’s representations and warranties. At that time, the Company
      recorded a $0.5 million reserve for the net present value of the Company’s
      guarantee obligations under these indemnification provisions. In January 2007,
      after the expiration of the two year period specified in the agreement, the
      Company reversed this reserve as no claims had been made.





**Interest
      Income**






**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Interest
                  income
              
              $
              604
              
              
              $
              1,195
              
              
              $
              293
              
              
              $
              525
              
              
              $
              107




The
      decrease in interest income in 2007 over 2006 was primarily due to the use
      of
      cash for ongoing operations as well as the $7.5 million in cash used as partial
      consideration in the repurchase of $25.0 million of our 5.25%
      Notes.  The increase in 2006 over 2004 and for the five month period
      ended May 31, 2005 over the same period in 2004 primarily resulted from higher
      average cash and investment balances resulting from the proceeds of sale of
      our
      San Jose, California campus in January 2005 combined with higher yields on
      investments.





23




**Interest
      Expense**




**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Interest
                  expense
              
              $
              1,091
              
              
              $
              2,177
              
              
              $
              2,370
              
              
              $
              1,024
              
              
              $
              997






Interest
      expense is comprised primarily of interest on our 5.25% Notes. The decrease
      in
      2007 over 2006 is primarily due to the repurchase of $25.0 million of the Notes
      in 2006.  The decrease in 2006 over 2005 primarily resulted from the
      repurchase of $2.0 million of the Notes in 2005. (see Note 10 – Convertible
      Subordinated Notes (“5.25% Notes”) Conversion Expense and Warrants)




**Gain
      on Sale of Long Term Investment**




In
      the
      fourth quarter of 2004, we sold our minority equity investment in Cascade
      Microtech, Inc. in connection with their initial public offering. We received
      $6.6 million in net proceeds from the sale and we recorded a net gain of $3.5
      million.




**Gain
      on Settlement of Long Term Liability**




In
      the
      third quarter of 2004, we recognized a $8.3 million gain on the settlement
      of a
      long term liability to our former parent company (“GSX”) that reduced our
      amounts payable under a tax benefit sharing agreement from $9.5 million to
      an
      aggregate of $1.3 million to be paid over seven quarters starting in the fourth

      quarter of 2004. As of May 31, 2007 there were no amounts outstanding under
      this
      agreement.




**Debt
      Conversion Expense**




During
      May
      2006, we exchanged $25.0 million of our 5.25% Notes for 4,268,000 shares of
      common stock and $7.5 million in cash in privately negotiated transactions
      with
      Note holders. At the conversion price of $10.2465 per share, the $25.0 million
      of Notes exchanged would have been convertible into 2,440,000 shares of common
      stock.  For accounting purposes, the additional 1,828,000 shares of
      common stock, valued at $8.6 million, and the $7.5 million cash paid was
      considered an inducement for the holders to convert their Notes, which combined
      with unamortized bond costs of $1.1 million and transaction costs of $0.4
      million, required us to record a non-operating debt conversion expense of $17.6
      million during the year ended May 31, 2006.




**Provision
      (Benefit) for Income Taxes**




**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Provision
                  (benefit) for income taxes
              
              $
              9
              
              
              $
              (628
              )
              
              $
              57
              
              
              $
              5
              
              
              $
              60






The
      2007
      provision resulted from taxes accrued on the income of various foreign branches
      and subsidiaries.  The 2006 income tax benefit resulted primarily from
      a release of tax reserves related to transfer pricing issues. The income tax
      provision for 2004, the five months ended May 31, 2005 and the five months
      ended
      May 29, 2004 resulted from taxes assessed on the income of various foreign
      branches.  Realization of our deferred tax assets depends on us
      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 valuation
      allowance of $126.3 million was required at May 31, 2007.





In
      October
      of 2004, the American Jobs Protection Act was signed into
      law.  Certain provisions of this Act allow multinational companies to
      repatriate cash related foreign earnings at a favorable rate if used to create
      or maintain jobs in the United States. At May 31, 2007, there are no plans
      to
      repatriate earnings from foreign subsidiaries as the only cash maintained in
      these entities is for working capital purposes.  Any repatriation of
      foreign earnings would have an immaterial effect on income taxes.






24




**Liquidity
      and Capital Resources**




**Years
                  ended**
              
              
              **Five
                  months ended****May
                  31,**
              
              
              **May
                  31,**
              
              
              **December
                  31,**
              
              
              **May
                  31,**
              
              
              **May
                  29,****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**Cash
                  used in operating activities
              
              $
              (11,251
              )
              
              $
              (20,525
              )
              
              $
              (6,609
              )
              
              $
              (8,033
              )
              
              $
              (6,345
              )Cash
                  provided by investing activities
              
              $
              1,191
              
              
              $
              13,377
              
              
              $
              8,083
              
              
              $
              13,818
              
              
              $
              1,983Cash
                  provided by (used in) financing activities
              
              $
              23,547
              
              
              $
              (7,051
              )
              
              $
              371
              
              
              $
              (1,724
              )
              
              $
              96


O*perating
      activities:*Cash used in operating activities was $11.3 million for the period ended
      May 31, 2007.  The primary uses of cash was to fund operational
      lossesand a growth in accounts payable and accrued
      liabilities offset by reduced accounts receivable.





Cash
      used
      in operating activities was $20.5 million for the period ended May 31,
      2006.  The primary uses of cash was to fund operational losses and
      fund increases in working capital levels, including accounts receivable and
      inventories, due to increased sales in the last half of 2006.





Cash
      used
      in operating activities during the five months ended May 31, 2005 was $8.0
      million.  The primary use of cash was to fund operational
      losses.





*Investing
      activities:*Cash provided by investing activities in 2007 was $1.2 million
      due to the maturity of investments offset by purchases of fixed
      assets.  Cash provided by investing activities in 2006 was $13.4
      million, an increase of $5.3 million over 2004 largely due to liquidation of
      investments due to our increased use of cash in operations as a result of larger
      accounts receivables and inventory balances. Cash provided by investing
      activities was $13.8 million in the five months ended May 31, 2005 compared
      to
      cash provided by investing activities of $2.0 million for the same period in
      2004.  This increase was principally due to the completion of the sale
      of the San Jose campus assets in January 2005 for $28.3 million in
      cash.  This was partially offset by $12.1 million net increase in
      investments and $2.4 million in capital expenditures primarily for our new
      San
      Jose, California headquarters location. Cash provided by investing activities
      was $8.1 million in 2004 largely due to the sale of our investment in Cascade
      Microtech, Inc. (see Note 18 – Sale of Investment) for $6.6 million in December
      2004.





*Financing
      activities:*Cash provided by financing activities in 2007 was $23.5
      million, largely from the proceeds received from the issuance of our 6.25%
      Notes
      in March 2007.  Cash used in financing activities in 2006 was $7.1
      million, largely from $7.5 million paid in the exchange of $25.0 million of
      our
      5.25% Notes in May 2006 for 4,268,000 shares of our common stock and cash in
      privately negotiated transactions with Note holders. Cash provided by financing
      activities in 2004 was $0.4 million primarily from proceeds of sales of common
      stock to employees. In the five months ended May 31, 2005, the Company
      repurchased $2.0 million of the 5.25% Notes with a $1.8 million net book value
      for $1.8 million of cash.





Cash
      contractual obligations are as follows as of May 31, 2007:




**Payments
                  Due by Fiscal Year****In
                  thousands**
              
              **Total**
              
              
              **2008**
              
              
              **2009**
              
              
              **2010**
              
              
              **2011**
              
              
              **Therafter**Operating
                  leases
              
              $
              5,118
              
              
              $
              1,975
              
              
              $
              1,840
              
              
              $
              1,303
              
              
              $
              -
              
              
              $
              -Purchase
                  commitments
              
              
              3,976
              
              
              
              3,976
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
                  payments on convertible subordinated notes
              
              
              6,660
              
              
              
              1,381
              
              
              
              1,609
              
              
              
              1,609
              
              
              
              2,061
              
              
              
              -Principal
                  payment on convertible subordinated notes
              
              
              34,250
              
              
              
              8,500
              
              
              
              -
              
              
              
              -
              
              
              
              25,750
              
              
              
              -Total
              
              $
              50,004
              
              
              $
              15,832
              
              
              $
              3,449
              
              
              $
              2,912
              
              
              $
              27,811
              
              
              $
              -







Purchase
      commitments include $1.7 million of purchase orders that are cancelable. In
      January 2002, we entered into a three-year operating lease for a 39,000 square
      foot manufacturing facility in Singapore with annual lease payments of
      approximately $0.4 million. This lease was renewed at the same rate in December
      2004. During the third quarter, 2007, we renewed this lease for two years at
      prevailing market of $0.5 million annually.  In February 2005, we
      entered into a five-year operating lease for a 78,000 square foot corporate
      headquarters building in San Jose, California. Payments are due under this
      new
      lease as follows: $1.2 million in fiscal year 2008, $2.5 million in fiscal
      years
      2009-2010 and nil thereafter.




25





*Line
      of credit:*In September 2006 and January 2007, we renewed and amended our
      revolving line of credit with Comerica Bank. Under these amendments, we may
      borrow up to $7.5 million based upon eligible accounts receivable balances.
      This
      amended line of credit, which has a maturity date of August 31, 2008, is secured
      by substantially all of our assets and requires that we maintain certain
      financial covenants. We currently maintain cash deposits of $3.0 million that
      will be considered restricted as compensating balances to the extent we borrow
      against this credit line.  There were no borrowings from the credit
      line as of May 31, 2007 and 2006, respectively.





*Liquidity:*Our principal source of liquidity as of May 31, 2007 consisted of $30.8
      million of cash and cash equivalents.  We used $8.7 million of these
      funds on June 15, 2007 to repay our maturing 5.25% convertible bonds. During
      2007, we continued to emphasize reduction of our utilization of cash,
      maintaining spending controls and additional headcount reductions. We currently
      anticipate that our future cash from operations, our available cash and cash
      equivalents and proceeds from the line of credit at May 31, 2007 should be
      sufficient to meet our anticipated needs for working capital and capital
      expenditures to support planned activities through fiscal 2008. We may be
      required under certain circumstances to pay the Singapore government past taxes
      of up to $2.7 million (see Note 19, Income Taxes). The demand for our products
      follows the semiconductor test markets which remain highly cyclical and
      difficult to forecast. We are committed to the successful execution of our
      operating plan and will take further action as necessary to align our operations
      and reduce expenses. External financing vehicles have been and are expected
      to
      continue to be available to us.





**Impact
      of Recently Issued Accounting Pronouncements**





In
      July 2006, the Financial Accounting Standards Board issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of
      FASB Statement No. 109” (“FIN 48”) which prescribes a recognition threshold
      and measurement attribute, as well as criteria for subsequently recognizing,
      derecognizing and measuring uncertain tax positions for financial statement
      purposes. FIN 48 also requires expanded disclosure with respect to uncertainties
      in income tax assets and liabilities. FIN 48 is effective for fiscal years
      beginning after December 15, 2006 and is required to be recognized as a
      change in accounting principle through a cumulative-effect adjustment to
      retained earnings as of the beginning of the year of adoption. The Company
      plans
      to adopt FIN 48 in June 2007. Management is currently evaluating the impact,
      if
      any, of adopting the provisions of FIN 48.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles, and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements, the
      FASB having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, this Statement does
      not require any new fair value measurements. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. This Statement is required
      to be adopted by us in the first quarter of its fiscal year 2009. Management
      is
      currently assessing the impact of the adoption of this Statement.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities- Including an amendment
      of FASB statement No. 115."  SFASNo. 159 permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value. If the fair value method is selected, a business entity shall
      report unrealized gains and losses on elected items in earnings at each
      subsequent reporting date. The standard also establishes presentation and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. SFASNo. 159 is effective for fiscal years
      beginning after November 15, 2007, which we would be required to implement
      no
      later than June 1, 2008.  Management is currently assessing the impact of
      adopting this Statement.





In
      November 2006, the FASB ratified EITF Issue No. 06-7, "Issuer’s Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities" (“EITF
      06-7”). At the time of issuance, an embedded conversion option in a convertible
      debt instrument may be required to be bifurcated from the debt instrument and
      accounted for separately by the issuer as a derivative under FAS 133, based
      on
      the application of EITF 00-19. Subsequent to the issuance of the convertible
      debt, facts may change and cause the embedded conversion option to no
      longer meet the conditions for separate accounting as a derivative instrument,
      such as when the bifurcated instrument meets the conditions of Issue 00-19
      to be
      classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
      option previously accounted for as a derivative under FAS 133 no longer meets
      the bifurcation criteria under that standard, an issuer shall disclose a
      description of the principal changes causing the embedded conversion option
      to
      no longer require bifurcation under FAS 133 and the amount of the liability
      for
      the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
      applied to all previously bifurcated conversion options in convertible debt
      instruments that no longer meet the bifurcation criteria in FAS 133 in interim
      or annual periods beginning after December 15, 2006, regardless of whether
      the
      debt instrument was entered into prior or subsequent to the effective date
      of
      EITF 06-7. Adoption of EITF 06-7 had no material impact on our consolidated
      financial position, results of operations or cash flows.




26




In
      December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration
      Payment Arrangements" (“FSP 00-19-2”) which addresses accounting for
      registration payment arrangements. FSP 00-19-2 specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement, whether issued as a separate agreement or
      included as a provision of a financial instrument or other agreement, should
      be
      separately recognized and measured in accordance with FASB Statement No. 5,
      "Accounting for Contingencies." FSP 00-19-2 further clarifies that a financial
      instrument subject to a registration payment arrangement should be accounted
      for
      in accordance with other applicable generally accepted accounting principles
      without regard to the contingent obligation to transfer consideration pursuant
      to the registration payment.  Adoption of FSP 00-19-2 had no material
      impact on our consolidated financial position, results of operations or cash
      flows.





**Item
      7A*.  Quantitative and Qualitative Disclosures about Market
      Risk***





***Interest
      Rate Risk***





At
      May 31,
      2007, our cash equivalents consisted primarily of fixed income securities.
      We
      maintain an investment policy, which ensures the safety and the preservation
      of
      our 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. If a 100 basis point change
      occurred in the value of our portfolio, the impact on our financial statements
      would be less than $0.3 million. The table below presents notional amounts
      and
      related weighted-average interest rates by year of maturity for our investment
      portfolios:





**In
                  thousands, except percentages**
              
              **Within
                  One Year**
              
              
              **Fair
                  Value at**
                **May
                  31, 2007**Interest
                  bearing cash accounts and cash equivalents
              
              $
              28,324
              
              
              $
              28,324Average
                  rate
              
              
              5.1
              %
              
              
              5.1
              %




***Foreign
      Currency Exchange Rate Risk***





We
      believe
      that our current foreign exchange exposure in all international operations
      is
      not material to our consolidated financial statements because we primarily
      transact business in United States dollars.  Accordingly, we do not
      use derivative financial instruments to hedge our current foreign exchange
      exposure.  We believe the impact of a 10% change in exchange rates
      would not be material to our financial condition and results of
      operations.  (see Note 2 – Business and Summary of Significant
      Accounting Policies)  There have been no significant changes in our
      market risk from the prior year.




27




**Item
      8*.  Financial Statements and Supplementary
      Data***





**Report
      of Independent Registered Public Accounting Firm**






Board
      of
      Directors and Stockholders


Electroglas,
      Inc.


San
      Jose,
      CA




We
      have
      audited the accompanying consolidated balance sheets of Electroglas, Inc. as
      of
      May 31, 2007 and 2006 and the related consolidated statements of operations,
      stockholders’ equity and comprehensive loss, and cash flows for each of the two
      years in the period ended May 31, 2007 and the five month period ended May
      31, 2005.  These financial statements are the responsibility of the
      Company’s management.  Our responsibility is to express an opinion on
      these financial statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (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, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation.  We believe that our audits
      provide a reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Electroglas, Inc. at May
      31,
      2007 and 2006, and the results of its operations and its cash flows for each
      of
      the two years in the period ended May 31, 2007 and the five month
      period ended May 31, 2005, in conformity with accounting principles generally
      accepted in the United States of America.





As
        discussed in Note 15, effective June 1, 2006, the Company adopted Statement
        of Financial Accounting Standards No. 123(R) “Share-Based
        Payment”.





As
      discussed in Note 16, effective May 31, 2007, the Company adopted Statement
      of
      Financial Accounting Standards No. 158 “Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)”.





We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Electroglas, Inc.’s
        internal control over financial reporting as of May 31, 2007, based on criteria
        established in Internal Control—Integrated Framework issued by the Committee of
        Sponsoring Organizations of the Treadway Commission (COSO), and our report
        dated
        August 9, 2007 expressed an unqualified opinion
        thereon.






/s/
      BDO
      Seidman, LLP




San
      Jose,
      California




August
      9,
      2007




28




**Report
      of Independent Registered Public Accounting Firm**







The
      Board
      of Directors and Stockholders


Electroglas,
      Inc.





We
      have
      audited the accompanying consolidated statements of operations, stockholders’
equity and comprehensive loss, and cash flows for the year ended December 31,
      2004.  These consolidated financial statements are the responsibility
      of the Company’s management.  Our responsibility is to express an
      opinion on these consolidated financial statements based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (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 audit provides a reasonable basis
      for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated results of Electroglas, Inc.’s operations
      and its cash flows for the year ended December 31, 2004, in conformity with
      United States generally accepted accounting principles.





/s/
      ERNST
& YOUNG LLP





San
      Jose,
      California


March
      3,
      2005




29




**ELECTROGLAS,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands, except per share data**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Sales
              
              $
              43,857
              
              
              $
              41,792
              
              
              $
              11,072
              
              
              $
              58,652Sales
                  to related parties
              
              
              767
              
              
              
              2,525
              
              
              
              151
              
              
              
              4,352Net
                  sales
              
              
              44,624
              
              
              
              44,317
              
              
              
              11,223
              
              
              
              63,004Cost
                  of sales
              
              
              35,141
              
              
              
              32,014
              
              
              
              10,114
              
              
              
              40,194Gross
                  profit
              
              
              9,483
              
              
              
              12,303
              
              
              
              1,109
              
              
              
              22,810Operating
                  expenses:Engineering,
                  research and development
              
              
              11,073
              
              
              
              11,510
              
              
              
              5,524
              
              
              
              16,194Sales,
                  general and administrative
              
              
              16,593
              
              
              
              16,153
              
              
              
              7,038
              
              
              
              17,182Restructuring
                  charges
              
              
              129
              
              
              
              239
              
              
              
              -
              
              
              
              979Impairment
                  charges
              
              
              -
              
              
              
              89
              
              
              
              86
              
              
              
              4,251Indemnification
                  release
              
              
              (459
              )
              
              
              -
              
              
              
              -
              
              
              
              -Total
                  operating expenses
              
              
              27,336
              
              
              
              27,991
              
              
              
              12,648
              
              
              
              38,606Operating
                  loss
              
              
              (17,853
              )
              
              
              (15,688
              )
              
              
              (11,539
              )
              
              
              (15,796
              )Interest
                  income
              
              
              604
              
              
              
              1,195
              
              
              
              525
              
              
              
              293Interest
                  expense
              
              
              (1,091
              )
              
              
              (2,177
              )
              
              
              (1,024
              )
              
              
              (2,370
              )Gain
                  on sale of long term investment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,545Gain
                  on settlement of long term liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              8,273Debt
                  conversion expense
              
              
              
              
              
              
              (17,603
              )
              
              
              -
              
              
              
              -Loss
                  on mark to market of financial instrumentsrelated
                  to convertible debt
              
              
              (154
              )
              
              
              -
              
              
              
              -
              
              
              
              -Other
                  expense, net
              
              
              (280
              )
              
              
              (385
              )
              
              
              (350
              )
              
              
              (260
              )Loss
                  before income taxes
              
              
              (18,774
              )
              
              
              (34,658
              )
              
              
              (12,388
              )
              
              
              (6,315
              )Provision
                  (benefit) for income taxes
              
              
              9
              
              
              
              (628
              )
              
              
              5
              
              
              
              57Net
                  loss
              
              $
              (18,783
              )
              
              $
              (34,030
              )
              
              $
              (12,393
              )
              
              $
              (6,372
              )Basic
                  and diluted net loss per share
              
              $
              (0.71
              )
              
              $
              (1.53
              )
              
              $
              (0.57
              )
              
              $
              (0.30
              )Shares
                  used in basic and diluted calculations
              
              
              26,285
              
              
              
              22,178
              
              
              
              21,762
              
              
              
              21,534




See
      the
      accompanying notes to consolidated financial statements.




30





**ELECTROGLAS,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**




**May
                  31,****In
                  thousands, except share data**
              
              **2007**
              
              
              **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              30,788
              
              
              $
              17,293Accounts
                  receivable, net of allowances of $392 and $479
              
              
              9,833
              
              
              
              12,223Accounts
                  receivable from related parties
              
              
              22
              
              
              
              396Inventories
              
              
              11,883
              
              
              
              19,389Restricted
                  cash
              
              
              500
              
              
              
              -Prepaid
                  expenses and other current assets
              
              
              2,355
              
              
              
              1,627Total
                  current assets
              
              
              55,381
              
              
              
              50,928Restricted
                  cash
              
              
              -
              
              
              
              500Long-term
                  investments
              
              
              -
              
              
              
              1,974Equipment
                  and leasehold improvements, net
              
              
              4,779
              
              
              
              5,089Goodwill
              
              
              1,942
              
              
              
              1,942Other
                  assets
              
              
              3,732
              
              
              
              2,239Total
                  assets
              
              $
              65,834
              
              
              $
              62,672**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              5,953
              
              
              $
              9,761Accrued
                  liabilities
              
              
              5,711
              
              
              
              7,016Deferred
                  revenue - current
              
              
              1,036
              
              
              
              1,627Accrued
                  losses on inventory purchase commitments
              
              
              636
              
              
              
              -Convertible
                  subordinated notes - short term
              
              
              8,486
              
              
              
              -Total
                  current liabilities
              
              
              21,822
              
              
              
              18,404Convertible
                  subordinated notes - long term
              
              
              22,851
              
              
              
              8,330Financial
                  instrument related to converitble debt
              
              
              3,192
              
              
              
              -Non-current
                  liabilities
              
              
              2,466
              
              
              
              2,756Total
                  liabilities
              
              
              50,331
              
              
              
              29,490Commitments
                  and contingencies (see Note 14)Stockholders’
                  equity:Preferred
                  stock, $0.01 par value; 1,000,000 shares authorized; none
                  outstanding
              
              
              -
              
              
              
              -Common
                  stock, $0.01 par value; 40,000,000 shares authorized; 26,466,000
                  and
                  26,402,000shares
                  issued; 26,311,000 and 26,247,000 outstanding
              
              
              265
              
              
              
              264Additional
                  paid-in capital
              
              
              195,586
              
              
              
              194,508Accumulated
                  deficit
              
              
              (178,052
              )
              
              
              (159,269
              )Accumulated
                  other comprehensive loss
              
              
              -
              
              
              
              (25
              )Cost
                  of common stock in treasury; 155,000 shares
              
              
              (2,296
              )
              
              
              (2,296
              )Total
                  stockholders’ equity
              
              
              15,503
              
              
              
              33,182Total
                  liabilities and stockholders’ equity
              
              $
              65,834
              
              
              $
              62,672




See
      the
      accompanying notes to consolidated financial statements.




31




**ELECTROGLAS,
      INC.**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE LOSS**




**Accumulated****Additional**
              
              
              **Retained**
              
              
              **Other**
              
              
              
              
              
              
              
              
              **Total****Common
                  Stock**
              
              
              **Paid-in**
              
              
              **Earnings**
              
              
              **Comprehensive**
              
              
              **Treasury
                  Stock**
              
              
              **Stockholders’****In
                  thousands**
              
              **Shares**
              
              
              **Amount**
              
              
              **Capital**
              
              
              **(Deficit)**
              
              
              **Income/(Loss)**
              
              
              **Shares**
              
              
              **Amount**
              
              
              **Equity****Balance
                  at January 1, 2004**
              
              
              21,602
              
              
              $
              216
              
              
              $
              158,863
              
              
              $
              (106,474
              )
              
              $
              (44
              )
              
              
              (155
              )
              
              $
              (2,296
              )
              
              $
              50,265Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,372
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,372
              )Net
                  unrealized gain on investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10
              
              
              
              -
              
              
              
              -
              
              
              
              10Foreign
                  currency translation adjustments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              34
              
              
              
              -
              
              
              
              -
              
              
              
              34Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,328
              )Issuance
                  of common stock underemployee
                  stock plans
              
              
              273
              
              
              
              2
              
              
              
              369
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              371Stock-based
                  compensation expense
              
              
              -
              
              
              
              -
              
              
              
              97
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              97Warrant
                  value reclassified from long termliability
              
              
              -
              
              
              
              -
              
              
              
              257
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              257**Balance
                  at December 31, 2004**
              
              
              21,875
              
              
              
              218
              
              
              
              159,586
              
              
              
              (112,846
              )
              
              
              -
              
              
              
              (155
              )
              
              
              (2,296
              )
              
              
              44,662Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (12,393
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (12,393
              )Net
                  unrealized gain on investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              14
              
              
              
              -
              
              
              
              -
              
              
              
              14Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,379
              )Issuance
                  of common stock underemployee
                  stock plans
              
              
              82
              
              
              
              1
              
              
              
              115
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              116Stock-based
                  compensation expense
              
              
              -
              
              
              
              -
              
              
              
              33
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33**Balance
                  at May 31, 2005**
              
              
              21,957
              
              
              
              219
              
              
              
              159,734
              
              
              
              (125,239
              )
              
              
              14
              
              
              
              (155
              )
              
              
              (2,296
              )
              
              
              32,432Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (34,030
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (34,030
              )Net
                  unrealized loss on investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (39
              )
              
              
              -
              
              
              
              -
              
              
              
              (39
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (34,069
              )Issuance
                  of common stock underemployee
                  stock plans
              
              
              177
              
              
              
              2
              
              
              
              447
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              449Issuance
                  of common stock throughconversion
                  of notes
              
              
              4,268
              
              
              
              43
              
              
              
              33,533
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,576Stock-based
                  compensation expense
              
              
              -
              
              
              
              -
              
              
              
              794
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              794**Balance
                  at May 31, 2006**
              
              
              26,402
              
              
              
              264
              
              
              
              194,508
              
              
              
              (159,269
              )
              
              
              (25
              )
              
              
              (155
              )
              
              
              (2,296
              )
              
              
              33,182Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18,783
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18,783
              )Net
                  unrealized loss on investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              25
              
              
              
              -
              
              
              
              -
              
              
              
              25Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (18,758
              )Issuance
                  of common stock underemployee
                  stock plans
              
              
              64
              
              
              
              1
              
              
              
              143
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              144Stock-based
                  compensation expense
              
              
              -
              
              
              
              -
              
              
              
              935
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              935**Balance
                  at May 31, 2007**
              
              
              26,466
              
              
              $
              265
              
              
              $
              195,586
              
              
              $
              (178,052
              )
              
              $
              -
              
              
              
              (155
              )
              
              $
              (2,296
              )
              
              $
              15,503


See
      the
      accompanying notes to consolidated financial statements.




32




**ELECTROGLAS,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**Years
                ended May 31,**
            
            
            **Five
                months ended**
            
            
            **Year
                Ended****In
                thousands**
            
            **2007**
            
            
            **2006**
            
            
            **May
                31, 2005**
            
            
            **December
                31, 2004****Cash
                flows used in operating activities**Net
                loss
            
            $
            (18,783
            )
            
            $
            (34,030
            )
            
            $
            (12,393
            )
            
            $
            (6,372
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Depreciation
            
            
            1,952
            
            
            
            2,220
            
            
            
            1,277
            
            
            
            5,046Amortization
            
            
            294
            
            
            
            588
            
            
            
            264
            
            
            
            645Provision
                for inventory reserves and amortizationof
                loaner equipment
            
            
            6,872
            
            
            
            988
            
            
            
            1,041
            
            
            
            658Stock
                based compensation charges
            
            
            935
            
            
            
            794
            
            
            
            33
            
            
            
            97Interest
                expense on convertible notes
            
            
            1,027
            
            
            
            2,095
            
            
            
            977
            
            
            
            2,325Loss
                on mark to market of financial instrument related toconvertible
                debt
            
            
            154
            
            
            
            -
            
            
            
            -
            
            
            
            -Indemnification
                release
            
            
            (459
            )
            
            
            -
            
            
            
            -
            
            
            
            -Impairment
                charges
            
            
            -
            
            
            
            89
            
            
            
            91
            
            
            
            4,251Gain
                on settlement of long term payable
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,273
            )Gain
                on sale of long term investment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,545
            )Loss
                (gain) on translation of foreign currency
            
            
            37
            
            
            
            (65
            )
            
            
            155
            
            
            
            (96
            )Gain
                on repurchase of convertible notes
            
            
            -
            
            
            
            -
            
            
            
            (7
            )
            
            
            -Debt
                conversion expense
            
            
            -
            
            
            
            17,604
            
            
            
            -
            
            
            
            -(Gain)
                loss on disposal of fixed assets
            
            
            14
            
            
            
            (15
            )
            
            
            1
            
            
            
            1Change
                in estimate on tax reserves
            
            
            -
            
            
            
            (865
            )
            
            
            -
            
            
            
            -Changes
                in current assets and liabilities:Accounts
                receivable
            
            
            2,761
            
            
            
            (6,939
            )
            
            
            3,696
            
            
            
            2,652Inventories
            
            
            422
            
            
            
            (4,033
            )
            
            
            (3,681
            )
            
            
            (1,284
            )Prepaid
                expenses and other current and long-term assets
            
            
            (49
            )
            
            
            1,438
            
            
            
            (1,050
            )
            
            
            14Accounts
                payable
            
            
            (3,781
            )
            
            
            2,565
            
            
            
            1,169
            
            
            
            (532
            )Accrued
                and other current and long-term liabilities
            
            
            (2,647
            )
            
            
            (2,959
            )
            
            
            394
            
            
            
            (2,196
            )(11,251
            )
            
            
            (20,525
            )
            
            
            (8,033
            )
            
            
            (6,609
            )**Cash
                flows provided by (used in) investing activities**Capital
                expenditures
            
            
            (808
            )
            
            
            (624
            )
            
            
            (2,362
            )
            
            
            (571
            )Proceeds
                from disposal of property, plant and equipment
            
            
            -
            
            
            
            16
            
            
            
            28,305
            
            
            
            -Proceeds
                from sale of long-term investment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,575Purchases
                of investments, available-for-sale
            
            
            -
            
            
            
            (10,000
            )
            
            
            (20,625
            )
            
            
            (5,912
            )Maturities
                of investments, available-for-sale
            
            
            1,999
            
            
            
            23,985
            
            
            
            8,500
            
            
            
            7,9911,191
            
            
            
            13,377
            
            
            
            13,818
            
            
            
            8,083**Cash
                flows provided by (used in) financing activities**Purchase
                of convertible notes
            
            
            -
            
            
            
            (7,500
            )
            
            
            (1,840
            )
            
            
            -Proceeds
                from issuance of convertible notes
            
            
            25,750
            
            
            
            -
            
            
            
            -
            
            
            
            -Debt
                issuance cost related to the  issuance of convertible
                notes
            
            
            (2,347
            )Sales
                of common stock to employees
            
            
            144
            
            
            
            449
            
            
            
            116
            
            
            
            37123,547
            
            
            
            (7,051
            )
            
            
            (1,724
            )
            
            
            371Effect
                of exchange rate changes on cash
            
            
            8
            
            
            
            7
            
            
            
            (17
            )
            
            
            15Net
                increase (decrease) in cash and cash equivalents
            
            
            13,495
            
            
            
            (14,192
            )
            
            
            4,044
            
            
            
            1,860Cash
                and cash equivalents at beginning of year
            
            
            17,293
            
            
            
            31,485
            
            
            
            27,441
            
            
            
            25,581Cash
                and cash equivalents at end of year
            
            $
            30,788
            
            
            $
            17,293
            
            
            $
            31,485
            
            
            $
            27,441**Supplemental
                cash flow disclosures:**Interest
                paid on convertible subordinated notes
            
            $
            (446
            )
            
            $
            (2,271
            )
            
            $
            (33
            )
            
            $
            (1,864
            )Cash
                received (paid) during the period for income taxes
            
            $
            (31
            )
            
            $
            170
            
            
            $
            (26
            )
            
            $
            (10
            )Assets
                reclassified as held for sale
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            28,305Conversion
                of subordinated debt
            
            $
            -
            
            
            $
            33,532
            
            
            $
            -
            
            
            $
            -See
                accompanying notes to consolidated financial statements.




33




**ELECTROGLAS,
      INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Note
      1.  Change in Fiscal Year**





Effective
      July 2005, Electroglas, Inc. (the Company) changed its fiscal year-end from
      December 31 to May 31 retroactive to May 31, 2005. The Company’s fiscal quarters
      are every 13 weeks and end on a Saturday. The Company is reporting results
      for
      the period January 1, 2005 through May 31, 2005 as a separate (“stub”)
      transition period.





**Note
      2.  Business and Summary of Significant Accounting
      Policies**





*Business:*
      Electroglas Inc. is a supplier of semiconductor manufacturing equipment and
      software to the global semiconductor industry. The Company was incorporated
      in
      Delaware in April 1993, to succeed the wafer prober business conducted by the
      Electroglas division of General Signal Corporation, our former parent.
      Immediately prior to the closing of the initial public offering of our Common
      Stock in July 1993, the Company assumed the assets and liabilities of the
      Electroglas division in an asset transfer. The Company has been in the
      semiconductor equipment business for more than 40 years. The Company’s primary
      product line is automated wafer probing equipment and related network software
      to manage information from that equipment. In conjunction with automated test
      systems from other suppliers, its semiconductor manufacturing customers use
      its
      wafer probers and network software to quality test semiconductor
      wafers.





*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 balances and
      transactions have been eliminated in consolidation.





*Use
      of
      estimates:*The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States requires
      management to make estimates and assumptions for such items as revenue
      recognition, inventory valuation, warranty reserves, allowances for doubtful
      accounts, guarantee obligations, tax valuation allowances, stock based
      compensation, valuation of long-lived assets, and accruals such as restructuring
      reserves.  These estimates and assumptions affect the amounts reported
      in the financial statements. Actual results could differ materially from these
      estimates.





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





*Reclassifications:*****Certain
      prior period amounts have been reclassified to conform to the current period
      presentation. These reclassifications have no effect on previously reported
      net
      loss or accumulated deficit.





*Investments:*The
      Company invests its excess cash in investment grade debt and equity instruments.
      Management determines the appropriate classification of the debt securities
      at
      the time of the 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. Amortization of
      premiums and accretion of discounts, as well as any interest on the securities,
      is included in interest income.





*Inventories:*Inventories
      are stated at the lower of cost or market (estimated net realizable value)
      using
      the first-in, first-out (FIFO) method. The Company may record charges to
      inventory reserves due to excess, obsolete and slow moving inventories. The
      Company’s reserve analysis is based on the estimated impact of changes in
      technology on the Company’s products (including engineering design changes) and
      the timing of these changes. The Company also considers future sales forecasts,
      product order history, and backlog to assess its inventory requirements.
      Inventory on loan to customers is included in finished goods inventory. Loaner
      inventory is reserved beginning in the ninth month after shipment through the
      twentieth month to a 10% residual value and is charged to the organization
      responsible for the inventory, either Engineering or Sales. If there is weak
      demand in the semiconductor equipment markets and orders fall below forecasts,
      additional reserves of inventories may be required which will negatively impact
      gross margins. Inventory reserves are considered to permanently establish a
      new
      basis for inventory and are not subsequently reversed to income even if
      circumstances later suggest that increased carrying amounts are recoverable,
      except when the associated inventory balances decline due to disposition or
      sale. As a result of these analyses, the Company recorded inventory provisions
      and amortization of $6.9 million, $1.0 million, $1.0 million, and $0.7 million
      in the years ended May 31, 2007 and 2006, the five months ended May 31, 2005
      and
      the year ended December 31, 2004, respectively.  At May 31, 2007, the
      Company had a liability of $0.6 million for accrued losses on noncancelable
      inventory purchase commitments as a result of market price declines for the
      underlying inventory subject to the noncancelable purchase
      commitment.




34




The
      following is a summary of the major categories of inventory as of:




**May
                  31,****In
                  thousands**
              
              **2007**
              
              
              
              
              
              **2006**Raw
                  materials
              
              $
              7,807
              
              
              
              
              
              
              $
              9,351Work-in
                  process
              
              
              2,327
              
              
              
              
              
              
              
              8,560Finished
                  goods
              
              
              1,749
              
              
              
              
              
              
              
              1,478$
              11,883
              
              
              
              
              
              
              $
              19,389




*Equipment
      and leasehold improvements:*  Equipment and leasehold improvements
      are stated at cost less accumulated depreciation and amortization using the
      straight-line method over the estimated useful lives of the assets or the life
      of the lease, whichever is shorter. The following is a summary by major category
      as of:







**Estimated**
              
              
              **May
                  31,****In
                  thousands, except estimated useful lives**
              
              **Useful
                  Lives**
              
              
              **2007**
              
              
              **2006**Equipment
              
              
              3-5
              
              
              $
              5,999
              
              
              $
              4,652Leasehold
                  improvements
              
              Term
                  of lease
              
              
              
              3,657
              
              
              
              3,899Office
                  furniture and equipment
              
              
              3-10
              
              
              
              7,377
              
              
              
              7,84417,033
              
              
              
              16,395Accumulated
                  depreciation and amortization
              
              
              
              
              
              
              (12,254
              )
              
              
              (11,306
              )$
              4,779
              
              
              $
              5,089




*Accounting
      for long-lived assets:*  In accordance with Statement of Financial
      Accounting Standards No. No.144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (SFAS 144), 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 of those assets
      over the fair value. The fair value of the assets then becomes the assets’ new
      carrying value, which is depreciated over the remaining estimated useful lives
      of the assets.





*Goodwill
      and Intangible Assets**:*The Company accounts for goodwill in accordance with Statement
      of
      Financial Accounting Standard No. 142, “Goodwill and Intangible Assets” (SFAS
      142). The Company performed its annual impairment test of goodwill as of
      December 31, 2006, 2005 and 2004 and has concluded that no impairment exists.
      The Company performs impairment tests on an annual basis and between annual
      tests if an event occurs or circumstances change that would indicate that a
      potential impairment in the value of these assets has occurred.





*Revenue
      recognition:*Revenue is recognized on the sale of the Company’s equipment
      when a customer purchase order or fully executed contract has been received,
      when the products or services have been delivered, when the total purchase
      price
      can be assured without making significant concessions, and when the Company’s
      ability to collect from its customer has been assured.  In recognizing
      revenue the Company makes certain assumptions and estimates, namely: (i) the
      Company considers a new system routinely accepted in the marketplace when three
      to five successful installations, based on our acceptance criteria, have been
      put into customer production; (ii) the Company considers systems delivered
      separately from options to have value to our customers on a stand alone basis
      if
      the options have a unique price assigned and are not significant to the total
      amount of the order and the options are not fundamental to the functionality
      of
      the system; (iii) the Company considers systems delivered separately from
      installation and training to have value to its  customers on a
      stand-alone basis because the equipment can readily be sold by the customer,
      customers are capable of installing the systems without the support of our
      installers, installation and training are routine and inconsequential to the
      total value of the transaction, and these services are routinely sold on a
      stand-alone basis; and (iv) for most customers the Company assumes that, based
      on past history, it will continue to collect its receivables from them without
      payment or product concessions, despite the fact that they have larger financial
      size relative to the Company and despite its dependence on them in a heavily
      concentrated industry. In an arrangement with multiple deliverables, such as
      training, installation and services, the delivered items are considered a
      separate unit of accounting if all of the following criteria are met: (i) the
      delivered items have value to the customer on a




35
 
  stand-alone
        basis, (ii) vendor specific objective evidence (VSOE) of fair value exists,
        which is based on the average price charged when each element is sold
        separately, and (iii) if the arrangement includes a general right of return
        relative to a delivered item, or if performance of the undelivered item is
        considered probable and substantially in the control of the
        Company.  If the Company cannot objectively determine the fair value
        of any undelivered element include in a multiple element arrangement, the
        Company defers revenue until all elements are delivered and service have
        been
        performed, or until fair value can objectively  be determined for any
        remaining undelivered elements.  Revenue related to maintenance and
        service contracts is recognized ratably over the duration of the
        contracts.





Deferred
      revenue consisted of the following as of:






**May
                  31,****In
                  thousands**
              
              **2007**
              
              
              
              **2006**Systems
                  products
              
              $
              96
              
              
              
              
              $
              874Prober
                  maintenance revenue
              
              
              617
              
              
              
              
              
              475Prober
                  services recognized upon future delivery
              
              
              276
              
              
              
              
              
              237Software
                  licenses
              
              
              47
              
              
              
              
              
              41Deferred
                  revenue - current
              
              $
              1,036
              
              
              
              
              $
              1,627Prober
                  maintenance revenue - non current
              
              $
              194
              
              
              
              
              $
              228




*Warranty:*
      The Company generally warrants its products for a period of thirteen months
      from
      the date of shipment and accrues a current liability for the estimated cost
      of
      warranty upon shipment. For established products, this accrual is based on
      historical experience; and for the Company’s newer products, this accrual is
      based on estimates from similar products.  In addition, from time to
      time, specific warranty accruals are made for specific technical
      problems.





*Allowance
      for doubtful accounts:*The Company closely monitors the
      collection of its accounts receivables and records a reserve for doubtful
      accounts against aged accounts and for specifically identified amounts that
      it
      believes are not recoverable. When receivable balances are determined to be
      uncollectible, these balances are written off.  The Company sells
      primarily to large, well-established semiconductor manufacturers and
      semiconductor test companies and has not experienced significant accounts
      receivable losses in the past.





*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, ongoing product and process
      improvement, and engineering, and support programs relating to existing products
      are conducted. Engineering, research and development costs are expensed to
      operations as incurred.





*Foreign
      currency accounting:*The United States dollar is the functional
      currency for all foreign operations. The effect on the consolidated statements
      of operations of transaction and translation gains and losses is insignificant
      for all periods presented.




*Stock
      based**c**ompensation**expense**:* We
      estimate the value of employee stock options on the date of grant using the
      Black-Sholes model and amortize these costs on a straight-line basis over the
      requisite service periods of the awards.  Under SFAS 123(R), the
      determination of fair value of share-based payment awards on the date of grant
      using an option-pricing model is affected by our stock price as well as
      assumptions regarding a number of highly complex and subjective
      variables.




Expected
      volatility – historical volatility of the Company’s stock
      price.


Expected
      term – historical data on employee exercises and post-vesting
      employment termination behavior.


Risk
      free
      interest rate – an implied yield currently based on United States Treasury
      rates.


Estimated
      forfeitures – historical option forfeitures over a given period.




*Shipping
      and handling:*The cost of shipping the Company’s products to
      customers is included in SG&A expenses. The cost of shipping related to
      material purchases is included in cost of sales. Shipping costs are not
      material.  The Company recognizes billings to customers related to
      shipping costs as Sales.  Shipping revenues are not
      material.




36




*Comprehensive
      loss:*This includes net loss as well as additional other
      comprehensive items such as unrealized losses on investments.  The
      Consolidated Statement of Stockholders’ Equity and Comprehensive Loss summarizes
      the activity in comprehensive loss, net of zero tax benefit.





The
      following schedule summarizes the components of accumulated other comprehensive
      income (loss), net of zero tax benefit, as of:




**May
                  31,****In
                  thousands**
              
              **2007**
              
              
              **2006**Unrealized
                  loss on investments
              
              $
              -
              
              
              $
              (25
              )





*Impact
      of**recently issued accounting pronouncements*:  In
      July 2006, the Financial Accounting Standards Board issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of
      FASB Statement No. 109” (“FIN 48”) which prescribes a recognition threshold
      and measurement attribute, as well as criteria for subsequently recognizing,
      derecognizing and measuring uncertain tax positions for financial statement
      purposes. FIN 48 also requires expanded disclosure with respect to uncertainties
      in income tax assets and liabilities. FIN 48 is effective for fiscal years
      beginning after December 15, 2006 and is required to be recognized as a
      change in accounting principle through a cumulative-effect adjustment to
      retained earnings as of the beginning of the year of adoption. The Company
      plans
      to adopt FIN 48 in the first quarter of fiscal year 2008. The Company is
      currently evaluating the impact, if any, of adopting the provisions of FIN
      48.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principles, and expands
      disclosures about fair value measurements. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements, the
      FASB having previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. Accordingly, this Statement does
      not require any new fair value measurements. SFAS No. 157 is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007, and interim periods within those fiscal years. This Statement is required
      to be adopted by the Company in the first quarter of its fiscal year 2009.
      The
      Company is currently assessing the impact of the adoption of this
      Statement.





In
      February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an amendment of FASB
      statement No. 115."  SFAS No. 159 permits entities to choose to
      measure many financial instruments and certain other items at fair value. If
      the
      fair value method is selected, a business entity shall report unrealized gains
      and losses on elected items in earnings at each subsequent reporting date.
      The
      standard also establishes presentation and disclosure requirements designed
      to
      facilitate comparisons between companies that choose different measurement
      attributes for similar types of assets and liabilities. SFAS No. 159 is
      effective for fiscal years beginning after November 15, 2007, which we would
      be
      required to implement no later than June 1, 2008.  Management is currently
      assessing the impact of adopting this Statement.





In
      November 2006, the FASB ratified EITF Issue No. 06-7, "Issuer’s Accounting for a
      Previously Bifurcated Conversion Option in a Convertible Debt Instrument When
      the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement
      No. 133, Accounting for Derivative Instruments and Hedging Activities" (“EITF
      06-7”). At the time of issuance, an embedded conversion option in a convertible
      debt instrument may be required to be bifurcated from the debt instrument and
      accounted for separately by the issuer as a derivative under FAS 133, based
      on
      the application of EITF 00-19. Subsequent to the issuance of the convertible
      debt, facts may change and cause the embedded conversion option to no
      longer meet the conditions for separate accounting as a derivative instrument,
      such as when the bifurcated instrument meets the conditions of Issue 00-19
      to be
      classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
      option previously accounted for as a derivative under FAS 133 no longer meets
      the bifurcation criteria under that standard, an issuer shall disclose a
      description of the principal changes causing the embedded
      conversion option to no longer require bifurcation under FAS 133 and the amount
      of the liability for the conversion option reclassified to stockholders’ equity.
      EITF 06-7 should be applied to all previously bifurcated conversion options
      in
      convertible debt instruments that no longer meet the bifurcation criteria in
      FAS
      133 in interim or annual periods beginning after December 15, 2006, regardless
      of whether the debt instrument was entered into prior or subsequent to the
      effective date of EITF 06-7. Adoption of EITF 06-7 had no material impact on
      our
      consolidated financial position, results of operations or cash
      flows.





In
      December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for Registration
      Payment Arrangements" (“FSP 00-19-2”) which addresses accounting for
      registration payment arrangements. FSP 00-19-2 specifies that the contingent
      obligation to make future payments or otherwise transfer consideration under
      a
      registration payment arrangement, whether issued as a separate agreement or
      included as a provision of a financial instrument or other agreement, should
      be
      separately recognized and measured in accordance




37
 
  with
        FASB
        Statement No. 5, "Accounting for Contingencies." FSP 00-19-2 further clarifies
        that a financial instrument subject to a registration payment arrangement
        should
        be accounted for in accordance with other applicable generally accepted
        accounting principles without regard to the contingent obligation to transfer
        consideration pursuant to the registration payment.  Adoption of FSP
        00-19-2 had no material impact on our consolidated financial position, results
        of operations or cash flows.


**Note
      3.  San Jose, California Corporate Campus – Purchase, Impairments and
      Sale**





In
      March
      2003, the Company purchased land and buildings in San Jose, California for
      approximately $37.2 million. In December 2003, based on management’s evaluation
      and on an appraisal performed by an outside appraisal company, the land and
      buildings were written down to $30.9 million.  In December 2004, the
      Company entered into an agreement to sell its campus to Integrated Device
      Technology (“IDT”) for $29.0 million and to continue to occupy certain portions
      of the buildings through June 2005. The fair value of the land and buildings
      was
      measured as of December 31, 2004 based on the sale price; net of closing costs
      and a $4.1 million impairment charge was recorded. The assets included in this
      agreement were classified as Assets Held for Sale as of December 31, 2004.
      The
      sale closed on January 5, 2005. There are no rental payments on the leaseback
      of
      the San Jose campus from the date of the sale to June 30, 2005. The fair value
      of base rent and common area charges for the term of the lease agreement was
      estimated to be approximately $0.5 million and was recorded as a prepaid expense
      upon closing.





The
      Company had indemnified IDT for two years with respect to representations and
      warranties made by the Company related to the sale. The limit of the Company’s
      liability for breach of the representations and warranties was $3.5 million
      in
      the sale agreement, and a $0.5 million reserve was recorded for the net present
      value of the Company’s guarantee obligations under the indemnification
      provisions.  In January 2007, after the expiration of the two year
      period specified in the agreement, the Company reversed this reserve on an
      indemnification release as no claims had been made.





**Note
      4.  Financial Instruments**





*Concentration
      of credit risk:*Financial instruments that potentially subject
      the Company to concentration of credit risk consist principally of cash
      equivalents, investments and trade receivables. The Company places its cash
      equivalents and 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 and
      contract test companies 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
      uncollectible amounts has been within management’s expectations. Accounts
      receivable from customers in Asia were $3.4 million and $5.2 million at May
      31,
      2007 and 2006, respectively. (see Note 17 – Segment Information)





*Fair
      value of financial instruments:*The Company estimated the fair
      value of financial instruments and concluded the amounts reported for cash
      and
      cash equivalents, accounts receivable, and accounts payable approximate fair
      value due to their short maturities.  Convertible subordinated notes
      are stated at cost which approximates fair value due to the recent March 2007
      issue of the 6.25% Notes and the payoff of the 5.25% Notes in June
      2007.





**Note
      5.  Other Assets**





The
      following is a summary of other assets by major category as of:




**May
                  31,****In
                  thousands**
              
              **2007**
              
              
              **2006**Cash
                  surrender value of Company owned life insurance
              
              $
              395
              
              
              $
              382Cash
                  surrender value of Company owned reinsurance policies
              
              
              1,009
              
              
              
              944Foreign
                  income tax receivable
              
              
              523
              
              
              
              522Deferred
                  financing costs on convertible subordinated notes
              
              
              1,663
              
              
              
              214Other
              
              
              142
              
              
              
              177$
              3,732
              
              
              $
              2,239




38




**Note
      6.  Accrued Liabilities**





The
      following is a summary of accrued liabilities by major category as
      of:




**May
                  31,****In
                  thousands**
              
              **2007**
              
              
              
              
              
              **2006**Accrued
                  compensation and related liabilities
              
              $
              1,550
              
              
              
              
              
              $
              2,268Warranty
                  reserves
              
              
              1,242
              
              
              
              
              
              
              1,518Accrued
                  audit and compliance fees
              
              
              523
              
              
              
              
              
              
              714Restructuring
                  charges
              
              
              321
              
              
              
              
              
              
              402Deferred
                  rent expense - current
              
              
              532
              
              
              
              
              
              
              -Taxes
                  other than on income
              
              
              319
              
              
              
              
              
              
              
              309Interest
                  payable on convertible subordinated notes
              
              
              491
              
              
              
              
              
              
              
              204Other
              
              
              733
              
              
              
              
              
              
              
              1,601$
              5,711
              
              
              
              
              
              
              $
              7,016










**Note
      7.  Warranty Reserves and Guarantees**





The
      Company’s warranty liability is included in accrued liabilities and changes
      during the reporting periods are as follow:




**In
                  thousands**
              
              **Balance
                  at**
                **Beginning
                  of**
                **Period**
              
              
              **Additions
                  Charged**
                **to
                  Costs of Sales**
              
              
              **Warranty
                  Reserve Utilized**
              
              
              **Warranty
                  reserve estimate changes**
              
              
              **Balance
                  at End of**
                **Period**Year
                  ended May 31, 2007
              
              $
              1,518
              
              
              $
              2,567
              
              
              $
              (2,382
              )
              
              $
              (461
              )
              
              $
              1,242Year
                  ended May 31, 2006
              
              $
              1,648
              
              
              $
              2,131
              
              
              $
              (2,525
              )
              
              $
              264
              
              
              $
              1,518






The
      Company’ssoftware
      license agreements generally include certain provisions for indemnifying
      customers against liabilities if the Company’s software products infringe a
      third party’s intellectual property rights. Further, the Company also provides
      guarantee instruments to certain third parties as required for certain
      transactions. To date, the Company has not incurred any material costs as a
      result of such indemnifications and has not accrued any liabilities related
      to
      such obligations.





The
      Company does not believe, based on historical experience and information
      currently available, that it is probable that any amounts will be required
      to be
      paid under these arrangements.





Also,
      see
“Note 3 - San Jose, California Corporate Campus – Purchase, Impairments and
      Sale” for additional guarantees.




**Note
      8.  Restructuring Charges**






During
      the
      fourth quarter 2007, the Company recorded $0.1 million net restructuring
      charge.  A $0.3 million charge related to a reduction of workforce in
      its foreign offices initiated in fiscal 2007 was offset by a $0.2 million
      reversal for the early termination of a facility lease previously restructured
      in 2004.  In 2006, the Company recorded $0.2 million in restructuring
      charges for workforce reductions of three employees in the United States and
      Europe. In the second half of 2004, the Company closed office facilities
      and completed workforce reductions related to these closures, recording a charge
      of $1.0 million. Under the 2004 restructuring plan, 14 employees within the
      Company’s engineering, research and development operations were designated for
      termination and these employees were terminated in 2004 and
      2005. Restructuring accruals are included in accrued
      liabilities.




39




Details
      of
      the 2007 Plan restructuring charges for the year ended May 31, 2007 are as
      follows and are expected to be fully paid by the end of fiscal
      2008:




**Year
                  ended May 31, 2007****In
                  thousands**
              
              **Severance**
              
              
              **Other
                  Costs**
              
              
              **Total**Beginning
                  balance
              
              $
              -
              
              
              $
              -
              
              
              $
              -Restructuring
                  charges
              
              
              227
              
              
              
              94
              
              
              
              321Cash
                  payments
              
              
              -
              
              
              
              -
              
              
              
              -Ending
                  balance
              
              $
              227
              
              
              $
              94
              
              
              $
              321


Details
      of
      the 2006 Plan restructuring charges for the year ended May 31, 2006 are as
      follows:




**Year
                  ended May 31, 2006****In
                  thousands**
              
              **Severance**
              
              
              **Other
                  Costs**
              
              
              **Total**Beginning
                  balance
              
              $
              -
              
              
              $
              -
              
              
              $
              -Restructuring
                  charges
              
              
              69
              
              
              
              13
              
              
              
              82Cash
                  payments
              
              
              (69
              )
              
              
              (13
              )
              
              
              (82
              )Ending
                  balance
              
              $
              -
              
              
              $
              -
              
              
              $
              -




Details
      of
      the 2004 Plan restructuring charges for the years ended May 31, 2007 and 2006
      are as follows:




**Year
                  ended May 31, 2007**
              
              
              **Year
                  ended May 31, 2006****In
                  thousands**
              
              **Severance**
              
              
              **Other
                  Costs**
              
              
              **Total**
              
              
              **Severance**
              
              
              **Other
                  Costs**
              
              
              **Total**Beginning
                  balance
              
              $
              -
              
              
              $
              365
              
              
              $
              365
              
              
              $
              -
              
              
              $
              611
              
              
              $
              611Restructuring
                  charges
              
              
              -
              
              
              
              (167
              )
              
              
              (167
              )
              
              
              -
              
              
              
              -
              
              
              
              -Cash
                  payments
              
              
              -
              
              
              
              (198
              )
              
              
              (198
              )
              
              
              -
              
              
              
              (246
              )
              
              
              (246
              )Ending
                  balance
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              365
              
              
              $
              365


Details
      of
      the 2003 and 2002 Plan restructuring charges for the years ended May 31, 2007
      and 2006 are as follows:







**Year
                  ended May 31, 2007**
              
              
              **Year
                  ended May 31, 2006****In
                  thousands**
              
              **Severance**
              
              
              **Other
                  Costs**
              
              
              **Total**
              
              
              **Severance**
              
              
              **Other
                  Costs**
              
              
              **Total**Beginning
                  balance
              
              $
              17
              
              
              $
              20
              
              
              $
              37
              
              
              $
              -
              
              
              $
              12
              
              
              $
              12Restructuring
                  charges
              
              
              (15
              )
              
              
              (10
              )
              
              
              (25
              )
              
              
              147
              
              
              
              10
              
              
              
              157Cash
                  payments
              
              
              (2
              )
              
              
              (10
              )
              
              
              (12
              )
              
              
              (130
              )
              
              
              (2
              )
              
              
              (132
              )Ending
                  balance
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              17
              
              
              $
              20
              
              
              $
              37


**Note
      9.  Gain on Settlement of Long Term Liability**





In
      the
      third quarter of 2004, the Company negotiated a new agreement with its former
      parent company (”GSX”) that reduced the amounts payable under the Company’s tax
      benefit sharing agreement. Under the terms of this new agreement, the Company
      was required to pay $1.3 million over seven quarters beginning in Q4 2004.
      This
      settlement resulted in an $8.3 million gain, or $0.38 per share, in 2004 as
      a
      result of reducing the estimated liability to the net present value of the
      settlement amount.  As of May 31, 2007, there were no amounts
      outstanding under this agreement.






**Note
      10. Convertible Subordinated Notes (“5.25% Notes”), Debt Conversion Expense and
      Warrants**




In
      June
      2002, the Company completed a $35.5 million private placement of 5.25% fixed
      rate convertible subordinated notes (the “5.25% Notes”) due in June 2007. The
      proceeds from the sales of the 5.25% Notes were $32.5 million, net of $3.0
      million in debt issuance expenses. Interest on the 5.25% Notes is payable each
      year on the fifteenth of June and December and is charged to interest




40
 
  expense.
        In the transition period ended May 31, 2005, the Company repurchased a total
        of
        $2.0 million of the 5.25% Notes. During May 2006, the Company exchanged $25.0
        million of 5.25% Notes for 4,268,000 shares of common stock and $7.5 million
        in
        cash in privately negotiated transactions with Note holders. At the conversion
        price of $10.2465 per share, the $25.0 million of Notes exchanged would have
        been convertible into 2,440,000 shares of common stock.  For
        accounting purposes, the additional 1,828,000 shares of common stock, valued
        at
        $8.6 million, and the $7.5 million cash paid was considered an inducement
        for
        the holders to convert their Notes, which combined with unamortized bond
        costs
        of $1.1 million and transaction costs of $0.4 million, required the Company
        to
        record a non-operating debt conversion expense of $17.6 million during the
        year
        ended May 31, 2006.


The
      following is a summary of the 5.25% Notes, as of :




**In
                  thousands**
              
              **May
                  31, 2007**
              
              
              **May
                  31, 2006**Convertible
                  subordinated notes
              
              $
              8,500
              
              
              $
              8,500Less:   Discount
              
              
              (14
              )
              
              
              (170
              )$
              8,486
              
              
              $
              8,330




As
      of May
      31, 2007, the $8.5 million in 5.25% Notes, at a conversion price of $10.25
      per
      share, would convert into approximately 830,000 shares of Common
      Stock.  In March 2007, the Company completed a $25.75 million private
      placement of 6.25% fixed rate senior subordinated secured notes. (see Note
      11 –
Senior Subordinated Secured Notes (“6.25% Notes”))  The Company used
      part of these proceeds to repay the $8.5 million of 5.25% Notes plus accrued
      interest on June 15, 2007, the maturity date.





In
      connection with the issuance of the 5.25% Notes in 2002, the Company also issued
      five year warrants for the purchase of 715,000 shares of Common Stock that
      are
      exercisable at a price of $15.44 per share. The original value of the warrants
      was determined to be $2.6 million using the Black-Scholes option pricing model
      and is being accreted to interest expense over the term of the 5.25% Notes
      using
      the effective interest rate method. These warrants expired on June 15,
      2007.





**Note
      11.  Senior Subordinated Secured Notes (“6.25%
      Notes”)**





In
      March
      2007, the Company completed a $25.75 million private placement of 6.25% (payable
      semi-annually in June and December) fixed rate senior subordinated secured
      notes
      (the “6.25% Notes”). The Company recorded debt issuance expenses totaling $2.3
      million as a prepaid expense and these costs are being amortized to other
      expense approximating the effective interest method over the estimated four
      year
      life of the 6.25% Notes, which coincides with the earliest date upon which
      the
      note holders can require the Company to repurchase. The 6.25% Notes are due
      in
      March 2027; however, the holders may require the Company to repurchase for
      cash
      on March 26, 2011 and various future dates at a price equal to 100% of the
      principal amount plus accrued interest, if any, to the applicable repurchase
      date. The 6.25% Note terms restrict the Company in transferring capital to
      certain of its subsidiaries, restrict the payment of dividends, and contain
      certain other restrictions.





The
      6.25%
      Notes are convertible at any time prior to maturity at the election of the
      bond
      holders into shares of Common Stock at a conversion price of $2.295, which
      represented a 12.5% premium over the Company’s stock price on the date of the
      private placement’s closing. If fully converted, the 6.25% Notes would convert
      into approximately 11.22 million shares of Common Stock. At any time prior
      to
      maturity, subject to certain limitations, the Company may elect to automatically
      convert (“Auto Convert”) the 6.25% Notes into Common Stock if the closing price
      of the Common Stock has exceeded 150% of the conversion price for at least
      20
      trading days during any 30-day period prior to the Company giving notice to
      the
      bond holders. If the Company elects to Auto Convert within the first three
      years, the Company will be required to pay the bond holders interest for the
      three year period (make-whole), less any interest paid up to that date. The
      Company considers this interest make-whole provision to be an embedded
      derivative and determined the value of it to be negligible.  The
      Company can also after three years redeem the 6.25% Notes for cash at 100%
      of
      the principal amount plus accrued interest.





The
      6.25%
      Notes are senior subordinated secured debt ranked junior to the Company’s
      Comerica bank line borrowings and are secured by a second priority lien on
      substantially all of the Company’s assets.  The terms of the 6.25%
      Notes require the Company to use part of the proceeds to repay the Company’s
      outstanding $8.5 million in 5.25% Notes due June 15, 2007.  These
      5.25% Notes were paid off in June 2007. The remainders of funds are intended
      to
      be used for general corporate purposes, including working capital and capital
      expenditures.




41




The
      6.25%
      Notes contain an embedded derivative requiring bifurcation and valuation in
      accordance with the guidance in SFAS 133 “Accounting for Derivative Instruments
      and Hedging Activities”.  Furthermore, in analyzing the terms of the
      6.25% notes, the Company determined that the notes represent non-conventional
      convertible debt as defined in EITF Issue 05-2, “The Meaning of ‘Conventional
      Convertible Debt Instrument’ in Issue No. 00-19” due to the fact that the 6.25%
      notes contain provisions that provide for adjustment to the number of shares
      into which the notes are convertible and, therefore, the number of share
      issuable upon conversion is not fixed. Under the provisions of EITF 00-19
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company’s Own Stock” this conversion feature would be
      classified as a liability if it were a freestanding financial instrument, due
      to
      the fact that at issuance and through the remainder of the year ended May 31,
      2007, the Company did not have enough authorized and unissued shares available
      to fully settle the maximum potential number of shares that could be required
      to
      be delivered under the terms of all of  the Company’s existing
      financial instruments.  As a result, to the extent that a shortfall
      exists between the maximum potential shares issuable under the conversion
      feature of approximately 13,365,000 shares and the minimum number of shares
      the
      Company has available for issuance of approximately 9,691,000 (resulting in
      a
      shortfall of approximately 3,274,000 shares), the Company has calculated the
      relative portion of the fair value of the conversion feature that pertains
      to
      this shortfall to be $3.0 million (see discussion of valuation methodology
      below) and has recognized this amount as a separate derivative liability with
      an
      offsetting discount to carrying value of the 6.25% notes.  The
      resultant discount is being amortized to interest expense over the estimated
      four year life of the 6.25% notes. Discount amortization recorded during the
      year ended May 31, 2007 totaled $0.1 million.





The
      conversion feature derivative liability was remeasured at May 31, 2007 at its
      estimated fair value and the increase in value of $0.2 million was recognized
      as
“Loss on mark to market financial instruments related to convertible debt” in
      the statement of operations.





The
      following table outlines the assumptions the Company used in the Black-Scholes
      model to value the conversion feature at inception of the 6.25% Notes (March
      26,
      2007) and at May 31, 2007:







**Conversion
                  Feature****March
                  26, 2007**
              
              **May
                  31, 2007**Exercise
                  price per share
              
              2.08
              
              2.17Contractual
                  term (years)
              
              4.0
              
              3.8Volitility
              
              66.8%
              
              66.8%Risk-free
                  interest rate
              
              4.5%
              
              4.9%


Additionally,
      one of the covenants of our debenture agreement with respect to the 6.25% Notes
      can be interpreted such that if we are late with any of our required filings
      under the Securities Act of 1934, as amended (“1934 Act”), and if we fail to
      effect a cure within 60 days, the holders of the 6.25% Notes can put the 6.25%
      Notes back to the Company, whereby the 6.25% Notes become immediately due and
      payable.





The
      following is a summary of the 6.25% Notes, as of:




**In
                  thousands**
              
              **May
                  31, 2007**Convertible
                  subordinated notes
              
              $
              25,750Less:   Discount
              
              
              (2,899
              )$
              22,851







**Note
      12.   Long Term Liability – Deferred Rent**





The
      Company leases facilities for its corporate headquarters under a five year
      agreement that includes tenant concessions such as tenant improvement allowances
      of $1.0 million and eighteen months of "free rent”. The Company records rent
      expense using the effective average net rent over the lease term after taking
      into consideration the value of these tenant rent concessions. This accounting
      resulted in long term deferred rent liabilities of $1.1 million and $1.5 million
      as of May 31, 2007 and 2006, respectively.




42




**Note
      13.  Line of Credit**





In
      April
      and January 2007 and September 2006, the Company renewed and amended its
      revolving line of credit with Comerica Bank. Under these amendments, the Company
      may borrow up to $7.5 million at a rate of prime plus 0.25% based upon eligible
      accounts receivable balances. This amended line of credit, which has a maturity
      date of August 31, 2008, is secured by substantially all of the Company’s assets
      and requires that the Company maintain certain financial covenants. The Company
      currently maintains cash deposits of $3.0 million that will be considered
      restricted as compensating balances to the extent the Company borrows against
      this credit line.  There were no borrowings from the credit line as of
      May 31, 2007 and May 31, 2006, respectively.





**Note
      14.  Commitments and Contingencies**





The
      Company’s lease agreement with 5729 Fontanoso Way, LLC for its new corporate
      headquarters commenced on May 1, 2005 for sixty months.  The Company
      has an option to extend this lease agreement for an additional five year period.
      In January 2002, the Company entered into a three-year operating lease for
      a
      39,000 square foot manufacturing facility in Singapore. This lease was renewed
      in December 2004 for two additional years and during the third quarter, 2007,
      we
      renewed this lease for two more years. The Company’s rent expense was $1.6
      million, $1.7 million, $1.1 million, and $1.1 million for the years ended May
      31, 2007 and May 31, 2006, the five months ended May 31, 2005 and the year
      ended
      December 31, 2004, respectively.  Purchase commitments, included in
      the table below, include $3.8 million of inventory purchase commitments of
      which
      $2.2 million are noncancelable.





The
      following table summarizes our contractual obligations and estimated commercial
      commitments as of May 31, 2007 and the effect such obligations are expected
      to
      have on liquidity in future periods:




**Payments
                  Due by Fiscal Period****In
                  thousands**
              
              **2008**
              
              
              **2009**
              
              
              **2010**
              
              
              **2011**
              
              
              **Thereafter**
              
              
              **Total**Operating
                  leases
              
              $
              1,975
              
              
              $
              1,840
              
              
              $
              1,303
              
              
              $
              -
              
              
              $
              -
              
              
              $
              5,118Purchase
                  commitments
              
              
              3,976
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,976Interest
                  payments on convertible notes
              
              
              1,381
              
              
              
              1,609
              
              
              
              1,609
              
              
              
              2,061
              
              
              
              -
              
              
              
              6,660Principal
                  payment on convertible notes
              
              
              8,500
              
              
              
              -
              
              
              
              -
              
              
              
              25,750
              
              
              
              -
              
              
              
              34,250Total
                  cash obligations
              
              $
              15,832
              
              
              $
              3,449
              
              
              $
              2,912
              
              
              $
              27,811
              
              
              $
              -
              
              
              $
              50,004




The
      Company is not currently involved in any legal actions that management 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 could be
      trebled.




**Note
      15.  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 therefrom, 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 in November 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
      option plans:*****The Company has a stock-based
      compensation program that provides its Board of Directors with broad discretion
      in creating employee equity incentives. In October 2006, the Company’s
      stockholders approved a new stock incentive plan (the “2006 Plan”) to replace
      the Company’s 1997 Stock Incentive Plan (the “1997 Plan”) and the Company’s 2001
      Non-Officer




43
 
  Employee
        Stock Incentive Plan (the “2001 Plan”). The stockholders approved a total of 4.0
        million shares of Common Stock (2.0 million of which may be restricted shares)
        reserved for issuance under the 2006 Plan, plus the number of shares of Common
        Stock that remained available for grants of awards under the 1997 and 2001
        Plans
        (1.4 million shares), plus any shares of Common Stock that would otherwise
        return to these plans as a result of forfeiture, termination or expiration
        of
        awards previously granted under these plans. Stock options are generally
        time-based, vesting on each annual anniversary of the grant date over three
        to
        four years and expire no more than seven years from the grant
        date.  At May 31, 2007, there were 8.5 million shares reserved and 5.4
        million shares available for grant.




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




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004****Shares
                  in thousands**
              
              **Options
                  Outstanding**
              
              
              **Weighted
                  Average Exercise**
                **Price**
              
              
              **Options
                  Outstanding**
              
              
              **Weighted
                  Average Exercise**
                **Price**
              
              
              **Options
                  Outstanding**
              
              
              **Weighted
                  Average Exercise**
                **Price**
              
              
              **Options
                  Outstanding**
              
              
              **Weighted
                  Average Exercise**
                **Price**Beginning
              
              
              3,480
              
              
              $
              6.88
              
              
              
              3,582
              
              
              $
              6.63
              
              
              
              3,520
              
              
              $
              8.75
              
              
              
              3,160
              
              
              $
              10.10Granted
              
              
              375
              
              
              $
              2.83
              
              
              
              1,614
              
              
              $
              3.75
              
              
              
              703
              
              
              $
              3.49
              
              
              
              945
              
              
              $
              5.23Exercised
              
              
              (3
              )
              
              $
              2.44
              
              
              
              (118
              )
              
              $
              2.20
              
              
              
              (30
              )
              
              $
              3.89
              
              
              
              (168
              )
              
              $
              1.49Forfeited
              
              
              (775
              )
              
              $
              6.33
              
              
              
              (1,598
              )
              
              $
              3.49
              
              
              
              (611
              )
              
              $
              15.52
              
              
              
              (417
              )
              
              $
              13.89Ending
              
              
              3,077
              
              
              $
              6.53
              
              
              
              3,480
              
              
              $
              6.88
              
              
              
              3,582
              
              
              $
              6.63
              
              
              
              3,520
              
              
              $
              8.75




Additional
      disclosures for options outstanding as of May 31, 2007 at various ranges of
      exercise prices are as follows (shares in thousands):




**Options
                  outstanding**
              
              
              **Options
                  exercisable****Range
                  of exercise prices**
              
              
              
              **Shares**
              
              
              
              **Weighted**
                **average
                  exercise**
                **price**
              
              
              
              **Weighted
                  average contractual life**
              
              
              
              **Shares**
              
              
              
              **Weighted**
                **average
                  exercise price**$
              1.48
              
              to
              
              $
              2.17
              
              
              
              176
              
              
              $
              1.79
              
              
              
              2.4
              
              
              
              171
              
              
              $
              1.79$
              2.18
              
              to
              
              $
              3.15
              
              
              
              1,093
              
              
              $
              2.98
              
              
              
              2.4
              
              
              
              792
              
              
              $
              3.02$
              3.16
              
              to
              
              $
              8.75
              
              
              
              1,133
              
              
              $
              4.51
              
              
              
              4.1
              
              
              
              688
              
              
              $
              4.37$
              8.76
              
              to
              
              $
              32.94
              
              
              
              675
              
              
              $
              16.92
              
              
              
              1.3
              
              
              
              675
              
              
              $
              16.923,077
              
              
              $
              6.53
              
              
              
              2.8
              
              
              
              2,326
              
              
              $
              7.36




Aggregate
      intrinsic value represents the excess of the Company’s closing stock price on
      the last trading day of the fiscal period, which was $2.17 as of May 31, 2007,
      over the option exercise price of the shares multiplied by the number of options
      outstanding.  Additional information on the status of options as of
      May 31, 2007 is as follows:






**Shares
                  and aggregate intrinsic value, in thousands**
              
              **Shares**
              
              
              **Aggregate
                  intrinsic value**
              
              
              **Weighted
                  average exercise price**
              
              
              **Weighted
                  average remaining contractual life (years)**Outstanding
              
              
              3,077
              
              
              $
              66
              
              
              $
              6.53
              
              
              
              2.8Vested
                  and expected to vest
              
              
              2,797
              
              
              $
              66
              
              
              $
              6.75
              
              
              
              2.5Exercisable
              
              
              2,326
              
              
              $
              64
              
              
              $
              7.36
              
              
              
              2.0




The
      following table summarizes stock option exercises for:




44




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  Ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Net
                  cash proceeds
              
              $
              8
              
              
              $
              260
              
              
              $
              45
              
              
              $
              250Intrinsic
                  value of options exercised
              
              $
              2
              
              
              $
              225
              
              
              $
              71
              
              
              $
              373Income
                  tax benefits
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -




In
      accordance with FAS 123(R), the Company presents excess tax benefits from the
      exercise of stock options, if any, as financing cash flows rather than operating
      cash flows.




*Restricted
        Stock Units:*****Restricted stock units are converted
        into shares of Common Stock upon vesting on a one-for-one basis. Vesting
        of
        restricted stock units is subject to the employee’s continuing service to the
        Company. The compensation expense related to these awards was determined
        using
        the fair value of Common Stock on the date of the grant, and compensation
        is
        recognized over the service period. Restricted stock units generally vest
        over
        three years.   During the year ended May 31, 2007, no restricted
        stock units vested.






**Outstanding
                  restricted stock units****Shares
                  in thousands**
              
              **Restriced
                  stock units outsanding**
              
              
              **Weighted
                  average grant date fair value**Unvested
                  awards beginning of period
              
              
              -
              
              
              $
              -Awards
              
              
              534
              
              
              $
              2.43Releases
              
              
              -
              
              
              $
              -Forfeitures
              
              
              (13
              )
              
              $
              2.43Unvested
                  awards end of period
              
              
              521
              
              
              $
              2.43




*Employee
      Stock Purchase Plan:*****In May 2002, the Company’s
      stockholders approved the 2002 Employee Stock Purchase Plan (the “2002 Plan”)
      and reserved 2,000,000 shares for issuance under the Plan. The Company’s
      2002 Plan provides that eligible employees may purchase stock at 85% of its
      fair value on specified dates through payroll deductions. At May 31, 2007,
      the
      Company had 1.6 million shares reserved for future issuance under the 2002
      Plan. During the year ended May 31, 2007, 60,000 shares were purchased at a
      weighted average of $2.24.  The intrinsic value of purchased shares
      was $24,000.




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  Ended****In
                  thousands, except per share data**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Shares
                  issued
              
              
              60
              
              
              
              59
              
              
              
              48
              
              
              
              108Average
                  purchase price
              
              $
              2.24
              
              
              $
              3.20
              
              
              $
              1.36
              
              
              $
              1.17Net
                  cash proceeds
              
              $
              135
              
              
              $
              189
              
              
              $
              66
              
              
              $
              126Income
                  tax benefits
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -


*Adoption
      of Statement of Financial Accounting Standard No. 123(revised)
“**Share-Based Payment”**:*****On June 1,
      2006, the Company adopted the provisions of FAS 123(R), and started
      recognizing compensation expense related to the fair value of its employee
      stock-based compensation awards. The Company elected to use the modified
      prospective transition method as permitted by FAS 123(R) and therefore financial
      results for prior periods were not restated. Under this transition method,
      stock-based compensation expense for year ended May 31, 2007 includes
      compensation expense for all employee stock-based compensation awards granted
      prior to, but not yet vested as of June 1, 2006 based on the grant date fair
      value estimated in accordance with the original provisions of FAS 123, adjusted
      for awards not expected to vest. Stock-based compensation expense for all
      stock-based compensation awards granted subsequent to June 1, 2006 was based
      on
      the grant-date fair value estimated in accordance with the provisions of FAS
      123(R), adjusted for awards not expected to vest. Upon adoption of SFAS 123(R),
      the Company recognizes compensation expense for stock option awards granted
      subsequent to June 1, 2006 on a straight-line basis over the requisite service
      period of the award while prior grants continue to be recognized on an
      accelerated basis.




The
      Company estimates the fair value of stock options using a Black-Scholes
      valuation model.  This is consistent with the provisions of FAS
      123(R), SEC Staff Accounting Bulletin No. 107 “Share-Based Payment”, and
      the Company’s prior period pro forma disclosures of net earnings, including
      stock-based compensation (determined under a fair value method as prescribed
      by
      FAS 123).  The fair value assumptions and weighted average grant date fair
      values for the plans are as follows:




45








**Year
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****Stock
                  Option Plans**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Expected
                  dividend yield
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Expected
                  stock price volatility
              
              
              66.8
              %
              
              
              67.4
              %
              
              
              88.7
              %
              
              
              88.7
              %Risk-free
                  interest rate
              
              
              4.9
              %
              
              
              4.9
              %
              
              
              3.8
              %
              
              
              2.5
              %Expected
                  life (years)
              
              
              3.1
              
              
              
              2.9
              
              
              
              2.3
              
              
              
              1.6Weighted
                  average grant date fair values
              
              $
              1.36
              
              
              $
              2.42
              
              
              $
              1.80
              
              
              $
              2.22**Year
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****Employee
                  stock purchase plans**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Expected
                  dividend yield
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Expected
                  stock price volatility
              
              
              55.9
              %
              
              
              71.8
              %
              
              
              70.5
              %
              
              
              67.9
              %Risk-free
                  interest rate
              
              
              5.1
              %
              
              
              3.6
              %
              
              
              3.2
              %
              
              
              2.0
              %Expected
                  life (years)
              
              
              1.3
              
              
              
              1.2
              
              
              
              1.2
              
              
              
              1.1Weighted
                  average purchase date fair values
              
              $
              1.05
              
              
              $
              1.85
              
              
              $
              1.79
              
              
              $
              1.39




The
      Company’s computation of expected volatility for all periods presented was based
      on historical volatility and the computation of expected life was based on
      historical exercise patterns. The interest rate for periods within the
      contractual life of the award was based on the U.S. Treasury yield curve in
      effect at the time of grant.  The Company pays no dividends and does
      not expect to pay any for the foreseeable future.




*Impact
      of the adoption of FAS
      123(R):*********The total stock-based
      compensation expense for stock options, restricted stock units, and ESPP was
      as
      follows:




**In
                  thousands**
              
              **Year
                  ended May 31, 2007**Cost
                  of sales
              
              $
              79Research
                  and development
              
              
              177Selling,
                  general and administrative
              
              
              679$
              935






In
      the
      Company’s pro forma disclosures prior to the adoption of FAS 123(R), the
      Company accounted for forfeitures upon occurrence.  FAS 123(R) requires
      forfeitures to be estimated at the time of grant and these estimates are revised
      if necessary in subsequent periods if actual forfeitures differ.   As
      of May 31, 2007, the unamortized stock-based compensation balance related to
      stock options, restricted stock units, and the ESPP was $1.7 million and will
      be
      recognized over an estimated weighted average amortization period of
      three years.




FAS
      123(R)
      requires the Company to calculate the pool of excess tax benefits that are
      available as of June 1, 2006 to absorb tax deficiencies recognized in
      subsequent periods, assuming the Company had applied the provisions of the
      standard in prior periods. The Company has elected to use the regular or long
      method of determining tax effects of share-based compensation. The choice of
      approach will have no impact on the tax benefit pool or tax expense to be
      recognized for the current period, due to the Company’s net operating loss
      position.




*Pr**ior
      to the adoption of FAS 123(R):*Prior to the adoption of FAS 123(R), the
      Company applied FAS 123, amended by FAS 148, “Accounting for Stock-Based
      Compensation – Transition and Disclosure” (SFAS 148), which allowed companies to
      apply the existing accounting rules under Accounting Principles Board Opinion
      No. 25, “Accounting for Stock Issued to Employees”and
      related interpretations. In general, as the exercise price of options granted
      under these plans was equal to the market price of the underlying common stock
      on the grant date, no stock-based employee compensation cost was recognized
      in
      the Company’s net loss.  As required by FAS 148 prior to the
      adoption of FAS 123(R), the Company provided pro forma net loss and pro forma
      net loss per common share disclosures for stock-based awards, as if the
      fair-value-based method defined in FAS 123 had been applied.




46




The
      following table illustrates the pro forma net loss after tax and net loss per
      common share as if the Company had applied the fair value recognition provisions
      of FAS 123 to stock-based compensation:




**Year
                  ended**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands, except per share data (unaudited)**
              
              **May
                  31, 2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Net
                  loss - as reported
              
              $
              (34,030
              )
              
              $
              (12,393
              )
              
              $
              (6,372
              )Add:
                  Stock-based employee compensation expenseincluded
                  in reported net loss
              
              
              794
              
              
              
              -
              
              
              
              -Deduct:  stock-based
                  employee compensationexpense
                  net of related tax effects
              
              
              (1,565
              )
              
              
              (924
              )
              
              
              (2,798
              )Pro
                  forma net loss
              
              $
              (34,801
              )
              
              $
              (13,317
              )
              
              $
              (9,170
              )Net
                  loss per share:Basic
                  and Diluted - as reported
              
              $
              (1.53
              )
              
              $
              (0.57
              )
              
              $
              (0.30
              )Basic
                  and Diluted - pro forma
              
              $
              (1.57
              )
              
              $
              (0.61
              )
              
              $
              (0.43
              )






*Warrants:*In
      connection with the issuance of the 5.25% Notes, the Company also issued
      warrants for the purchase of 715,000 shares.  (see Note 10 –
Convertible Subordinated Notes (“5.25% Notes”) Conversion Expense and
      Warrants)  These warrants expired June 15, 2007.




**Note
      16.  Employee Benefit Plans**





*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 to set
      aside
      amounts into a profit sharing pool based upon performance targets to pay bonuses
      to employees. There were no charges to operations for these plans during 2007,
      2006, 2005, and 2004.





*Pension
      Plans**:* The majority of employees in the United States are
      covered by 401K type defined contribution plans. In Germany, employees are
      covered by a defined benefit pension plan (“The Plan”) in accordance with local
      legal requirements.




In
      September 2006, the FASB issued Statement No. 158,*Employers**’**Accounting for Defined Benefit Pension and Other
      Postretirement Plans* (“SFAS No. 158”). SFAS No. 158 amends SFAS No. 87,*Employers**’**Accounting for Pensions,* SFAS No. 88,
*Employers**’**Accounting for Settlements
      and Curtailments of
      Defined Benefit Pension Plans and for Termination Benefits,* SFAS No.
      106,*Employers**’**Accounting for Postretirement Benefits
      Other Than Pensions,* SFAS No. 132−R,*Employers**’**Disclosures about Pensions and Other**Postretirement Benefits,* and
      other related accounting literature. SFAS No. 158 requires employers to
      recognize the funded status of a benefit plan, measured as the difference
      between plan assets at fair value and the benefit obligation, in their balance
      sheet. The recognition of the funded status on the balance sheet requires
      employers to recognize actuarial items (such as actuarial gains and losses,
      prior service costs, and transition obligations) as a component of other
      comprehensive income, net of tax. Electroglas has adopted SFAS No. 158
      effective May 31, 2007.




The
      Company has purchased insurance policies to cover the payment risk of The
      Plan.  These insurance policies have not been segregated and
      restricted to provide for pension benefits and are therefore not considered
      plan
      assets  The cash surrender value of these insurance policies as of May
      31, 2007 and 2006 was $1.0 million and $0.9 million, respectively, and have
      been
      included in non-current assets.




47




The
      projected benefit obligations of the Plan are as follows and are classified
      as
      non-current liabilities:






**In
                  thousands**
              
              **May
                  31, 2007**
              
              
              **May
                  31, 2006**Projected
                  benefit obligation at beginning of year
              
              $
              826
              
              
              $
              752Interest
                  costs
              
              
              40
              
              
              
              37Actuarial
                  loss
              
              
              (20
              )
              
              
              26Service
                  costs
              
              
              8
              
              
              
              7Benefits
                  paid
              
              
              (25
              )
              
              
              (11
              )Effect
                  of foreign currency
              
              
              79
              
              
              
              15Projected
                  benefit obligation at the end of the year
              
              $
              908
              
              
              $
              826




The
      net
      periodic pension costs are as follows for the periods presented:




**Years
                  ended May 31,**
              
              
              **Five
                  months ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**Interest
                  on projected benefit obligation
              
              $
              40
              
              
              $
              37
              
              
              $
              15Service
                  cost
              
              
              8
              
              
              
              7
              
              
              
              2Net
                  periodic pension cost
              
              $
              48
              
              
              $
              44
              
              
              $
              17




The
        weighted-average assumptions used in computing the projected benefit obligation
        and net periodic pension costs are as follows for the periods
        presented:


**May
                    31,****2007**
                
                **2006**
                
                **2005**Assumed
                    discount rate
                
                4.9%
                
                4.6%
                
                4.7%Rate
                    of compensation increase
                
                1.5%
                
                1.5%
                
                1.5%


The
      Plan
      benefit payments, which reflect expected future service are expected to be
      paid
      as follows:







**In
                    thousands**2007
                
                $
                252008
                
                
                262009
                
                
                262010
                
                
                272011
                
                
                272012-2016
                
                
                141Total
                
                $
                272





**Note
      17.  Segment Information**





FASB
      Statement No. 131, “Disclosures about Segments of an Enterprise and Related
      Information”, establishes standards for reporting information about operating
      segments.  Operating segments are defined as components of an
      enterprise about which separate financial information is available that is
      evaluated regularly by the chief operating decision maker, or decision making
      group, in deciding how to allocate resources and in assessing performance.
      The
      Company’s chief operating decision maker is the Chief Executive
      Officer.  The Company operates as a single operating unit and has one
      reportable unit and is a United States, Delaware Corporation.




48





The
      Company’s net sales by geography are as follows:




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Europe
              
              $
              11,355
              
              
              
              25
              %
              
              $
              9,804
              
              
              
              22
              %
              
              $
              3,700
              
              
              
              33
              %
              
              $
              18,396
              
              
              
              29
              %Asia
              
              
              13,704
              
              
              
              31
              
              
              
              15,924
              
              
              
              36
              
              
              
              4,522
              
              
              
              40
              
              
              
              21,520
              
              
              
              34International
              
              
              25,059
              
              
              
              56
              
              
              
              25,728
              
              
              
              58
              
              
              
              8,222
              
              
              
              73
              
              
              
              39,916
              
              
              
              63North
                  America
              
              
              19,565
              
              
              
              44
              
              
              
              18,589
              
              
              
              42
              
              
              
              3,001
              
              
              
              27
              
              
              
              23,088
              
              
              
              37$
              44,624
              
              
              
              100
              %
              
              $
              44,317
              
              
              
              100
              %
              
              $
              11,223
              
              
              
              100
              %
              
              $
              63,004
              
              
              
              100
              %




Sales
      between geographic areas are at prices that the Company believes are at arm’s
      length and are eliminated in the consolidated financial statements.
      International sales represent the combined total of export sales made by United
      States operations and all sales made by foreign operations.





Sales
      to
      customers in the United States represented 44% of the Company’s sales in
      2007.  Sales to customers in the United States, Singapore and France
      represented 41%, 11% and 10% of the Company’s sales in 2006, respectively. In
      the five months ended May 31, 2005, sales to customers in the United States,
      France, Singapore, and China represented 27%, 25%, 12% and 10% of sales,
      respectively. Sales to customers in United States, France and Singapore
      represented 37%, 15% and 13% of the Company’s sales in 2004,
      respectively.





Service
      revenue, included in aftermarket prober products and services was 11% and 10%
      of
      net sales for the year ended May 31, 2007 and 2006, respectively, 12% of net
      sales for the five months ended May 31, 2005 and less than 10% of net sales
      during the year ended December 31, 2004.Revenues from after-sale
      services have traditionally totaled less than 10% of the Company’s total
      revenues and are not shown separately.The following is a summary
      of the Company’s net sales by product category, although the Company manages its
      business as a single operating unit:




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Prober
                  systems and software
              
              $
              26,084
              
              
              $
              27,074
              
              
              $
              6,988
              
              
              $
              44,480Aftermarket
                  prober products and services
              
              
              18,540
              
              
              
              17,243
              
              
              
              4,235
              
              
              
              18,524$
              44,624
              
              
              $
              44,317
              
              
              $
              11,223
              
              
              $
              63,004






The
      following table presents summary customer concentration information as a
      percentage of sales:




**Years
                  ended May 31,**
              
              **Five
                  months ended**
              
              **Year
                  ended****Customers**
              
              **2007**
              
              **2006**
              
              **May
                  31, 2005**
              
              **December
                  31, 2004**Customer
                  A
              
              11%
              
              8%
              
              6%
              
              9%Customer
                  B
              
              8%
              
              28%
              
              39%
              
              29%Customer
                  C
              
              5%
              
              2%
              
              2%
              
              13%




The
      following table presents summary customer concentration information as a
      percentage of accounts receivable:




**Customers**
              
              **May
                  31, 2007**
              
              **May
                  31, 2006**Customer
                  B
              
              8%
              
              36%Customer
                  D
              
              9%
              
              15%




49







Identifiable
      long-lived assets by geography are as follows:







**As
                  of**
              
              
              **As
                  of****In
                  thousands**
              
              **May
                  31, 2007**
              
              
              **May
                  31, 2006**Europe
              
              $
              111
              
              
              $
              183Asia
              
              
              690
              
              
              
              720International
              
              
              801
              
              
              
              903North
                  America
              
              
              3,978
              
              
              
              4,186$
              4,779
              
              
              $
              5,089




The
      majority of the Company’s long-lived assets in Asia consist of fixed assets
      located at the Company’s Singapore manufacturing facility.





**Note
      18.  Sale of Investment**





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.
      The Company’s Chairman and Chief Executive Officer (who resigned as of April 7,
      2006) was a director of Cascade. (see Note 21 – Related Party
      Transactions)  In December 2004, the Company sold its equity
      investment in Cascade in connection with their Initial Public Offering. The
      Company received $6.6 million in net proceeds from the sale and recorded a
      $3.5
      million gain in the fourth quarter of 2004.





**Note
      19.  Income Taxes**





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




**Years
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Federal:Current
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              --
              
              
              
              -
              
              
              
              -
              
              
              
              -State:Current
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              --
              
              
              
              -
              
              
              
              -
              
              
              
              -Foreign:Current
              
              
              297
              
              
              
              (628
              )
              
              
              5
              
              
              
              57Deferred
              
              
              (288
              )
              
              
              -
              
              
              
              -
              
              
              
              -9
              
              
              
              (628
              )
              
              
              5
              
              
              
              57$
              9
              
              
              $
              (628
              )
              
              $
              5
              
              
              $
              57




No
      tax
      benefits were realized from exercises of nonqualified stock options or
      disqualifying dispositions of stock acquired through incentive stock option
      or
      the employee stock purchase plan during the years ended May 31, 2007 and 2006,
      the five months ended May 31, 2005 and the year ended December 31, 2004,
      respectively.  Pre-tax income (loss) from foreign operations was $0.6
      million, $2.1 million, $(0.9) million, and $3.4 million for the same
      periods.





The
      Company uses estimates based on historical experience and various other
      assumptions in the area of income tax accounting that are believed to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of tax assets and
      liabilities.  It is the Company’s policy to accrue for income tax
      exposures or to release such tax reserves in the period in which facts and
      circumstances arise that suggest that the valuation allowances or reserves
      should be adjusted.  As of May 31, 2007 and May 31, 2006, income tax
      related reserves totaled approximately $1.0 million for each period,
      respectively.




50




When
      establishing the manufacturing facility in Singapore, the Company received
      a
      five-year exemption from income taxes beginning March 1, 2003 under the
      condition that certain capital investment and expenditure milestones are reached
      by March 1, 2008.  As a result of the Company’s strategic initiatives,
      which include outsourcing of the manufacturing function, the Company may be
      exposed to a liability for the taxes that otherwise would have been due during
      the first four years of the tax exemption period totaling approximately $2.7
      million. As a result during 2007, the Company initiated negotiations with the
      Singapore government, which are currently ongoing to end the tax exemption
      period retroactively to February 28, 2007, and eliminate the remaining
      investment milestones, in exchange for a four-year tax exemption. If the
      Singapore government does not agree to shorten the exemption period and waive
      the remaining investment milestones requiring up to an additional investment
      of
      $3.0 million to $4.0 million in capital equipment, the Company could be required
      to meet the remaining investment milestones or pay the estimated $2.7 million
      retroactive tax liability. This amount has not been accrued in the financial
      statements as the Company has the wherewithal to meet the investment milestones
      and management would invest in additional capital equipment, the value of
      which we believe to be recoupable, in lieu of paying this tax should the
      Singapore government decide not to revise the tax exemption
      agreement.


The
      reconciliation of income tax computed at the United States federal statutory
      rates to income tax expense is as follows for the periods ended:




**Year
                  ended**
              
              
              **Year
                  ended**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands,**
              
              **May
                  31, 2007**
              
              
              **May
                  31, 2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004****except
                  percentages**
              
              **Amount**
              
              
              **Percent**
              
              
              **Amount**
              
              
              **Percent**
              
              
              **Amount**
              
              
              **Percent**
              
              
              **Amount**
              
              
              **Percent**Tax
                  computed
                at
                  U.S. statutory rate
              
              $
              (6,571
              )
              
              
              (35.0
              )%
              
              $
              (12,131
              )
              
              
              (35.0
              )%
              
              $
              (4,287
              )
              
              
              (35.0
              )%
              
              $
              (2,211
              )
              
              
              (35.0
              )%State
                  income taxes (net of
                federal
                  benefit)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Research
                  and development
                credits
              
              
              (296
              )
              
              
              (1.6
              )
              
              
              (554
              )
              
              
              (1.6
              )
              
              
              (175
              )
              
              
              1.4
              
              
              
              (350
              )
              
              
              (5.5
              )Foreign
                  taxes
              
              
              (16
              )
              
              
              (0.1
              )
              
              
              13
              
              
              
              -
              
              
              
              3
              
              
              
              -
              
              
              
              37
              
              
              
              0.6Debt
                  conversion expenses
              
              
              -
              
              
              
              
              
              
              
              6,023
              
              
              
              17.4
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -GSX
                  release of liability
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,310
              )
              
              
              (52.4
              )Unbenefitted
                  losses
              
              
              6,496
              
              
              
              34.6
              
              
              
              5,857
              
              
              
              16.9
              
              
              
              4,111
              
              
              
              33.6
              
              
              
              5,477
              
              
              
              86.7Changes
                  in valuation
                allowance
              
              
              296
              
              
              
              1.6
              
              
              
              554
              
              
              
              1.6
              
              
              
              175
              
              
              
              1.4
              
              
              
              350
              
              
              
              5.5Reversal
                  of tax reserves
              
              
              -
              
              
              
              
              
              
              
              (647
              )
              
              
              (1.9
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other,
                  net
              
              
              100
              
              
              
              0.5
              
              
              
              257
              
              
              
              0.8
              
              
              
              178
              
              
              
              1.5
              
              
              
              64
              
              
              
              1.0Provision
                  (benefit) for income
                taxes
              
              $
              9
              
              
              
              (0.0
              )%
              
              $
              (628
              )
              
              
              (1.8
              )%
              
              $
              5
              
              
              
              0.0
              %
              
              $
              57
              
              
              
              0.9
              %




Deferred
      income taxes reflect the net tax effects of temporary timing 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:




**Years
                  ended May 31,****In
                  thousands**
              
              **2007**
              
              
              **2006**Deferred
                  tax assets:Intangible
                  assets
              
              $
              2,099
              
              
              $
              3,288Warranty
                  reserves
              
              
              470
              
              
              
              561Inventories
              
              
              2,090
              
              
              
              1,111Depreciable
                  assets
              
              
              (222
              )
              
              
              132Deferred
                  revenue
              
              
              361
              
              
              
              395Net
                  operating losses
              
              
              104,562
              
              
              
              94,366Tax
                  credit carryforwards
              
              
              13,893
              
              
              
              13,402Other
              
              
              3,346
              
              
              
              3,374Total
                  deferred tax assets
              
              
              126,599
              
              
              
              116,629Less:
                  valuation allowance
              
              
              (126,311
              )
              
              
              (116,629
              )Net
                  deferred tax assets
              
              $
              288
              
              
              $
              -




51




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 losses
      and tax credit carryforwards. The Company has provided a valuation allowance
      against deferred tax assets of $126.3 million to reflect management’s estimation
      that, as of May 31, 2007, it is more likely than not that only $ 0.3 million
      of
      deferred tax assets will be utilized.  The valuation allowance
      increased by $9.7 million and $6.9 million in 2007 and 2006,
      respectively.





The
      company’s tax attributes were as follows as of May 31, 2007:






**Federal**
              
              
              **State****In
                  thousands**
              
              **Amount**
              
              
              **Expiration**
              
              
              **Amount**
              
              
              **Expiration**Acquistion
                  related net operating losses
              
              $
              230
              
              
              
              2018-2020
              
              
              $
              -Acquisition
                  related tax credits
              
              $
              139
              
              
              
              2010-2019
              
              
              $
              -Non-acquisition
                  related net operating losses
              
              $
              289,491
              
              
              
              2021-2027
              
              
              $
              101,606
              
              
              
              2013-2017Non-acquisition
                  related tax credits
              
              $
              8,371
              
              
              
              2018-2026
              
              
              $
              8,607
              
              
              
              2009-2014




As
      of May
      31, 2007, the Company had federal and state net operating losses and tax credits
      that will expire in varying amounts if unutilized as indicated
      above.  Due to change of ownership rules, net operating losses and tax
      credits attributable to the Company’s acquisitions are significantly limited and
      will expire if not utilized.  The California research and development
      credit of $8.3 million does not expire under the current law, whereas the
      manufacturer’s investment credit of $0.3 million will expire if not used in
      2014.





**Note
      20.  Economic Development Board Grants**





The
      Company maintains manufacturing operations in Singapore and is eligible to
      receive employment-related grants from the Economic Development Board of
      Singapore (“EDB”).  As these grants are the result of ongoing
      negotiations rather than fixed and determinable at year-end, it is the Company’s
      policy to record grant income when received.  In the year ended May
      31, 2006, the five months ended May 31, 2005, and the year ended December 31,
      2004, the Company received $0.1 million, $nil, and $0.1 million, respectively
      in
      EDB grants. This grant income is included in other income (expense) in the
      Consolidated Statements of Operations.





**Note
      21.  Related Party Transactions**





Until
      October 2006, one of the Company’s directors was a director of National
      Semiconductor (“National”), a customer of the Company. The Company sold prober
      products and had receivable balances from National as follows:




**Year
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Revenue
              
              $
              757
              
              
              $
              2,276
              
              
              $
              151
              
              
              $
              4,352Accounts
                  Receivable
              
              $
              22
              
              
              $
              396
              
              
              $
              91
              
              
              $
              2,999






The
      Company’s former Chairman and Chief Executive Officer (who resigned as of April
      7, 2006) was a director of Cascade Microtech, Inc. (“Cascade”). The Company sold
      its minority equity investment in Cascade in December 2004. (see Note 18 – Sale
      of Investment)   As of May 31, 2007 and 2006, there were no
      accounts payable or accounts receivable balances with Cascade.





One
      of the
      Company’s directors (who joined the board in January 2006) is an officer of
      Novellus, Inc., (“Novellus”) a customer of the Company.  The Company
      sold prober products and had receivable balances from Novellus as
      follows:




**Year
                  ended May 31,**
              
              
              **Five
                  months ended**
              
              
              **Year
                  ended****In
                  thousands**
              
              **2007**
              
              
              **2006**
              
              
              **May
                  31, 2005**
              
              
              **December
                  31, 2004**Revenue
              
              $
              10
              
              
              $
              249
              
              
              $
              -
              
              
              $
              -Accounts
                  Receivable
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -





One
      of the
      Company’s directors is an officer of Vignani Inc., a vendor of the Company,
      providing engineering services.  Payments made and payable are
      negligible for the years ended May 31, 2007 and 2006.




52




Sales
      terms and pricing and purchase terms and pricing to and from for related parties
      are consistent with those offered by the Company to other customers and
      purchased by the Company from other vendors.





**Note
      22.  Allowance for Doubtful Accounts and Sales
      Returns**







**In
                  thousands**
              
              **Balance
                  at Beginning of Period**
              
              
              **Charged
                  to costs and expenses**
              
              
              **Deductions**
              
              
              **Balance
                  at End of Period**Year
                  ended May 31, 2007Allowance
                  for doubtful accounts
              
              $
              418
              
              
              $
              29
              
              
              $
              (116
              )
              
              $
              331Allowance
                  for sales returns
              
              
              61
              
              
              
              -
              
              
              
              -
              
              
              
              61Total
              
              $
              479
              
              
              $
              29
              
              
              $
              (116
              )
              
              $
              392Year
                  ended May 31, 2006Allowance
                  for doubtful accounts
              
              $
              513
              
              
              $
              (79
              )
              
              $
              (16
              )
              
              $
              418Allowance
                  for sales returns
              
              
              81
              
              
              
              (20
              )
              
              
              -
              
              
              
              61Total
              
              $
              594
              
              
              $
              (99
              )
              
              $
              (16
              )
              
              $
              479Five
                  months ended May 31, 2005Allowance
                  for doubtful accounts
              
              $
              484
              
              
              $
              29
              
              
              $
              -
              
              
              $
              513Allowance
                  for sales returns
              
              
              54
              
              
              
              27
              
              
              
              -
              
              
              
              81Total
              
              $
              538
              
              
              $
              56
              
              
              $
              -
              
              
              $
              594Year
                  ended December 31, 2004Allowance
                  for doubtful accounts
              
              $
              808
              
              
              $
              57
              
              
              $
              (381
              )
              
              $
              484Allowance
                  for sales returns
              
              
              195
              
              
              
              (141
              )
              
              
              -
              
              
              
              54Total
              
              $
              1,003
              
              
              $
              (84
              )
              
              $
              (381
              )
              
              $
              538




53




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





Not
      applicable.





**Item
      9A.*Controls and Procedures***





**Controls
      and Procedures**





***Evaluation
      of disclosure controls and procedures:***We conducted an
      evaluation of the effectiveness of the design and operation of our “disclosure
      controls and procedures” (Disclosure Controls) as of May 31, 2007, the end of
      the period covered by this Form 10−K. The controls evaluation was conducted
      under the supervision and with the participation of management, including our
      CEO and CFO. Disclosure Controls are controls and procedures designed to
      reasonably assure that information required to be disclosed in our reports
      filed
      under the Exchange Act, such as this Form 10−K, is recorded, processed,
      summarized and reported within the time periods specified in the U.S. Securities
      and Exchange Commission’s (SEC’s) rules and forms. Disclosure Controls are also
      designed to reasonably assure that such information is accumulated and
      communicated to our management, including the CEO and CFO, as appropriate to
      allow timely decisions regarding required disclosure. Our quarterly evaluation
      of Disclosure Controls includes an evaluation of some components of our internal
      control over financial reporting, and internal control over financial reporting
      is also separately evaluated on an annual basis for purposes of providing the
      management report which is set forth below.





The
      evaluation of our Disclosure Controls included a review of the controls’
objectives and design, the Company’s implementation of the controls and the
      effect of the controls on the information generated for use in this Form 10−K.
      In the course of the controls evaluation, we sought to identify any past
      instances of data errors, control problems or acts of fraud and sought to
      confirm that appropriate corrective actions, including process improvements,
      were being undertaken.





This
      type
      of evaluation is performed on a quarterly basis so that the conclusions of
      management, including the CEO and CFO, concerning the effectiveness of the
      Disclosure Controls can be reported in our periodic reports on Form 10−Q and
      Form 10−K. Many of the components of our Disclosure Controls are also evaluated
      on an ongoing basis by our finance organization. The goals of these various
      evaluation activities are to monitor our Disclosure Controls, and to modify
      them
      as necessary. Our intent is to maintain the Disclosure Controls as dynamic
      systems that change as conditions warrant.





Based
      upon
      the controls evaluation, our CEO and CFO have concluded that as of May 31,
      2007,
      the end of the period covered by this Form 10−K, our Disclosure Controls were
      effective.








**Management’s
      Report on Internal Control over Financial Reporting**





Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a−15(f) and 15d−15(f). Under the supervision and with the participation of our
      management, including our Chief Executive Officer and Chief Financial Officer,
      we conducted an evaluation of the effectiveness of our internal control over
      financial reporting as of May 31, 2007 based on the guidelines established
      in
*Internal Control—Integrated Framework*issued by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO).





Based
      on
      the results of this evaluation, our management has concluded that our internal
      control over financial reporting was effective as of May 31, 2007. We reviewed
      the results of management’s assessment with the Audit Committee of Electroglas’
Board of Directors. BDO Seidman, LLP, our independent registered public
      accounting firm, audited management’s assessment and independently assessed the
      effectiveness of our internal control over financial reporting as of May 31,
      2007.  BDO Seidman, LLP has issued an attestation report on
      management’s assessment, which is included in Item 9A of this Annual Report on
      Form 10−K.




54





**Report
      of Independent Registered Public Accounting
      Firm**







To
      The
      Board of Directors and Stockholders of Electroglas, Inc.:


We
        have
        audited management’s assessment, included in the accompanying Item 9A,
“Management’s Report on Internal Control over Financial Reporting,” that
        Electroglas, Inc. maintained effective internal control over financial reporting
        as of May 31, 2007, based on criteria established in Internal
        Control — Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (the “COSO criteria”). Electroglas,
        Inc.’s management is responsible for maintaining effective internal control over
        financial reporting and for its assessment of the effectiveness of internal
        control over financial reporting. Our responsibility is to express an opinion
        on
        management’s assessment and an opinion on the effectiveness of the company’s
        internal control over financial reporting based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
  A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company;
        (2) provide reasonable assurance that transactions are recorded as
        necessary to permit preparation of financial statements in accordance with
        generally accepted accounting principles, and that receipts and expenditures
        of
        the company are made only in accordance with authorizations of management
        and
        directors of the company; and (3) provide reasonable assurance regarding
        prevention or timely detection of unauthorized acquisition, use, or disposition
        of the company’s assets that could have a material effect on the financial
        statements.
  Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  In
        our opinion, management’s assessment that Electroglas, Inc. maintained effective
        internal control over financial reporting as of May 31, 2007, is fairly
        stated, in all material respects, based on the COSO criteria. Also in our
        opinion, Electroglas, Inc. maintained, in all material respects, effective
        internal control over financial reporting as of May 31, 2007, based on the
        COSO criteria.
  We
        have also audited, in accordance with the standards of the Public Company
        Accounting Oversight Board (United States), the consolidated balance sheets
        of
        Electroglas, Inc. as of May 31, 2007 and 2006, and the related consolidated
        statements of operations and comprehensive loss, stockholders’ equity, and cash
        flows for each of the two years in the period ended May 31, 2007 and
        the five month period ended May 31, 2005 and our report dated August 9, 2007
        expressed an unqualified opinion thereon.






/s/
      BDO
      Seidman, LLP





San
      Jose,
      California


August
      9, 2007






55




**Item
      9B.*Other Information***




Not
      applicable.




**Part
      III**





**Item
      10*.  Directors and Executive Officers of the
      Registrant***





The
      information required by this item, including the independence of the audit
      committee and the audit committee’s financial expert, is included under the
      heading “Election of Director” and “Other Matters” in the Company’s Proxy
      Statement to be filed in connection with the Annual Meeting of Stockholders
      to
      be held on October 17, 2007 and is incorporated herein by
      reference.





We
      adopted
      a code of business conduct and ethics, or code of conduct, in 2003. The code
      of
      conduct has been designed to qualify as a “code of ethics” within the meaning of
      Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated
      thereunder.  The code is available on our website
      (www.electroglas.com). To the extent required by law, any amendments to,
      or waivers from, any provision of the code will be promptly disclosed publicly.
      To the extent permitted by such requirements, we intend to make such public
      disclosure by posting the relevant material on our website in accordance with
      SEC rules.





**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 the Annual Meeting of Stockholders to be held on October
      17,
      2007, and is incorporated herein by reference.





**Item
      12*.  Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters***





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 the Annual Meeting of Stockholders
      to
      be held on October 17, 2007, and is incorporated herein by
      reference.





**Item
      13*.  Certain Relationships and Related Transactions**and
      Director Independence***





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 the Annual Meeting of Stockholders to be held on
      October 17, 2007, and is incorporated herein by reference.





**Item
      14.*Principal Accountant Fees and
      Services.***





The
      information required by this item is included under the heading “Principal
      Accountant Fees and Services” in the Company’s Proxy Statement to be filed in
      connection with the Annual Meeting of Stockholders to be held on October 17,
      2007, and is incorporated herein by reference.





57





**Part
      IV**





**Item
      15.*Exhibits and Financial Statement
      Schedules***





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




(1)
                *Index to Financial Consolidated Statements*Report
                of Independent Registered Public Accounting Firm, BDO Seidman
                LLP
            29Report
                of Independent Registered Public Accounting Firm, Ernst & Young
                LLP
            30Consolidated
                statements of operations — years ended May 31, 2007 and 2006, five months
                ended May 31, 2005,
              and
                year ended December 31, 2004
            31Consolidated
                balance sheets - May 31, 2007 and 2006
            32Consolidated
                statements of stockholders’ equity and comprehensive loss — years ended
                May 31, 2007 and 2006,
              five
                months ended May 31, 2005, and year ended December 31,
                2004
            33Consolidated
                statements of cash flows — years ended May 31, 2007 and 2006, five months
                ended May 31, 2005,
              and
                year ended December 31, 2004
            34Notes
                to consolidated financial statements
            35(2)
                *Index to Financial Statement Schedules*– All schedules have been
                omitted because the required information is included in the consolidated
                financial statements or the notes thereto, or are not applicable
                or
                required.(3)
                *Exhibit Index*





**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.(3)4.1
            Reference
                is made to Exhibits 3.1, 3.2 and 3.3.4.2
            Specimen
                Common Stock Certificate of Electroglas, Inc., a Delaware
                corporation.(1)10.1*
            Electroglas,
                Inc. 1993 Long-Term Incentive Plan.(4)10.2*
            Change
                of Control Agreement between Electroglas, Inc. and Armand J. Stegall
                dated
                as of June 9, 1995.(5)10.3*
            Electroglas,
                Inc. Restricted Stock Bonus Agreement Between Electroglas, Inc. and
                Curtis
                S. Wozniak.(6)10.4*
            Change
                of Control Agreement between Electroglas, Inc. and Curtis S. Wozniak
                dated
                as of April 4, 1996.(6)10.5*
            Electroglas
                Officers’ Retirement Medical and Dental Coverage
                Policy.(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, Wayne E. Woodard, Thomas E. Brunton, and Richard J. Casler
                as of
                June 9, 1995, April 5, 1999, December 22, 2000, and March 15, 2004,
                respectively.(10)10.11*
            Electroglas,
                Inc. 1998 Employee Stock Purchase Plan.(11)10.12*
            Electroglas,
                Inc. 2001 Non-Officer Employee Stock Incentive
                Plan.(12)10.13*
            Executive
                Employment Agreement between Electroglas, Inc. and Keith Barnes dated
                October 22, 2003. (13)10.14*
            Electroglas,
                Inc. Stock Option Award Agreement between Electroglas, Inc. and Keith
                Barnes dated October 28, 2003. (14)10.15*
            Resignation
                letter from Curt Wozniak to Electroglas, Inc. dated October 28, 2003.
                (15)10.16
            Lease
                agreement between 5729 Fontanoso Way, LLC and Electroglas, Inc. dated
                February 7, 2005.(16)10.17*
            Form
                of Board of Directors Consulting and Indemnity Agreement, dated December
                19, 2005, by and between Electroglas, Inc. and each of Robert J.
                Frankenberg, Mel Friedman, C. Scott Gibson, John F. Osborne, Thomas
                M.
                Rohrs, and Edward M. Saliba. (17)




57




10.18*
            Board
                of Directors Consulting and Indemnity Agreement, dated February 7,
                2006,
                by and between Electroglas, Inc. and Fusen E.
                Chen.(18)


10.19*
            Board
                of Directors Consulting and Indemnity Agreement, dated April 12,
                2006, by
                and between Electroglas, Inc. and Keith L. Barnes.(19)10.20*
            Offer
                letter, effective April 7, 2006 by and between the Company and Thomas
                M.
                Rohrs. (20)10.19
            Exchange
                Agreement with certain holder of the Company’s 5.25% Convertible
                Subordinated Notes Due 2007 (21)10.20*
            Clarification
                of Consulting Agreement by and between Electroglas, Inc. and Keith
                L.
                Barnes dated July 6, 2006.10.21*
            Amended
                and Restated Change of Control Agreement, dated March 31, 2006, by
                and
                between Electroglas, Inc. and Thomas E. Brunton.(22)10.22*
            Board
                of Directors Consulting and Indemnity Agreement, dated March 20,
                2007, by
                and between Electroglas, Inc. and Jack G. Wilborn.(23)12.1
            Statement
                of Computation of Ratios.21.1
            List
                of subsidiaries of registrant.23.1
            Consents
                of BDO Seidman LLP, Independent Registered Public Accounting
                Firm.23.2
            Consent
                of  Independent Registered Public Accounting
                Firm.31.1
            Certification
                of Thomas M. Rohrs, Chief Executive Officer, pursuant to Rules 13a-14(a)
                and 15d-14(a) of the Securities Exchange Act, as
                amended.31.2
            Certification
                of Thomas E. Brunton, Chief Financial Officer, pursuant to Rules
                13a-14(a)
                and 15d-14(a) of the Securities Exchange Act, as
                amended.32.1
            Certification
                of Thomas M. Rohrs, Chief Executive Officer, pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.32.2
            Certification
                of Thomas E. Brunton, Chief Financial Officer, pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.





__________





(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 12, 1999.


(3)
            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.


(4)
            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.


(5)
            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.


(6)
            Exhibits
                10.3 and 10.4 are Incorporated by reference to Exhibits 10.10 and
                10.11,
                respectively, of the Company’s Quarterly Report on Form 10-Q, for the
                quarter ended June 30, 1996.


(7)
            Incorporated
                by reference to Exhibit 10.12 of the Company’s Quarterly Report on Form
                10-Q, for the quarter ended September 31,
                1996.


(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 10.2 of the Company’s Quarterly Report on Form
                10-Q, for the quarter ended June 30,
                1998.


(12)
            Incorporated
                by reference to Exhibit 10.12 of the Company’s Annual Report on Form 10-K,
                filed with the Securities and Exchange Commission on March 13,
                2002.


(13)
            Incorporated
                by reference to Exhibit 10.13 of the Company’s quarterly report on Form
                10-Q for the quarter ended September 30,
                2003.


(14)
            Incorporated
                by reference to Exhibit 10.14 of the Company’s quarterly report on Form
                10-Q for the quarter ended September 30,
                2003.


(15)
            Incorporated
                by reference to Exhibit 10.15 of the Company’s quarterly report on Form
                10-Q for the quarter ended September 30,
                2003.






58




(16)
              Incorporated
                  by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K,
                  filed with the Securities and Exchange Commission on March 14,
                  2005.
 (17)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
                  filed with the Securities and Exchange Commission on December 23,
                  2005.
 (18)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
                  filed with the Securities and Exchange Commission on February 8,
                  2006.
 (19)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
                  filed with the Securities and Exchange Commission on April 14,
                  2006.
 (20)
              Incorporated
                  by reference to Exhibit 10.2 of the Company’s quarterly report on Form
                  10-Q for the quarter ended March 4,
                  2006.
 (21)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Form 8-K filed on May 3,
                  2006.
 (22)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 31,
                  2006.
 (23)
              Incorporated
                  by reference to Exhibit 10.1 of the Company’s Form 8-K filed on March 21,
                  2007.




*
            Management
                contracts, or Company compensatory plans or
                arrangements.




59






**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/            
                  THOMAS M. ROHRSThomas
                  M. Rohrs*Chairman
                  and Chief Executive
                  Officer*




Date:
      August 9, 2007





**Power
      of Attorney**




KNOW
      ALL
      PERSONS BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints Thomas M. Rohrs and Thomas E. Brunton, and each of
      them, his attorneys-in-fact, each with power of substitution, for him in any
      and
      all capacities, to sign any amendments to this Annual Report on Form 10-K and
      to
      file the same, with exhibits thereto and other documents in connection
      therewith, with the Securities and Exchange Commission, hereby ratifying and
      confirming all that each of said attorneys-in-fact, or his substitute or
      substitutes may do or cause to be done by virtue hereof.





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Annual Report
      on Form 10-K 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/               THOMAS M.
                ROHRS
            Chairman
                and Chief Executive Officer
            August
                9, 2007Thomas
                M. Rohrs
            *(Principal
                Executive Officer)*/s/             THOMAS
                E.BRUNTON
            Vice
                President, Finance, Chief Financial Officer,
            August
                9, 2007Thomas
                E. Brunton
            Treasurer
                and Secretary*(Principal
                Financial and Accounting Officer)*/s/                   FUSEN
                E.
                CHEN
            Director
            August
                9, 2007Fusen
                E. Chen/s/                  MEL
                FRIEDMAN
            Director
            August
                9, 2007Mel
                Friedman/s/                 C.
                SCOTT
                GIBSON
            Director
            August
                9, 2007C.
                Scott Gibson/s/                   JOHNOSBORNE
            Director
            August
                9, 2007John
                Osborne/s/                  JACK
                G.WILBORN
            Director
            August
                9, 2007Jack
                G. Wilborn








60