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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2002
OR[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___________ to ___________

Commission File No. 0-22166

AETRIUM INCORPORATED

(Exact name of registrant as specified in its charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Minnesota                       |  | 41-1439182         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)

2350 Helen Street
North St. Paul, Minnesota 55109
(Address of principal executive offices) (Zip code)

Registrants telephone number, including area code: (651) 770-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value

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 an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [   ] NO [X]

The aggregate market value of the Registrants Common Stock held by
non-affiliates, computed by reference to the price at which the Common Stock
was last sold as of June 28, 2002, which is the last business day of the
Registrants most recently completed second fiscal quarter, as reported by The
Nasdaq Stock Market was $11,460,000.

As of March 21, 2003, 9,477,044 shares of Common Stock of the Registrant
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates by reference
information (to the extent specific sections are referred to herein) from the
Registrants definitive Proxy Statement for its 2003 Annual Meeting of
Stockholders to be held May 21, 2003 (the 2003 Proxy Statement).



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TABLE OF CONTENTS



|                                                |                                                                                                |  |  |  |  |  |  | 
|----------------------------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                         
|                                                | ITEM 1. BUSINESS.                                                                             
|                                                | ITEM 2. PROPERTIES.                                                                           
|                                                | ITEM 3. LEGAL PROCEEDINGS.                                                                    
|                                                | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.                                  
|                                                | ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.                                                
|PART II                                        
|                                                | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.            
|                                                | ITEM 6. SELECTED FINANCIAL DATA.                                                              
|                                                | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                                                | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                          
|                                                | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                          
|                                                | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. 
|PART III                                       
|                                                | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.                                  
|                                                | ITEM 11. EXECUTIVE COMPENSATION.                                                              
|                                                | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.                      
|                                                | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                                      
|                                                | ITEM 14. CONTROLS AND PROCEDURES                                                              
|PART IV                                        
|                                                | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                     
|SIGNATURES                                     
|Certification by Chief Executive Officer       
|EX-10.17 Amendment to Standard Lease Agreement 
|EX-10.18 2003 Stock Incentive Plan             
|EX-23.1 Independent Accountants' Consent       
|EX-99 Certification Pursuant to 18 USC Sec 1350



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AETRIUM INCORPORATED

Form 10-K

For the fiscal year ended December 31, 2002

TABLE OF CONTENTS

|         |                                                                                                |  |    |    | 
|-------- | ---------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART I   |                                                                                                |  | 1  |   
|         |                                                                                                |  |    |   
|         | ITEM 1. BUSINESS.                                                                              |  |    | 1  | 
|         | ITEM 2. PROPERTIES.                                                                            |  |    | 11 | 
|         | ITEM 3. LEGAL PROCEEDINGS.                                                                     |  |    | 12 | 
|         | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.                                   |  |    | 12 | 
|         | ITEM 4A. EXECUTIVE OFFICERS OF THE
REGISTRANT.                                                 |  |    | 12 | 
|         |                                                                                                |  |    |   
|PART II  |                                                                                                |  | 14 |   
|         |                                                                                                |  |    |   
|         | ITEM 5. MARKET FOR THE REGISTRANTS
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.             |  |    | 14 | 
|         | ITEM 6. SELECTED FINANCIAL DATA.                                                               |  |    | 15 | 
|         | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. |  |    | 17 | 
|         | ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.                           |  |    | 33 | 
|         | ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.                                           |  |    | 33 | 
|         | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.  |  |    | 33 | 
|         |                                                                                                |  |    |   
|PART III |                                                                                                |  | 34 |   
|         |                                                                                                |  |    |   
|         | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.                                   |  |    | 34 | 
|         | ITEM 11. EXECUTIVE COMPENSATION.                                                               |  |    | 34 | 
|         | ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.                       |  |    | 34 | 
|         | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.                                       |  |    | 34 | 
|         | ITEM 14. CONTROLS AND PROCEDURES                                                               |  |    | 34 | 
|         |                                                                                                |  |    |   
|PART IV  |                                                                                                |  | 35 |   
|         |                                                                                                |  |    |   
|         | ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K                      |  |    | 35 | 

(i)



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PART I

This Form 10-K contains certain forward-looking statements. For this
purpose, any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as may, will, expect, believe,
anticipate, estimate or continue or comparable terminology are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may differ
materially depending on a variety of factors, including those set forth under
the heading Business Risks and Uncertainties located in Managements
Discussion and Analysis of Financial Condition and Results of Operations under
Item 7 below. References in this Form 10-K to Aetrium, the company, we
and our, unless the context otherwise requires, refer to Aetrium Incorporated
and its consolidated subsidiaries and their respective predecessors.




|        |  |          
|------- |  | ---------
|ITEM 1. |  | BUSINESS.

Overview

We design, manufacture and market a variety of electromechanical equipment
used in the handling and testing of semiconductor and passive electronic
devices, such as integrated circuits, or ICs, and discrete electronic
components. Our primary focus is on high volume IC and discrete electronic component device types and on the latest device package designs. Our products are
purchased primarily by semiconductor manufacturers and their assembly and test
subcontractors. Our products are used in the test, assembly and packaging, or
TAP, segment of semiconductor manufacturing (in which we include the
manufacture of both semiconductor and passive electronic devices). Our
products automate critical functions to improve manufacturing yield, raise
quality levels, increase product reliability and reduce manufacturing costs.

We have three principal product lines:



| |  |  | Test Handler Products. In terms of revenue, this is our
largest product line. Our broad line of test handler products
incorporates thermal conditioning, contacting and automated handling
technologies to provide automated handling of ICs and discrete
electronic components during production test cycles. We also offer
change kits to adapt our test handlers to different device package
configurations or to upgrade installed equipment for enhanced
performance, which represent a significant part of our revenue.                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Semiconductor Automation Products. Some of our semiconductor
automation products are sold to original equipment manufacturers, or
OEMs, to be incorporated as the automated handling components of
such OEMs own proprietary equipment for a variety of other IC
processing requirements, such as marking, lead scanning, and lead
trim and form. The rest of our semiconductor automation products
are sold to semiconductor manufacturers and their subcontractors,
and are used to automate the loading and unloading of burn-in boards
and the transfer of ICs and discrete electronic components from one
transport medium to another.
|
| |  |  | Reliability Test Equipment. The primary focus of our
reliability test products is to provide IC manufacturers with
structural performance data to aid in the evaluation and improvement
of IC designs and manufacturing processes to increase IC yield and
reliability.                                                                                                                                                                                                                                                                                                                                                                     





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See Note 15 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K for information about the percentage of revenue that
we derive from each of our principal product lines.

2002 was another year of tremendous challenge for us, as the semiconductor
industry suffered through the second year of its worst downturn in 25 years.
This downturn resulted in a decrease in sales in the TAP segment of the
semiconductor equipment industry of over 70% from 2000 to 2002. We addressed
this challenge through several restructuring and reorganizing actions that
saved us over $16 million in operating expenses in 2002 over 2000 levels,
reduced our workforce from 225 employees at the end of 2000 to 94 employees at
the end of 2002, and maintained our working capital at levels that should
support us during the remainder of this downturn. At the same time, we
continued our product development efforts focused on the newest and fastest
growing IC package types and the latest semiconductor processes. We believe
that our cost structure and product offerings position us to take full
advantage of the next industry upturn.

As a result of the restructuring activities completed in 2000 and early
2001, we now have two operating locations where all product development and
manufacturing activities are conducted, North St. Paul, Minnesota and Dallas,
Texas. We manufacture products within each of our principal product lines at
both of these facilities.

Background

Our strategy has focused on revenue growth through product line expansion,
by both internally developing and acquiring complementary technologies,
businesses, or product lines.

In 1998, we acquired the equipment business of WEB Technology, Inc., based
in Dallas, Texas. The primary products we acquired were semiconductor
automation products used to automate the loading and unloading of burn-in
boards. This equipment can be configured to accommodate any burn-in board
currently being manufactured. We manufacture this equipment at our Dallas
operations.

In 1997, we completed two acquisitions that expanded our test handler
product lines. In November 1997, we acquired a product line of pick-and-place
test handlers from Advantek Inc. This acquisition extended our product line of
pick-and-place test handlers for non-memory analog and logic IC devices. We
manufacture the product line acquired from Advantek at our North St. Paul
operations.

In April 1997, we acquired a line of turret based test handler products through
our purchase of the assets of Forward Systems Automation, Inc. This line of
test handlers addresses discrete electronic components and small ICs, including
the fastest growing and newest IC package types. We manufacture this product
line at our Dallas operations.

In December 1995, we acquired the assets of E.J. Systems, Inc. Through
this acquisition, we obtained some early stage conductive thermal core
technology that we have further developed and transferred to our North St. Paul
operations.

In November 1994, we acquired the assets of Sym-Tek Systems, Inc., which
expanded our presence in the memory IC market, and also extended our line of
gravity feed test handlers for non-memory IC test handler applications. We
have since discontinued the products for non-memory applications. In the fourth
quarter of 2000, we also decided to exit the highly volatile handler market for
memory applications. However, through this acquisition we obtained core
pick-and-place and in-tray handling technologies, which we further developed
and transferred to our North St. Paul operations.

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In December 1993, we originated our reliability test systems product line
through the purchase of the assets of Sienna Technologies, Inc. Since the
acquisition, we have developed and introduced a new generation product line
that has been well received by a growing customer base. Our reliability test
products are primarily manufactured at our North St. Paul operations.

In April 1988, we acquired the core products of our 5050 series of gravity
feed test handlers through our acquisition of Electro-Mechanical Systems, Inc.
Since then, we have expanded this series of products through internal
development to include a full range of thermal conditioning capabilities,
contactors and change kits for a wide range of IC package types. We sell these
products into the largest and fastest growing IC market segments. We
manufacture our gravity feed test handlers at our North St. Paul operations.

We were incorporated in Minnesota in December 1982. Our executive offices
are located at 2350 Helen Street, North St. Paul, Minnesota 55109, and our
telephone number is (651) 770-2000. Our web site address is www.aetrium.com. We
make available through our website this Annual Report on Form 10-K, quarterly
reports that we file on Form 10-Q, current reports that we file on Form 8-K,
and all amendments to those reports as soon as is reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission. Our website is not intended to be a part of this Annual
Report on Form 10-K.

Financial Information About Segments

Since our inception, we have operated in the single industry segment of
supplying electromechanical equipment to the semiconductor industry. Our
financial results are set forth in Item 6 of this Annual Report on Form 10-K.

Test Handler Products

Test handlers are electromechanical systems interfaced with a tester to
form a test system designed to handle, thermally condition, contact and sort
ICs and discrete electronic components automatically during the final test
stage of the manufacturing process. The devices are loaded into the handler
from bowls, tubes or trays and then typically transported to a temperature
chamber within the test handler where they are thermally conditioned and
controlled to the required testing temperature. The devices are then placed
into a contactor, which provides an electrical connection between the device
and the tester. After testing, the test handler sorts the devices according to
test performance as provided by the tester. In some cases, additional process
steps are completed by the test handler system. These include marking or
inspection of the device packages, and automatic placement of the devices into
a tube, tray or tape for shipment to the end user. Test handlers must meet
industry criteria for thermal conditioning, contactor integrity and
minimization of damage to the device package during the test handling cycle.

ICs are multi-function semiconductor devices that may contain up to
millions of individual transistors, and include microprocessors,
microcontrollers, digital signal processors and memory devices. ICs come in a
wide range of sizes and package types, depending upon their application.
Discrete electronic components are single function semiconductor devices, such
as transistors and diodes, and passive electronic devices, such as resistors
and capacitors. They are typically very small and are manufactured in several
package types.

In the testing of ICs and discrete electronic components, the device
package type being tested often dictates the type of test handler used. Small
outline packages, or SOPs, constituting the largest IC package segment, have
leads, or electrical contacts, extending from two sides and are typically
tested with gravity feed test handlers. Micro leadless packages, or MLPs and
sometimes referred to as MLFTMs, SONs

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or QFNs, have electrical contact pads flush with the sides and bottoms of
the ICs and are typically tested with gravity feed or turret based test
handlers. MLPs constitute one of the fastest growing new IC package types.

More complex ICs are sometimes packaged in the IC package families more
easily damaged in handling, and these package families are typically tested
with pick-and-place test handlers. More fragile IC package types include QFPs,
BGAs, PGAs, some CSPs and the most fragile SOP packages. QFPs, or quad flat
packs, have leads extending from all four sides. BGAs, or ball grid array
packages, have bumped leads on the bottom of the package. PGAs, or pin grid
arrays, have pin type leads extending from the bottom of the package. CSPs, or
chip scale packages, are a category of some of the smallest IC packages, with
package sizes being no more than 1.2 times the size of the IC die within.

Discrete electronic component package types include small outline
transistor packages, or SOTs, which are also sometimes used for the smallest
ICs. Discrete electronic component package types are typically tested with
turret based test handlers.

Our primary focus continues to be on the newer generation of surface mount
devices that represent the largest volumes, the newest IC device types, and the
fastest growing markets in the industry. We believe we offer the broadest line
of test handling products to the semiconductor industry, addressing the full
spectrum of non-memory device types, device package types and media transport
types. Our test handler products are complementary with minimal overlap of
application, and we distribute and service them through a common organization
for efficiency.

Gravity Feed Test Handlers

Traditionally, test handlers have used gravity to move ICs from tubes
through the handler system and back into tubes. Typically, in gravity feed
systems ICs are halted at necessary points in the handling process by colliding
against other ICs or other stopping mechanisms, which can result in lead damage
to more fragile IC packages. Accordingly, gravity feed handlers are best suited
for more rugged IC packages, which include MLPs and most SOPs.

Our gravity feed test handlers compete most favorably in high-volume
applications and their high throughput rates are an added advantage in
relatively short test time applications. These handlers adapt to plunge to
board"-type contacting and third party contactors, as well as our internally
developed proprietary contactors, providing cost-effective solutions to a wide
range of customer test requirements. In plunge to board"-type contacting, the
IC is placed directly against the test head with no intermediary sockets or
connections, which is particularly well suited for high performance ICs. Our
gravity feed test handlers can heat or cool the ICs being tested to any test
temperature from -55 degrees C to +155 degrees C. They use mechanical
refrigeration to cool ICs, which is more economical than liquid nitrogen,
commonly used as a refrigerant in competing handlers. Our principal gravity
feed test handlers include:



| |  |  | 55V6 Series.First introduced in 2002, our newly developed
55V6 Series of single and dual site gravity feed test handlers for
analog and logic IC applications addresses a wide range of IC
packages including SOPs and MLPs. The 55V6 Series is an advancement
over our 5500 Series first introduced in 2000, and offers a smaller
footprint, a vertical backplane that can accommodate any size of
test head, and our high speed test site actuator with an effective
throughput rate of up to 12,000 devices per hour per test site.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 5050 Series. Our 5050 Series of gravity feed test handlers
for analog and logic IC applications addresses a wide range of SOP
package types. In addition to single test site capability, we offer                                                                                                                                                                                                                                                                                                                                     

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| |  |  | dual test site and quad test site capability within our 5050 Series of
handlers to increase productivity and reduce testing costs in certain
applications.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

Turret Based Test Handlers

Turret based test handlers have a series of pickup heads that rotate
around a fixed axis and move devices from station to station. They are
typically configured for bowl feed input and tape and reel output, although
they can be configured for tube or tray input and tube or tray output. One or
more stations on turret based handlers are used for testing ICs and discrete
electronic components. Stations on turret based handlers can also be used for
additional process steps such as marking and inspection. Turret based handlers
are well suited for discrete electronic components and smaller ICs that are
difficult to handle in gravity handlers because of their size and small mass,
and are well suited for MLPs because they can be handled in bulk. Turret based
handlers are typically more costly than gravity feed handlers, but typically
offer higher throughput rates than gravity feed handlers.

Our turret based test handlers are designed for high volume testing of
discrete electronic component packages and ICs in MLP, CSP and SOT packages.
These test handlers can integrate several functions, including test, laser
marking, mark inspection, lead inspection, and tape and reel output. They can
be configured for a variety of options for contacting, including plunge to
board"-type contacting. These test handlers are typically configured for bowl
feed input and tape and reel output. Our principal turret based handlers
include:



| |  |  | Model 5800.We introduced the Model 5800 Small Component
Integrated Test Handler in 2000. It has eight stations, and can be
configured for up to four test sites. It operates at temperatures
ranging from ambient to +150 degrees C, and can be configured for
tube input and tube output. The Model 5800 can achieve throughputs
of up to 16,000 devices per hour.                                                                                                                                                                                                                                                       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Model 8832.We introduced the Model 8832 Small Component
Integrated Test Handler in 2000. It has 32 stations, which provide a
high degree of flexibility in integrating additional device process
functions into the handler. It can be configured for up to eight
test sites and, optionally, for tube or tray input and tube or tray
output. The Model 8832 is capable of throughputs of up to 24,000
devices per hour.                                                                                                                                                                                                  
|
| |  |  | Model 8816. We introduced the Model 8816 Small Component
Integrated Test Handler in 2002. It is based on the Model 8832, has
sixteen stations, and provides for a direct dock tester interface,
where the test head is docked directly against the test handler to
minimize the distance between the test head electronics and the
device under test. Direct dock tester interface is necessary where
electrical interference during test must be minimized, such as for
high performance mixed signal and analog telecommunications devices.
The Model 8816 is capable of throughputs of up to 12,000 devices per
hour.

Pick-and-Place Test Handlers

Pick-and-place test handlers move ICs by picking up each device and
placing the device to the appropriate position, similar to a robot. The
motions avoid jarring stops and potential resulting lead damage. Thus, they can
handle a wide variety of packages, including the IC package families most
easily damaged in handling.

Our pick-and-place test handlers can be configured for a wide variety of
analog and logic ICs in SOP, QFP, BGA, CSP and PGA packages. Using a
conventional thermal chamber technique, these handlers can heat or cool the
devices being tested to any test temperature from -55 degrees C to +155

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degrees C. These handlers feature the Soft-Touch Probe to safely and
reliably handle the most fragile IC packages. Devices are transported with
their leads up, virtually eliminating the possibility of lead damage. These
handlers feature plunge to board"-type contacting, and can be modified with
change kits, typically within 15 minutes, to accommodate nearly every IC
package configuration being manufactured in volume today.Our principal
pick-and-place handlers include:



| |  |  | Model 3000.The Model 3000 test handler is a dual site
pick-and-place test handler, which allows for significantly
increased throughput for dual site applications, as compared to
single site test handlers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Model 1400.The Model 1400 is a single site pick-and-place
test handler.                                                                                                                                     

Change Kits, Upgrades and Spare Parts

We have an ongoing demand for IC and discrete electronic component package
change kits for our installed test handler products, including test handlers no
longer in our active product lines. We sell a variety of change kits to
accommodate the growing variety of device packages used in the semiconductor
industry. The demand for change kits is driven by the introduction of new
device package types and increased production volumes experienced by our end
customers. Also included in change kits are upgrade kits to enhance the
performance of installed equipment. We sell spare parts with new orders as
kits or separately as piece parts or in kit form as required.

Semiconductor Automation Products

We have applied our core automation technologies to extend our product
lines to other applications of automation of the handling of ICs and discrete
electronic components.

4800 Series Burn-in Board Loaders/Unloaders

Our 4800 Series is a line of products used to automate the loading and
unloading of burn-in boards. Burn-in boards vary in size and density, and are
used to place individual ICs into a convection oven for an extensive
reliability screening and stress testing procedure known as burn-in. Our
burn-in board automation products take untested ICs out of trays or other media
and place them into sockets on a burn-in board. After the burn-in test is
complete, the 4800 Series system unloads and removes ICs that have completed
the burn-in cycle from the burn-in board sockets and sorts the ICs according to
the results of the test as provided by the burn-in system. The burn-in process
screens for early failures by operating the IC at elevated voltages and
temperatures, usually at 125 degrees C, for periods typically ranging from 12
to 96 hours. Burn-in systems can process thousands of ICs simultaneously,
utilizing multiple boards. Most leading-edge microprocessors, digital signal
processors, and memory ICs undergo burn-in testing.

Our 4800 Series comes in single pick-up head, dual-head, five-head and
ten-head versions. The single and dual head models are best suited for large
IC packages or for those applications requiring a quick conversion of the 4800
Series system to handle a different IC package. The five-head and ten-head
systems are best suited to very high volume memory applications. All are
available with a variety of input and output options, including tubes and
trays. Package positioning stations ensure device alignment into sockets and
output media. An optional stacked burn-in board elevator and trolley allows the
system to process up to 32 burn-in boards without any operator intervention.

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Automation Modules Product Line for OEMs

We market our Automation Modules product line to other semiconductor
equipment manufacturers to provide automation for their semiconductor process
equipment. We believe that the growing number and volume of fine pitch SOPs and
other delicate device packages such as QFPs, BGAs and CSPs is driving a demand
for automated equipment for all IC final manufacturing processes. Our
Automation Modules have been incorporated into the equipment of other
manufacturers to provide automation in trim and form, marking, mark curing,
lead inspection, mark inspection, lead conditioning, media transfer and prom
programming equipment to accommodate various device characteristics and media
packaging.

Our Automation Modules currently consist of a series of robotic
electromechanical handling modules, each designed to perform a specific
handling function. Together these modules perform nearly all of the handling
functions necessary for the various IC manufacturing processes. Each handling
module has a microprocessor that directs the handling modules function and
communicates with other modules through a proprietary software protocol that
enables the transfer of ICs between modules in a logical and efficient manner.

The Automation Modules can be readily assembled into systems configured to
provide nearly any IC routing pattern required by an IC processing application,
and can be readily integrated as a component of the processing equipment. This
generic nature of the Automation Modules allows us to provide a versatile, cost
effective automation solution to IC processing equipment OEMs that overcomes
the handling automation challenges presented by more fragile IC package types.
The Automation Modules can also be adapted to provide an automated linkage
between IC manufacturing processes, thus offering the potential for seamless
automated handling of ICs from trim and form to packaging for shipment.

Model M5 Taping System

We introduced our Model M5 Taping System in 2002 to address requirements
for automated equipment to transfer smaller electronic devices from transport
media such as bulk, tray or tube to tape and reel for shipment. The system is
designed specifically to handle a wide variety of the new leadless MLP
packages, others of the smallest geometry IC packages, and discrete electronic
component package types. The system was developed from our turret based test
handler technologies, and can be configured to include vision inspection
processes.

Reliability Test Equipment

The IC industrys demand for higher performance devices through smaller
circuit geometries has led to significant technological changes in the
materials and processes used to manufacture ICs, including an emerging shift to
copper materials for the increasingly minute circuitry of devices. These
changes in technology, along with IC user demand for increased reliability,
have created a need for increasingly sophisticated reliability testing of IC
designs and manufacturing processes. Our reliability test equipment product
line enables IC manufacturers to force and measure precise levels of voltage
and current through ICs, collect and analyze relevant data, and predict
lifetime performance of ICs. This equipment can be utilized to perform
reliability testing of packaged and unpackaged ICs. We have reliability test
equipment installed at 18 of the top 20 semiconductor manufacturers in the
world.

In 1998, we introduced our 1164 Series of reliability test equipment,
including a suite of applications for customers to perform a variety of tests.
The 1164 Series features a modular design that allows for great flexibility in
performing reliability tests, and can test up to 4,096 devices at a time and

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perform numerous simultaneous tests on batches of ICs. The 1164 Series
includes the full reliability test functionality necessary for testing an IC
manufacturers entire copper process.

Our reliability test products also include a line of products designed for
the test of over-voltage protection devices for telecommunications
applications.

Competition

The semiconductor capital equipment market is highly competitive. In the
market for test handler products, we compete with a number of companies ranging
from very small businesses to large companies, some of which have substantially
greater financial, manufacturing, marketing and product development resources
than we have. Some of these companies manufacture and sell both testers and
test handlers. The particular companies with which we compete vary with our
different markets, with no one company dominating the overall test handler
market. The companies with which we compete most directly in the surface mount
IC test handler market include Cohu, Inc., Multitest Electronic Systems GmbH,
Rasco AG, and Micro Component Technology, Inc. We also compete with Ismeca
S.A., SRM Technology (M) Sdn Bhd and Tesec Corporation in the market for turret
based test handlers.

We compete for test handler sales primarily on the basis of effective
handler throughput, cost of ownership, temperature accuracy, contactor
integrity and other performance characteristics of our products, the breadth of
our product lines, the effectiveness of our sales and distribution channels and
our customer relationships. We believe we compete favorably on all of these
factors.

The market for burn-in board automation products is highly competitive.
We compete with a number of companies ranging from very small businesses to
large companies, some of which have substantially greater financial,
manufacturing, marketing and product development resources than we have. The
companies with which we compete most directly in this market include Cohu, Inc.
and Todo Seisakusho, Ltd.

We compete for burn-in board automation product sales primarily on the
basis of effective throughput, cost of ownership, versatility, and other
performance characteristics of our products, the breadth of our product line,
the effectiveness of our sales and distribution channels and our customer
service. We believe we compete favorably on all of these factors.

We believe that the market for our Automation Modules sold on an OEM basis
has no clearly defined commercial competitors offering similar automated
handling modules to the IC industry. Historically, OEMs supplying equipment
for IC manufacturing processes have developed custom or semi-custom handling
components. Many of these OEMs have internal development capability for
automated handling and many engineering companies also have automated handling
development capability.

The market for our reliability test equipment is also highly competitive
and our competitors include QualiTau, Ltd. We compete for reliability test
system sales on the basis of technology, price, delivery, system flexibility
and overall system performance. We believe we compete favorably on all of these
factors.

Manufacturing and Supplies

We manufacture test handlers, reliability test equipment and our
Automation Modules product line at our North St. Paul, Minnesota facility. We
manufacture our turret based test handler products, some of our reliability
test equipment and our 4800 Series and Model M5 Taping System at our Dallas,

8



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Texas facility. Our manufacturing operations consist of procurement and
inspection of components and subassemblies, assembly and extensive test of
finished products.

We emphasize quality and reliability in both the design and manufacture of
our products. We or our suppliers inspect all components and subassemblies for
mechanical and electrical compliance to our specifications. We test all
finished products against our specifications, and customer specifications where
applicable, and fully assembled test handler products are tested at all
temperatures for which they are designed and with all the device packages to be
accommodated.

A significant portion of the components and subassemblies used in our
products, including machined parts, PC boards, refrigeration systems, vacuum
pumps and contactor elements, are manufactured by third parties on a
subcontract basis. As a part of our total quality management program, we have
an ongoing supplier quality program under which we select, monitor and rate our
suppliers, and recognize suppliers for outstanding performance.

Certain components used in our products, including certain contactor
components, printed circuit boards and refrigeration systems, are currently
available from only a limited number of sources. We do not maintain long term
supply agreements with most of our suppliers, and we purchase most of our
components through individual purchase orders. We may not always be able to
replace all of our suppliers within a time period consistent with our business
requirements. We attempt to keep an adequate supply of critical components in
our inventory to minimize any significant impact the loss of a supplier may
cause.

Customers

We rely on a limited number of customers for a substantial percentage of
our net sales. In 2002, our top three customers accounted for 50% of our net
sales, with Maxim Integrated Products, Inc. accounting for over 10% of net
sales. In 2001, our top three customers accounted for 35% of our net sales,
with Maxim Integrated Products, Inc. accounting for over 10% of net sales. In
2000, our top three customers accounted for approximately 32% of our net sales,
with UST Technology Pte, Ltd. and Maxim Integrated Products, Inc. each
accounting for over 10% of net sales. The loss of or a significant reduction in
orders by these or other significant customers, including reductions due to
market, economic or competitive conditions in the semiconductor industry, would
likely have a negative impact on our financial condition and results of
operations.

Sales and Marketing

We market our products through a combination of direct salespeople and
international distributors. Our direct sales organization, comprised of eight
salespeople, is responsible for all domestic sales, and coordinates the
activities of our international distributors and actively participates with
them in international selling efforts. This enables us to establish strong
direct ties with our customers.

We maintain sales and service locations in North St. Paul, Minnesota,
Santa Clara, California, Dallas, Texas, and Saugus, Massachusetts. As of
December 31, 2002, we had international distributors located in the United
Kingdom, France, Germany, Italy, Korea, Japan, Taiwan, Hong Kong, China,
Thailand, Malaysia, Singapore and the Philippines.

Our marketing efforts include participation in industry trade shows and
production of product literature and sales support tools. These efforts are
designed to generate sales leads for our international distributors and direct
salespeople.

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International shipments accounted for 53%, 37%, and 32% of our net sales
in 2002, 2001, and 2000, respectively. In addition, it is not uncommon for
U.S. customers to take delivery of products in the United States for subsequent
shipment to international sites, particularly the Automation Modules product
line that is sold on an OEM basis. Most of our international shipments are
made to international sites of U.S. semiconductor manufacturers, although there
is a growing foreign customer base included in our international sales.

We invoice all of our international sales in U.S. dollars and,
accordingly, have not historically been subject to fluctuating currency
exchange rates. We establish credit limits from time to time on our
international distributors, who purchase products from us and resell to
end-users. We also often require irrevocable letters of credit from our
end-user international customers to minimize credit risk and to simplify the
purchasing/payment cycle.

Research and Development

We believe we must continue to enhance, broaden and modify our existing
product lines to meet the constantly evolving needs of the semiconductor
equipment market. To date, we have relied both on internal development and
acquisitions of technology and product lines to extend our product lines,
increase our customer base and avoid reliance on any single semiconductor
equipment market segment. Due to the record industry downturn in 2001-2002 and
the resulting decline in our revenues, we significantly reduced our levels of
research and development spending during this period and focused our available
resources on product development with near term revenue potential. In 2002, we
concentrated our new product development efforts on:



| |  |  | completion of the Model 8816 hard dock turret based handler;                                                                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | completion of the 55V6 Series single and dual test site gravity feed handlers;                                                                                                    
|
| |  |  | completion of the high speed test site actuator for the 55V6 Series of test handlers;                                                                                             
|
| |  |  | completion of the Model M5 Taping System; and                                                                                                                                     
|
| |  |  | development of additional test capabilities for our 1164
Series of reliability test equipment for the latest generations of
copper, gate oxide and transistor device technologies.

Product development expenses are typically divided approximately 50% for
new product development and 50% for continuation engineering. Our continuation
engineering efforts include the development of additional change kits to meet
the expanding families of IC and discrete electronic component package types,
further advancement of contactor technologies, and the addition of features and
performance options for existing equipment.

We expense all research and development costs, including costs for
software development, as incurred. In 2002, 2001, and 2000, our expenses
relating to research and development were approximately $2.3 million, $4.7
million, and $8.5 million, respectively. Over time, our objective is to invest
approximately 13% to 15% of our net sales in research and development, although
the percentage may be higher in periods of reduced sales, such as 2002 where
our research and development spending as a percentage of net sales was 18%. We
employed 29 engineering personnel as of December 31, 2002.

10



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Intellectual Property Rights

We attempt to protect the proprietary aspects of our products with
patents, copyrights, trade secret law and internal nondisclosure safeguards.
We currently hold several U.S. patents covering certain features of our
handling systems and Automation Modules, the contactor elements incorporated in
certain of our test handlers, and elements of our proprietary conductive
thermal technology. The source code for the software contained in our products
is considered proprietary and we typically do not furnish source code to our
customers. We have also entered into confidentiality agreements with each of
our key employees. Despite these restrictions, it may be possible for
competitors or users to copy aspects of our products or to obtain information
that we regard as a trade secret.

There is a rapid pace of technological change in the semiconductor
industry. We believe that patent, trade secret and copyright protection is
less significant to our competitive position than factors such as the
knowledge, ability and experience of our personnel, new product development,
frequent product enhancements, name recognition and ongoing, reliable product
maintenance and support.

Backlog

Our backlog was $2.3 million at the end of 2002 and $5.4 million at the
end of 2001. Because purchase orders are generally subject to cancellation or
delay by customers with limited or no penalty, our backlog is not necessarily
indicative of future revenue or earnings. We expect to ship all of our backlog
as of the end of 2002 in 2003.

Employees

As of December 31, 2002, we had 94 employees, consisting of 33 in
manufacturing, 29 in engineering and product development, 20 in sales,
marketing and customer service, and 12 in general administration and finance.
None of our employees is represented by a labor union or is subject to any
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are satisfactory.

Financial Information About Geographic Areas

See Note 15 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K for information about geographic areas.

Certain Important Factors

In addition to the factors identified above, there are several important
factors that could cause our actual results to differ materially from our
results in the past and those we anticipate as reflected in any forward-looking
statements. Please refer to the heading Business Risks and Uncertainties
located in Managements Discussion and Analysis of Financial Condition and
Results of Operations under Item 7 of this Annual Report on Form 10-K for a
discussion of these factors and their potential impact on the success of our
operations and our ability to achieve our goals.




|        |  |            
|------- |  | -----------
|ITEM 2. |  | PROPERTIES.

We conduct our corporate functions and manufacturing, product development,
sales, marketing and field service activities in North St. Paul, Minnesota. We
currently occupy approximately 45,000 square feet in North St. Paul under a
lease that expires in March 2006. We have an option under the lease,
exercisable at any time during the initial lease term, to require construction
of an additional

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approximately 45,000 square feet for lease at the same rental rate. We
also conduct manufacturing, product development, sales, marketing and field
service activities in approximately 29,400 square feet in Dallas, Texas, under
a lease that expires in April 2006. We also occupy approximately 3,000 square
feet of space in Santa Clara, California under a lease that expires in May
2003, which we use for sales and field service activities.

We also have the following continuing lease obligations for facilities we
have vacated:



| |  |  | We vacated a 30,000 square foot facility that is adjacent to
our North St. Paul facility in June 2001 when we consolidated our
North St. Paul operations into a single building. This facility is
under a lease that expires in February 2006. Approximately half of
this space is currently subleased to third parties, and we are
actively seeking to sublease the remainder. We remain liable under
the lease, on a contingent basis, for the portion of this facility
that is subleased.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We vacated a 10,000 square foot facility located in Poway,
California in March 2001 when we completed the consolidation of our
Poway, California operation into our North St. Paul operation. This
facility is under a lease that expires in September 2003. In April
2001, we subleased this facility to a third party for the remainder
of the lease term, but we remain liable under the lease on a
contingent basis.                                                                    
|
| |  |  | We vacated a 45,000 square foot facility in Poway, California
in 2000 when we relocated to the 10,000 square foot Poway,
California facility. This lease was assigned to a third party and
we are contingently liable for the lease if the assignee defaults.
This lease expires in January 2010.                                                                                                                                                                                           




|        |  |                   
|------- |  | ------------------
|ITEM 3. |  | LEGAL PROCEEDINGS.

We are not a party to, and none of our property is the subject of, any
material pending legal, governmental, administrative or other proceedings.




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

We did not submit any matter to a vote of our security holders during the
fourth quarter of fiscal year 2002.




|         |  |                                      
|-------- |  | -------------------------------------
|ITEM 4A. |  | EXECUTIVE OFFICERS OF THE REGISTRANT.

Our executive officers, their ages and the offices they held as of March
1, 2003 are as follows:

|                   |  |     |    |          |  |                                                             
|------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Joseph C. Levesque |  |     | 58 |          |  | Chairman of the Board, President and Chief Executive Officer
|                   |  |     |    |          |  |                                                             
|Douglas L. Hemer   |  |     | 56 |          |  | Chief Administrative Officer, Secretary and Director        
|                   |  |     |    |          |  |                                                             
|Daniel M. Koch     |  |     | 49 |          |  | Vice President  Worldwide Sales                            
|                   |  |     |    |          |  |                                                             
|John J. Pollock    |  |     | 43 |          |  | Vice President  General Manager, North St. Paul Operations 
|                   |  |     |    |          |  |                                                             
|Keith E. Williams  |  |     | 59 |          |  | President  Dallas Operations                               
|                   |  |     |    |          |  |                                                             
|Paul H. Askegaard  |  |     | 51 |          |  | Treasurer                                                   

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Mr. Levesquehas served as our President, Chief Executive Officer and
Chairman of our board since 1986. From 1973 to 1986, Mr. Levesque served in
various capacities and most recently as Executive Vice President of Micro
Component Technology, Inc., a manufacturer of IC testers and test handlers.

Mr. Hemerhas served as one of our directors since 1986, and has served as
our Secretary since May 2000 and as our Chief Administrative Officer since
March 2001. He served as our Group Vice President from August 1998 to March
2001, as the President of our Poway, California operations from February 1997
to August 1998 and as our Chief Administrative Officer from May 1996 until
February 1997. Mr. Hemer was a partner in the law firm of Oppenheimer Wolff &
Donnelly LLP for more than 15 years before joining Aetrium. Mr. Hemer is also
a director of Versa Companies, a privately held company.

Mr. Kochhas served as our Vice President - Worldwide Sales since March
1991. From March 1990 to March 1991, Mr. Koch served as the Vice President of
Sales of Summation, Inc., a company involved with the testing of IC boards.
From December 1973 to March 1990, Mr. Koch served in various sales positions
and most recently as Vice President of Sales of Micro Component Technology,
Inc.

Mr. Pollockhas served as the Vice President and General Manager of our
North St. Paul operations since December 2001. From August 1998 to December
2001, Mr. Pollock served as our Vice President of Product Development and
Marketing. From April 1998 to August 1998, Mr. Pollock served as interim
general manager of our North St. Paul operations. From November 1997 to May
1998, Mr. Pollock served as interim general manager of the handler group we
acquired from Advantek Inc. From September 1996 to August 1997, Mr. Pollock
served as Business Unit Manager of our Automation Modules product group.

Mr. Williamshas served as the President of our Dallas operations since
April 1998, when we acquired the handler equipment business of WEB Technology,
Inc. Mr. Williams co-founded WEB in 1982, and served as its President and CEO
from its inception until we acquired it.

Mr. Askegaardhas served as our Treasurer since February 1992. From
October 1986 to February 1992, Mr. Askegaard served as our Corporate
Controller. Mr. Askegaard is a certified public accountant.

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##### Table of Contents






PART II




|        |  |                                                                           
|------- |  | --------------------------------------------------------------------------
|ITEM 5. |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.

Market Information

Our common stock is quoted on The Nasdaq National Market under the symbol
ATRM. The following table summarizes the high and low closing sale prices
per share of our common stock for the periods indicated, as reported on The
Nasdaq National Market. These prices do not include adjustments for retail
mark-ups, markdowns or commissions.

|     |  |      |  |   |      |               |  |                |      |               |  |                |      |  |  |   |      |  |  | 
|---- |  | ---- |  | - | ---- | ------------- |  | -------------- | ---- | ------------- |  | -------------- | ---- |  |  | - | ---- |  |  | 
|     |  |      |  |   |      | First Quarter |  | Second Quarter |      | Third Quarter |  | Fourth Quarter
|     |  |      |  |   |      |               |  |                |      |               |  |               
|2002 |  | High |  | $ | 2.78 |               |  | $              | 2.87 |               |  | $              | 1.35 |  |  | $ | 1.20 | 
|     |  | Low  |  | $ | 1.16 |               |  | $              | 1.25 |               |  | $              | 0.98 |  |  | $ | 0.65 | 
|     |  |      |  |   |      |               |  |                |      |               |  |                |      |  |  |   |      |  |  | 
|2001 |  | High |  | $ | 4.63 |               |  | $              | 2.40 |               |  | $              | 2.25 |  |  | $ | 1.75 | 
|     |  | Low  |  | $ | 1.75 |               |  | $              | 1.25 |               |  | $              | 0.71 |  |  | $ | 0.80 | 

Holders

As of March 19, 2003, there were approximately 200 shareholders of record.
We estimate that an additional 3,700 shareholders own stock held for their
accounts at brokerage firms and financial institutions.

Dividends

We have never paid cash dividends on our common stock. We currently intend
to retain any earnings for use in our operations and do not anticipate paying
cash dividends in the foreseeable future.

Recent Sale of Unregistered Securities

We did not have any unregistered sales of equity securities during fiscal
year 2002.

14



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##### Table of Contents






|        |  |                         
|------- |  | ------------------------
|ITEM 6. |  | SELECTED FINANCIAL DATA.

You should read the Selected Financial Data presented below in conjunction
with the Consolidated Financial Statements and notes thereto included elsewhere
in this Annual Report on Form 10-K, and in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Annual Report on Form 10-K.

Five Year Summary
(in thousands, except per share data)

|                              |                                                                   |                                                                   |   |        |        |      |   |         |       |       |   |         |          |   |   |         |       |   |   |         |       |  
|----------------------------- | ----------------------------------------------------------------- | ----------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------- | ----- | ----- | - | ------- | -------- | - | - | ------- | ----- | - | - | ------- | ----- | -
|Year ended December 31,       |                                                                   | 2002                                                              |   | 2001   |        | 2000 |   | 19997   |       | 19987
|                              |                                                                   |                                                                   |   |        |        |      |   |         |       |      
|Statement of operations data: |                                                                   |                                                                   |   |        |        |      |   |         |       |       |   |         |          |   |   |         |       |   |   |        
|                              | Net sales                                                         |                                                                   | $ | 12,688 |        |      | $ | 20,014  |       |       | $ | 46,052  |          |   | $ | 37,188  |       |   | $ | 59,619  |      
|                              | Loss from operations                                              |                                                                   |   | (3,336 | )1,2   |      |   | (11,143 | )2,4  |       |   | (7,423  | )2,5     |   |   | (15,628 | )2,8  |   |   | (15,276 | )2,9 
|                              | Loss before cumulative effect of
a change in accounting principle |                                                                   |   | (2,806 | )1,2   |      |   | (10,669 | )2,4  |       |   | (21,705 | )2,5,6   |   |   | (9,013  | )2,8  |   |   | (9,450  | )2,8 
|                              | Cumulative effect of a change in
accounting principle             |                                                                   |   | (6,486 | )3     |      |   |        |       |       |   | (824    | )7       |   |   |        |       |   |   |        |      
|                              | Net loss                                                          |                                                                   |   | (9,292 | )1,2,3 |      |   | (10,669 | )2,4  |       |   | (22,529 | )2,5,6,7 |   |   | (9,013  | )2,8  |   |   | (9,450  | )2,9 
|                              |                                                                   |                                                                   |   |        |        |      |   |         |       |       |   |         |          |   |   |         |       |   |   |        
|                              | Per basic and diluted share:                                      |                                                                   |   |        |        |      |   |         |       |       |   |         |          |   |   |         |       |   |   |         |      
|                              |                                                                   | Loss before cumulative effect
of a change in accounting principle |   |        | (0.30  | )    |   |         | (1.13 | )     |   |         | (2.29    | ) |   |         | (0.95 | ) |   |         | (1.00 | )
|                              |                                                                   | Cumulative effect of a change in
accounting principle             |   |        | (0.68  | )    |   |         |      |       |   |         | (0.09    | ) |   |         |      |   |   |         |      |  
|                              |                                                                   | Net loss                                                          |   | $      | (0.98  | )    |   | $       | (1.13 | )     |   | $       | (2.38    | ) |   | $       | (0.95 | ) |   | $       | (1.00 | )
|                              |                                                                   |                                                                   |   |        |        |      |   |         |       |       |   |         |          |   |   |         |       |   |   |        
|                              | Weighted average common shares
outstanding (basic and diluted)    |                                                                   |   | 9,476  |        |      |   | 9,438   |       |       |   | 9,466   |          |   |   | 9,470   |       |   |   | 9,423   |      
|                              |                                                                   |                                                                   |   |        |        |      |   |         |       |       |   |         |          |   |   |         |       |   |   |         |      

|                    |                                      |      |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        |  | 
|------------------- | ------------------------------------ | ---- | - | ------ |  | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ |  | 
|December 31,        |                                      | 2002 |   | 2001   |  | 2000 |   | 1999   |  | 1998
|                    |                                      |      |   |        |  |      |   |        |  |     
|Balance sheet data: |                                      |      |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |       
|                    | Total assets                         |      | $ | 18,081 |  |      | $ | 29,386 |  |      | $ | 44,374 |  |  | $ | 63,604 |  |  | $ | 72,444 | 
|                    | Long-term debt, less current portion |      |   |       |  |      |   |       |  |      |   |       |  |  |   |       |  |  |   |       | 



---

|1. |  | Includes a $0.7 million goodwill impairment charge. See Note 5 to the Consolidated Financial Statements.                                                                                                                                                                       
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | As a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, we recorded no goodwill amortization expense in 2002. Goodwill amortization
expense amounted to $0.7 million in 2001, $0.7 million in 2000, $0.9 million in 1999 and $0.7 million in 1998.
|  
|3. |  | Includes a $6.5 million goodwill impairment charge recorded as a cumulative effect of a change in accounting principle. See Note 5 to the Consolidated Financial
Statements.                                                                                                   
|  
|4. |  | Includes pre-tax charges of $3.7 million for inventory excess and obsolescence charges and $2.2 million for unusual charges related to restructuring costs and asset
write-downs. See Notes 6 and 7 to the Consolidated Financial Statements.                                  
|  
|5. |  | Includes pre-tax charges of $1.7 million for inventory excess and obsolescence charges and $4.1 million for unusual charges related to restructuring costs and asset
write-downs. See Notes 6 and 7 to the Consolidated Financial Statements.                                  
|  
|6. |  | Includes a $17.3 million charge to record a valuation reserve against deferred tax assets. See Note 14 to the Consolidated Financial Statements.                                                                                                                               

15



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##### Table of Contents



|7. |  | In 2000, we implemented a change in accounting for revenue recognition for certain types of equipment sales. The cumulative effect of the change in accounting
principle was an after-tax charge of $0.8 million. See Note 2 to the Consolidated Financial Statements. The table below presents unaudited estimated pro forma
results for 1999 and 1998 as if the accounting change was in effect for those years.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                           |                            |  |      |        |      |  |   |        |  
|---------------------------------------------------------- | -------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                           |                            |  | 1999 |        | 1998
|                                                           |                            |  |      |        |     
|Unaudited pro forma (in thousands, except per share data): |                            |  |      |        |      |  |   |       
|                                                           | Net sales                  |  | $    | 39,575 |      |  | $ | 65,163 |  
|                                                           | Net loss                   |  |      | (8,497 | )    |  |   | (7,451 | )
|                                                           | Net loss per diluted share |  | $    | (0.90  | )    |  | $ | (0.79  | )



|8. |  | Includes pre-tax charges of $3.5 million for inventory excess and obsolescence charges and $1.4 million for unusual charges related to restructuring costs and the
write-off of an intangible asset.                                             
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | Includes pre-tax charges of $3.3 million for inventory excess and obsolescence charges and $6.5 million for unusual charges related to purchased in-process research
and development, restructuring costs and the write-off of intangible assets.

Quarterly Financial Data (Unaudited)
(in thousands, except per share data)

|               |                                                                                                     |   |         |        |         |   |         |        |         |   |       |        |   |   |       |        |  
|-------------- | --------------------------------------------------------------------------------------------------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ----- | ------ | - | - | ----- | ------ | -
|               |                                                                                                     |   | First   |        | Second  |   | Third   |        | Fourth 
|               |                                                                                                     |   | Quarter |        | Quarter |   | Quarter |        | Quarter
|               |                                                                                                     |   |         |        |         |   |         |        |        
|2002 Net sales |                                                                                                     | $ | 3,117   |        |         | $ | 3,177   |        |         | $ | 3,219 |        |   | $ | 3,175 |       
|               | Gross profit                                                                                        |   |         | 1,411  |         |   |         | 1,433  |         |   |       | 1,492  |   |   |       | 1,584  |  
|               | Loss before cumulative effect of a
change in accounting principle1,2                                |   |         | (661   | )       |   |         | (583   | )       |   |       | (215   | ) |   |       | (1,347 | )
|               | Net loss1,2,3                                                                                       |   |         | (7,147 | )       |   |         | (583   | )       |   |       | (215   | ) |   |       | (1,347 | )
|               | Net loss per share before cumulative effect of
a change in accounting principle (basic
and diluted) |   |         | (0.07  | )       |   |         | (0.06  | )       |   |       | (0.02  | ) |   |       | (0.14  | )
|               | Net loss per share (basic and diluted)                                                              |   |         | (0.75  | )       |   |         | (0.06  | )       |   |       | (0.02  | ) |   |       | (0.14  | )
|               |                                                                                                     |   |         |        |         |   |         |        |         |   |       |        |   |   |       |       
|2001 Net sales |                                                                                                     | $ | 8,030   |        |         | $ | 4,344   |        |         | $ | 3,876 |        |   | $ | 3,764 |       
|               | Gross profit4                                                                                       |   |         | 4,195  |         |   |         | 1,986  |         |   |       | 1,770  |   |   |       | (970   | )
|               | Net loss2,5                                                                                         |   |         | (2,278 | )       |   |         | (2,972 | )       |   |       | (1,061 | ) |   |       | (4,358 | )
|               | Net loss per share (basic and diluted)                                                              |   |         | (0.24  | )       |   |         | (0.31  | )       |   |       | (0.11  | ) |   |       | (0.47  | )



---

|1. |  | Includes a tax benefit of $0.4 million in the third quarter and a goodwill impairment charge of $0.7 million in the fourth
quarter.                                                                                                                                                                                            
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Net loss in each quarter of 2001 includes goodwill amortization expense of $0.2 million. Amortization of goodwill was
discontinued in 2002 upon the adoption of SFAS No. 142, Goodwill and Other Intangible Assets.                                                                                                          
|  
|3. |  | Includes a $6.5 million charge related to a change in accounting principle in the first quarter, a tax benefit of $0.4
million in the third quarter and a goodwill impairment charge of $0.7 million in the fourth quarter.                                                                                                    
|  
|4. |  | Includes an unusual inventory write-down charge of $2.7 million in the fourth quarter.                                                                                                                                                                                                                                         
|  
|5. |  | Includes restructuring and other unusual charges amounting to $0.5 million in the first quarter, $1.0 million in the
second quarter, and $0.7 million in the fourth quarter. Also includes a tax benefit of $0.2 million in the third quarter
and an unusual inventory write-down charge of $2.7 million in the fourth quarter.

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|        |  |                                                                                       
|------- |  | --------------------------------------------------------------------------------------
|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

Overview:

Aetrium designs, manufactures and markets a variety of electromechanical
equipment used by the semiconductor industry to handle and test semiconductor
and passive electronic devices, such as integrated circuits, or ICs, and
discrete electronic components.

The semiconductor capital equipment industry is often described as a
cyclical growth industry characterized by a long-term growth trend occasionally
interrupted by periods of contraction and significant declines in revenue.
General industry conditions and the demand for Aetriums products can fluctuate
significantly from period to period as a result of numerous factors, including
but not limited to changes in U.S. and worldwide economic conditions, supply
and demand for ICs and discrete electronic components, changes in semiconductor
manufacturing capacity, advancements in industry technologies and competitive
factors. For these and other reasons, our operating results for 2000, 2001 and
2002 may not be indicative of future operating results.

Aetriums business was impacted by changes in industry and economic
conditions throughout the period 2000 to 2002. After a period of contraction
in 1998 and early 1999, semiconductor equipment industry conditions generally
improved in the second half of 1999 and continued to improve in early 2000. We
experienced increased demand for our products in 2000 as semiconductor
manufacturers added substantially to their production capacity in response to
increased global demand for ICs and discrete electronic components, and our
2000 revenues increased 24% compared with 1999. Towards the end of 2000, the
demand for semiconductor equipment decreased sharply as the U.S. and global
economies slowed and the demand for ICs and discrete electronic components
softened.

In 2001, excess inventories, excess production capacity and continuing
weakness in the U.S. and global economies combined to produce a record-setting
downturn in the semiconductor industry. For only the second time in 25 years,
fewer ICs and discrete electronic components were shipped than the year before,
as unit sales of ICs and discrete electronic components fell by 21%. As a
result, semiconductor manufacturers severely curtailed capital spending, and
revenues for the test, assembly and packaging, or TAP, segment of the
semiconductor equipment industry dropped approximately 63% in 2001 from 2000
levels. Our revenues decreased each quarter in 2001 and our revenues for the
year were down 57% compared with 2000.

Generally weak industry conditions continued into the first quarter of
2002. In the second quarter, many semiconductor manufacturers began to
experience stronger demand for integrated circuits and improvements in capacity
utilization. However, the anticipated recovery stalled in the second half of
the year amid weakening economic conditions, concerns about war and lower
consumer demand for products containing ICs and discrete electronic components.
As a result, revenues for the TAP segment of the semiconductor industry
dropped an additional approximately 23% from 2001 totals, for an aggregate
decrease of 71% from 2000 levels, and many industry forecasters are predicting
that any meaningful industry recovery will be delayed until the second half of
2003. In 2002, Aetriums revenues continued to decline in the first quarter
compared to the fourth quarter of 2001 and quarterly revenues remained
relatively flat through the remainder of the year. Our 2002 revenues of $12.7
million were down 37% compared with 2001 and down 72% compared with 2000.

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Critical Accounting Policies and Estimates:

Managements discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. We
believe the critical accounting policies that require the most significant
judgments and estimates used in the preparation of our consolidated financial
statements are those related to revenue recognition, bad debts, inventories,
intangible assets, goodwill, warranty obligations, and income tax accounting.

Our policy is to recognize revenue on product sales upon shipment if
contractual obligations have been substantially met, collection of the proceeds
is assessed as being reasonably assured, and title and risk of loss have passed
to the customer, which is generally the case for sales of spare parts,
accessories, change kits and some equipment and equipment upgrade sales. Some
equipment or equipment upgrade sales contracts, however, may include
post-shipment obligations and/or contractual terms that can only be satisfied
after shipment, such as installation and meeting customer-specified acceptance
requirements at the customers site. In these cases, revenue is not recognized
until such obligations have been completed and there is objective evidence that
the applicable contract terms have been met. Due to the high selling price of
certain types of equipment, the timing of revenue recognition of a relatively
small number of transactions may have a significant impact on our quarterly
results.

We maintain an allowance for doubtful accounts that reflects our estimate
of losses that may result from the uncollectibility of accounts receivable. Our
allowance for doubtful accounts is based primarily on an analysis of individual
accounts for which we have information indicating the customer may not be able
to pay amounts owed to us. In these cases, based on the available facts and
circumstances, we estimate the amount that will be collected from such
customers. We also evaluate the collectibility of our accounts receivable in
the aggregate based on factors such as the aging of receivable amounts,
customer concentrations, historical experience, and current economic trends and
conditions. We adjust our allowance for doubtful accounts when additional
information is received that impacts the amount reserved. If circumstances
change, our estimates of the recoverability of accounts receivable could be
reduced or increased by a material amount. Such a change in estimated
recoverability would be accounted for in the period in which the facts that
give rise to the change become known. As of December 31, 2002, our allowance
for doubtful accounts was $0.3 million.

We establish valuation reserves on our inventories for estimated excess
and obsolete inventory equal to the difference between the cost of inventory
and its estimated market value based upon assumptions about future product
demand and market conditions. If actual product demand or market conditions are
less favorable than those projected by management, additional inventory
reserves may be required. As of December 31, 2002, our inventory excess and
obsolescence reserve was $4.0 million.

Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 142 provides that goodwill is no longer amortized, but
rather is reviewed for impairment at the beginning of the fiscal year in which
the standard is adopted and at least annually thereafter. SFAS 142 requires a
two-step process in the review of goodwill for impairment. In step one we
compare the fair value of our single reporting unit (i.e., Aetrium) with the
net carrying value of our assets, including goodwill. If our fair value is less
than our net asset carrying value, we perform the second step of the

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impairment test. In step two, we compare the aggregate fair values of our
non-goodwill assets and liabilities with the fair value of Aetrium in order to
determine the implied fair value of goodwill. At January 1, 2002, we determined
that the carrying value of our goodwill exceeded its implied fair value by $6.5
million and recorded a goodwill impairment charge in that amount. At December
31, 2002, we determined that the carrying value of our goodwill exceeded its
implied fair value by $0.7 million and recorded a goodwill impairment charge in
that amount. As of December 31, 2002, after recording the goodwill impairment
charge at that date, we had no remaining goodwill balance.

We review our identifiable intangible assets and other long-lived assets
whenever an event or change in circumstances indicates that the carrying value
of an asset may be impaired. If such an event or change in circumstances
occurs and potential impairment is indicated because the carrying values exceed
the estimated future undiscounted cash flows, we would measure the impairment
loss as the amount by which the carrying value of the asset exceeds its fair
value. During 2002, as a result of our identified impairment of the carrying
value of goodwill, we reviewed our identifiable intangible and other long-lived
assets for potential impairment and concluded that the carrying value of these
assets was not impaired. As of December 31, 2002, the carrying value of our
identifiable intangible assets was $2.6 million.

We accrue estimated warranty costs in the period that the related revenue
is recognized. Our warranty cost estimates and warranty reserve requirements
are determined based upon product performance, historical warranty experience,
and costs incurred in addressing product performance issues. Should product
performance or cost factors differ from our estimates, adjustments to our
warranty accrual may be required. As of December 31, 2002, our warranty reserve
was $0.4 million.

Our deferred tax assets are reduced by a valuation allowance when we
believe it is more likely than not that some portion or all of the deferred tax
assets will not be realized. In the fourth quarter of 2000, in accordance with
SFAS No. 109, Accounting for Income Taxes, due to then recent operating
losses, reduced sales order activity in late 2000, and softening industry
conditions in early 2001, we recorded a valuation allowance against our
deferred tax assets. If we generate taxable income consistently in future
periods, our assessment of our ability to realize these deferred tax assets may
change and we may reduce this valuation allowance, which would be reported as
an income tax benefit. As of December 31, 2002, our valuation allowance was
$25.1 million.

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Results of Operations:

Selected statement of operations items as a percentage of our net sales
for 2002, 2001 and 2000 were as follows:

|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |      | 
|--------------------------------------------------------------------- | ----------------------------------- |  | ----- | ---- | ---- |  | ----- | ---- |  |  | ----- | ---- | 
|                                                                      |                                     |  | 2002  |      | 2001 |  | 2000 
|                                                                      |                                     |  |       |      |      |  |      
|Net sales                                                             |                                     |  | 100.0 | %    |      |  | 100.0 | %    |  |  | 100.0 | %   
|Cost of goods sold                                                    |                                     |  | 46.7  |      |      |  | 65.1  |      |  |  | 50.8  |     
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Gross profit                                                          |                                     |  | 53.3  |      |      |  | 34.9  |      |  |  | 49.2  |     
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Operating expenses:                                                   |                                     |  |       |      |      |  |       |      |  |  |       |     
|                                                                      | Selling, general and administrative |  |       | 55.9 |      |  |       | 56.1 |  |  |       | 37.9 | 
|                                                                      | Research and development            |  |       | 18.1 |      |  |       | 23.5 |  |  |       | 18.5 | 
|                                                                      | Goodwill impairment charge          |  |       | 5.6  |      |  |       |     |  |  |       |     | 
|                                                                      | Unusual charges                     |  |       |     |      |  |       | 11.0 |  |  |       | 8.9  | 
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Total operating expenses                                              |                                     |  | 79.6  |      |      |  | 90.6  |      |  |  | 65.3  |     
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Loss from operations                                                  |                                     |  | (26.3 | )    |      |  | (55.7 | )    |  |  | (16.1 | )   
|Other income, net                                                     |                                     |  | .7    |      |      |  | 1.3   |      |  |  | 0.9   |     
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Loss before income taxes                                              |                                     |  | (25.6 | )    |      |  | (54.4 | )    |  |  | (15.2 | )   
|Income tax benefit (provision)                                        |                                     |  | 3.5   |      |      |  | 1.1   |      |  |  | (31.9 | )   
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Net loss before cumulative effect of a
change in accounting principle |                                     |  | (22.1 | )    |      |  | (53.3 | )    |  |  | (47.1 | )   
|Cumulative effect of a change in
accounting principle                 |                                     |  | (51.1 | )    |      |  |      |      |  |  | (1.8  | )   
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     
|Net loss                                                              |                                     |  | (73.2 | )%   |      |  | (53.3 | )%   |  |  | (48.9 | )%  
|                                                                      |                                     |  |       |      |      |  |       |      |  |  |       |     

Net Sales:

Our net sales by product line as a percentage of total sales for 2002,
2001 and 2000 were as follows:

|                                    |       |  |      |     |      |  |      |     |   |  |    |     |  
|----------------------------------- | ----- |  | ---- | --- | ---- |  | ---- | --- | - |  | -- | --- | -
|                                    |       |  | 2002 |     | 2001 |  | 2000
|                                    |       |  |      |     |      |  |     
|Test handlers                       |       |  | 51   | %   |      |  | 53   | %   |   |  | 52 | %  
|Semiconductor automation products   |       |  | 8    |     |      |  | 16   |     |   |  | 22 |    
|Reliability test equipment products |       |  | 18   |     |      |  | 18   |     |   |  | 13 |    
|Change kits and spare parts         |       |  | 23   |     |      |  | 13   |     |   |  | 13 |    
|                                    |       |  |      |     |      |  |      |     |   |  |    |    
|                                    | Total |  |      | 100 | %    |  |      | 100 | % |  |    | 100 | %
|                                    |       |  |      |     |      |  |      |     |   |  |    |    

In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, or SAB101. SAB101 summarizes the SECs views in applying
generally accepted accounting principles to selected revenue recognition
issues, including equipment sales contracts that contain provisions related to
installation and customer acceptance.

Prior to 2000, we generally recognized revenue upon shipment if
contractual obligations were substantially complete, post-delivery obligations
were inconsequential, and customer acceptance and payment were reasonably
assured. In the fourth quarter of 2000, in accordance with SAB101 guidance, we
changed our accounting policy such that certain equipment revenue, depending on
contract terms and other factors, is recognized subsequent to shipment,
generally after installation and customer-specified acceptance processes have
been completed. As required, the accounting change was made retroactive to
January 1, 2000. The cumulative effect of the accounting change was an
after-tax charge of $0.8 million ($.09 per share), which includes revenue of
approximately $3.0 million less cost of sales and certain related

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expenses such as commissions. Substantially all of the $3.0 million in
deferred revenue was recognized in 2000 upon satisfying the new revenue
recognition criteria.

Our net sales decreased to $12.7 million in 2002 compared with $20.0
million in 2001, a decrease of 37%. Quarterly revenues were relatively flat
during 2002, ranging from $3.1 to $3.2 million. Equipment sales decreased
across all product lines in 2002 as a result of the prolonged downturn in the
semiconductor equipment industry that began in late 2000 and continued through
2001 and 2002. Sales of test handlers, representing 51% of total sales in 2002,
decreased 39% relative to 2001. Sales of our reliability test equipment
decreased 36% in 2002 compared to 2001. Sales of our semiconductor automation
products decreased because of a sharp decline in sales of burn-in board loaders
as well as a reduction in sales to OEM customers, whose businesses have also
been adversely impacted by the industry downturn. Sales of spare parts and
change kits increased in 2002 from 2001 levels, reflecting improving capacity
utilization for some customers and certain product applications.

Net sales decreased 57% to $20.0 million in 2001 compared with $46.1 million
in 2000. The severe semiconductor industry downturn experienced in 2001
resulted in significant decreases in our revenues for the first three quarters
and sequentially flat revenues in the fourth quarter. The decline in revenues
occurred across all of our product lines. Sales of our test handlers,
representing 53% of total sales in 2001, decreased 55% compared to 2000 as
customers experienced significant excess manufacturing capacity for many
product applications. Sales of our reliability test equipment decreased also,
but increased from 13% in 2000 to 18% in 2001 as a percentage of our revenues
as semiconductor manufacturers continued to invest in new equipment to support
the increasing use of copper materials in their manufacturing processes. Our
semiconductor automation product sales declined as a percentage of our revenues
in 2001 both because of the impact of the industry downturn on our OEM
customers and because of a decline in sales of burn-in board loaders. Sales of
spare parts and change kits in 2001 were unchanged as a percentage of our
revenues, and declined in all areas from 2000 levels.

Gross Profit:

Gross profit, as a percentage of net sales, was 53.3% in 2002 compared
with 34.9% in 2001 and 49.2% in 2000. Results for 2001 and 2000 included
unusual inventory write-down charges due to lower product demand resulting from
the significant industry downturn and certain specific events as described
below:



| |  |  | In fourth quarter 2001, we recorded an unusual inventory
write-down of $2.7 million. By year-end 2001, the consensus forecast
of industry analysts was that the severe semiconductor industry
downturn that started in late 2000 had reached an end, but that
significant recovery of the semiconductor equipment industry would
not occur before the second half of 2002, and that the recovery for
our industry would be slow. Previous industry analyst forecasts had
suggested that the semiconductor industry downturn would not be as
severe or as long. We determined that under the conditions then most
recently forecasted, by the time significant capacity requirements
emerged for mature IC packages, some of our older products focused
on those applications would be superceded by our newer products and
those of our competitors. Accordingly, we wrote down the value of
our inventories for these older products to their estimated net
realizable values based upon a revised expectation of limited future
sales of these products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In 2000, we recorded unusual inventory write-downs totaling
$0.9 million. The write-downs were primarily related to inventories
for dynamic random access memory, or DRAM, test handler
applications, a volatile market segment that we decided not to
pursue further. In the second quarter, we recorded an inventory
write-down of $0.4 million related to our decision to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |   |  | discontinue marketing and manufacturing our oldest DRAM test handler,
the model M3200. As a result of this decision, all inventories related
to the production of the M3200 were written down to scrap value and
were substantially disposed of by December 31, 2000. In the fourth
quarter, we recorded an inventory write-down of $0.5 million. This
charge was primarily related to our decision to discontinue marketing
our DTX thermal test handler product to the DRAM market segment and
rather to focus our marketing of the DTX on high power logic
semiconductor applications, which required significant product design
changes. As a result of this decision, DTX-related inventories were
evaluated and written down to estimated net realizable value.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The unusual inventory write-downs in 2001 and 2000 were
determined through a detailed analysis of inventories with
consideration given to anticipated usage through future equipment
and spares sales, and the potential use of common parts in other
products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

In addition to the unusual inventory charges discussed above, we regularly
record inventory charges due to the evolving nature of our products. Our
products are continually improved and modified to better meet evolving market
requirements. These ongoing product improvements and modifications result in
parts inventory obsolescence as parts are replaced due to the product changes.
To address this recurring obsolescence, we recorded inventory charges of $0.1
million in 2002, $1.0 million in 2001, and $0.8 million in 2000, in addition to
the unusual inventory charges discussed above.

Excluding the unusual charges described above, gross profit of 53.3% of
net sales in 2002 would have compared with 48.3% and 51.2% in 2001 and 2000,
respectively. Gross margins improved in 2002 despite lower revenue levels
primarily due to lower costs resulting from restructuring activities, including
the restructuring of North St. Paul, Minnesota operations in December 2001,
which resulted in lower costs for all of 2002.

The gross profit margin decrease in 2001 compared with 2000 was due
primarily to significantly lower sales volume, offset in part by reduced
overhead expenses resulting from restructuring activities during the year. We
significantly reduced our manufacturing overhead expenses in 2001 through
workforce reductions and reorganization of our operations at our North St.
Paul, Minnesota operations and the consolidation of those operations into a
single facility.

Selling, General and Administrative Expenses:

Selling, general and administrative, or SG&A, expenses were $7.1 million
in 2002 compared with $11.2 million in 2001 and $17.5 million in 2000. The
decrease in 2002 resulted primarily from a full year of cost savings realized
from the restructuring activities in 2001 described below. Commissions expense
decreased in 2002 due to lower sales volume and savings realized from the
termination of our U.S. independent sales representatives early in the year. In
addition, we recorded no goodwill amortization expense in 2002 compared with
$0.7 million in 2001 due to the implementation of SFAS No. 142 as explained in
Note 5 to our consolidated financial statements. SG&A expenses decreased in
2001 compared with 2000 due to lower commissions expense on significantly lower
revenues and due to restructuring activities implemented during the year,
including workforce reductions, the closing of our Poway, California facility,
the consolidation of our North St. Paul, Minnesota operations into a single
facility, and the reorganization of our North St. Paul, Minnesota operations.

Research and Development Expenses:

Research and development expenses were $2.3 million in 2002 compared with
$4.7 million in 2001 and $8.5 million in 2000. The decrease in 2002 research
and development expenses reflects

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reductions in wages, materials and contract services, including a full
year of cost savings realized from the restructuring activities in 2001. The
decrease in research and development expenses in 2001 compared with 2000 was
primarily attributable to a reduction in engineering personnel, including
workforce reductions related to the closing of our Poway, California facility
in early 2001, as well as workforce reductions we made during the course of
2001 at our North St. Paul, Minnesota and Dallas, Texas facilities.

Goodwill Impairment Charges:

Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 142 provides that goodwill is no longer amortized, but
rather is reviewed for impairment at the beginning of the fiscal year in which
the standard is adopted and at least annually thereafter. In accordance with
SFAS 142, we evaluated our existing goodwill and intangible assets as of
January 1, 2002 and determined that certain intangibles did not meet the
criteria for recognition apart from goodwill as set forth in SFAS 141,
Business Combinations. Therefore, the aggregate carrying value of these
intangibles as of January 1, 2002 in the amount of $52,000 was reclassified to
goodwill. We also reassessed the useful lives of our acquired identifiable
intangible assets at January 1, 2002 and determined that no adjustments to the
remaining amortization periods were necessary.

The adoption of SFAS 142 required that we complete a transitional goodwill
impairment test as of January 1, 2002 using a two-step process. We completed
step one of the impairment test by comparing the fair value of our single
reporting unit (i.e., Aetrium) with the net carrying value of our assets,
including goodwill. The fair value of Aetrium was determined based on quoted
market prices of our common stock, as adjusted for a control premium. Since the
carrying value of our net assets exceeded their fair value, we concluded that
there was a potential impairment. Because there was an indication of a
potential impairment, we completed step two of the impairment test in order to
measure the amount of any impairment loss. In performing the second step of the
impairment test, we compared the aggregate fair values of our non-goodwill
assets and liabilities with the fair value of Aetrium in order to determine the
implied fair value of goodwill. Step two of the impairment test indicated that
the carrying value of our goodwill exceeded its implied fair value by $6.5
million. In accordance with SFAS 142, this impairment charge (net of income
taxes of $0) was recorded in our consolidated statement of operations as a
change in accounting principle effective January 1, 2002.

Aetrium completed its annual goodwill impairment test at December 31,
2002, again using the prescribed two-step process. We completed step one of the
impairment test by comparing the fair value of Aetrium with the net carrying
value of our assets, including goodwill. The fair value of Aetrium was
determined based on quoted market prices of our common stock, as adjusted for a
control premium consistent with that applied in performing our impairment test
at January 1, 2002. Since the carrying value of our net assets exceeded their
fair value, indicating potential impairment, we completed the second step of
the test in order to measure the amount of any impairment loss. In performing
the second step of the impairment test, we compared the aggregate fair values
of our non-goodwill assets and liabilities with the fair value of Aetrium in
order to determine the implied fair value of goodwill. Step two of the
impairment test indicated that the carrying value of our goodwill exceeded its
implied fair value by $0.7 million. This impairment charge is included in
operating expenses in our consolidated statement of operations for the year
ended December 31, 2002. We believe that the following were the most
significant factors that led to the decrease in the public trading market value
of our common stock and the resulting goodwill impairment: the continued
weakness of the world economies; the possibility and uncertainty of war with
Iraq; the continued depressed average selling prices and excess capacity in the
semiconductor industry; the resulting continuation of a record downturn in the
semiconductor equipment industry; the impact of these factors on our financial
position and the results of our operations;

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and the decline in the public trading market value of semiconductor
equipment companies in general in 2002.

The change in the carrying amount of goodwill for the year ended December
31, 2002 was as follows (in thousands):

|                                                                                            |                                                                                                 |   |       |        |  
|------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | - | ----- | ------ | -
|Goodwill balance at December 31, 2001                                                       |                                                                                                 | $ | 7,140 |       
|Intangible assets reclassified to goodwill at
January 1, 2002 upon the adoption of SFAS 142 |                                                                                                 |   | 52    |       
|Goodwill impairment charges:                                                                |                                                                                                 |   |       |       
|                                                                                            |  Impairment charge recorded as a change in accounting
principle upon the adoption of SFAS 142  |   |       | (6,486 | )
|                                                                                            |  Impairment charge recorded at December
31, 2002 upon the completion of annual
impairment test |   |       | (706   | )
|                                                                                            |                                                                                                 |   |       |       
|Goodwill balance at December 31, 2002                                                       |                                                                                                 | $ |      |       
|                                                                                            |                                                                                                 |   |       |       

Unusual Charges:

Fiscal 2001

During 2001, as Aetrium continued to be impacted by the downturn in the
semiconductor equipment industry that began in late 2000, we continued various
restructuring activities to improve operating efficiencies and reduce costs.
In 2001, we completed the transfer of our operations in Poway, California to
North St. Paul, Minnesota, we restructured our operations in Minnesota, we
reduced our facility costs through the consolidation of operations, and we
significantly reduced our workforce. Unusual charges recorded in 2001 related
to these activities were as follows (in thousands):

|                                           |                               |                                               |                             |     |     |       | 
|------------------------------------------ | ----------------------------- | --------------------------------------------- | --------------------------- | --- | --- | ----- | 
|Restructuring charges:                     |                               |                                               |                             |    
|                                           | Severance and related charges |                                               | $                           | 928 |    
|                                           | Facility exit charges:        |                                               |                             |     |    
|                                           |                               | North St. Paul, MN facility                   |                             |     | 606 |      
|                                           |                               | Grand Prairie, TX facility  accrual increase |                             |     | 193 |      
|                                           |                               |                                               |                             |     |    
|                                           |                               |                                               | Total restructuring charges |     |     | 1,727 | 
|Write-down of equipment and leaseholds     |                               |                                               | 215                         |    
|Moving expenses and other transition costs |                               |                                               | 261                         |    
|                                           |                               |                                               |                             |     |    
|                                           |                               |                                               | Total unusual charges       |     | $   | 2,203 | 
|                                           |                               |                                               |                             |     |    

During 2001, in response to declining revenue levels throughout the year,
we implemented workforce reductions in March, April, June, and December. These
workforce reductions included the elimination of 98 positions in manufacturing,
sales, administration, and engineering. We recorded charges of $928,000 for
severance and related costs associated with these terminations. The charges
were recorded in the periods when the restructuring plans were approved by
management, severance benefits were determined, and the affected employees were
notified. The workforce reductions resulted in quarterly cost savings of
approximately $1.3 million.

In May 2001, we consolidated our North St. Paul, Minnesota operations from
two buildings into one and vacated a building that is under lease through
February 2006. We recorded facility exit charges

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of $606,000 for estimated future non-cancelable lease payments and other
facility costs we expected to incur related to the vacated building. Also, in
connection with the vacated facility, we recorded a charge of $215,000 for
abandoned leaseholds and losses on the sale of certain equipment.

Aetrium conducted operations in a leased facility in Grand Prairie, Texas
until that business was transferred to our Dallas, Texas facility in early
2000. We recorded a facility exit charge in 2000 related to the vacated Grand
Prairie facility, for which the lease term ended in June 2003. In late 2001,
due to our inability to locate a subtenant and due to softening economic
conditions, we recorded an additional facility exit charge of $193,000 to cover
the non-cancelable lease payments and other costs we estimated we would incur
until a subtenant could be found.

In 2001, we incurred moving and other transition costs amounting to
$261,000 that were related to restructuring our operations. Of this amount,
approximately $203,000 was incurred in the first quarter primarily related to
the relocation and other final costs associated with the transfer of operations
from Poway, California to Minnesota and $58,000 was related to moving expenses
incurred in the second quarter when we combined our operations in Minnesota
from two buildings into one.

Fiscal 2000

During 2000, we initiated a number of activities to reduce costs and
improve operating efficiencies. These actions included consolidating our two
operations in Texas, closing our Lawrence, Massachusetts facility, and
restructuring our operations in Poway, California. Unusual charges recorded in
2000 related to these activities were as follows (in thousands):

|                                       |                               |                            |                             |                       |     |       |       | 
|-------------------------------------- | ----------------------------- | -------------------------- | --------------------------- | --------------------- | --- | ----- | ----- | 
|Restructuring charges:                 |                               |                            |                             |                      
|                                       | Severance and related charges |                            | $                           | 2,157                 |    
|                                       | Facility exit charges:        |                            |                             |                       |    
|                                       |                               | Grand Prairie, TX facility |                             |                       | 385 |      
|                                       |                               | Lawrence, MA facility      |                             |                       | 101 |      
|                                       |                               | Poway, CA facilities       |                             |                       | 472 |      
|                                       |                               |                            |                             |                       |    
|                                       |                               |                            | Total restructuring charges |                       |     | 3,115 |      
|Write-down of equipment and leaseholds |                               |                            | 495                         |                      
|Write-down of intangible assets        |                               |                            | 415                         |                      
|Other                                  |                               |                            | 51                          |                      
|                                       |                               |                            |                             |                       |    
|                                       |                               |                            |                             | Total unusual charges |     | $     | 4,076 | 
|                                       |                               |                            |                             |                       |    

Consolidation of Texas Operations.

During the first quarter of 2000, we consolidated our two operations in
Texas. Strategically significant manufacturing and development activities being
conducted at our Grand Prairie facility were transferred to our facility in
Dallas. The transfer was completed in mid-March 2000 and the Grand Prairie
facility was closed in late March 2000.

Charges related to this restructuring included the following:
approximately $565,000 for severance and related costs; $385,000 for facility
exit costs, including estimated non-cancelable lease payments and other
facility costs we expected to incur during the estimated time needed to find a
sub-tenant; $121,000 related to the write-down of abandoned leaseholds and
equipment; and $186,000 related to the write-down of impaired intangibles,
primarily capitalized trained workforces. The elimination of 56 positions in
Texas and reduced facility and other costs resulted in quarterly cost savings
of approximately $0.9 million, which reductions were partially offset by
increased costs at the Dallas facility.

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Closure of Lawrence, Massachusetts Facility.

In the first quarter of 2000, we decided to close our Lawrence,
Massachusetts facility. Development activities associated with our proprietary
conductive thermal technology were transferred to our North St. Paul, Minnesota
facility. We sold or licensed certain assets associated with the Lawrence
operation, including the environmental test equipment product line.
Consideration received for these assets was the transferees assumption of
certain future obligations related to the transferred product line and
royalties on future sales. As indicated below, the transferee of the product
line subsequently bought out the royalty contract later in the year. We ceased
operations at our Lawrence facility in late March 2000 and the facility was
vacated in May 2000.

Charges related to closing this facility included approximately $844,000
for severance and related costs and $101,000 for facility exit costs, including
rent, taxes and other facility expenses we incurred during the six weeks from
the time operations ceased until we moved out of the facility. In addition, we
recorded charges in the first quarter of $229,000 related to impaired
intangibles associated with the transferred product line and $672,000 for
losses on the sale of the business assets and abandoned leaseholds. The charge
related to the loss on the sale of the business assets was subsequently reduced
by $629,000 in the second half of 2000 for cash proceeds we received pursuant
to the royalty contract, resulting in a net charge of $43,000. The elimination
of 38 positions in Lawrence and reduced facility costs resulted in quarterly
cost savings of approximately $0.6 million, which reductions were partially
offset by increased costs at our Minnesota facility.

Poway, California Restructuring.

In the second quarter of 2000, we announced that we would transfer
manufacturing and certain administrative functions at our Poway, California
facility to our North St. Paul, Minnesota operation. Certain marketing and
engineering activities were to remain in Poway. The restructuring plan
included a workforce reduction, vacating a leased 45,000 square-foot building,
and transferring the remaining marketing and engineering personnel to a 10,000
square-foot facility nearby. This action resulted in the elimination of 20
positions in manufacturing, engineering, accounting and administration. The
lease for the 45,000 square-foot facility was subsequently assigned to a third
party.

In October 2000, we announced our intention to transfer the remaining
marketing and engineering operations in Poway to North St. Paul and to close
the Poway facility. Prior to December 31, 2000, management approved the
restructuring plan that included the elimination of an additional 20 positions
in engineering and administration and closing the facility by March 31, 2001.
The affected employees were identified and notified of the terminations and
related severance benefits prior to December 31, 2000. Some employees were
terminated prior to December 31, 2000 with the remaining termination dates
scheduled for March 31, 2001 or sooner. We subleased the 10,000 square-foot
facility to a third party, effective April 1, 2001.

Charges related to the Poway restructuring during 2000 included
approximately $748,000 for severance and related costs, $472,000 for facility
exit costs, and $331,000 related to the write-down of abandoned leaseholds and
equipment. The severance costs were related to the elimination of a total of 40
positions. The facility exit costs were related to exiting both facilities and
included noncancellable lease payments and other operating costs incurred after
vacating as well as costs incurred to sublease the facilities.

The elimination of 40 positions and reduced facility and other costs
associated with the Poway restructuring represented quarterly cost savings of
approximately $1.0 million. These cost reductions were partially realized in
the second half of 2000 after the second quarter restructuring with the balance
of

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the estimated savings being realized after the facility closed on March
31, 2001. These cost decreases were partially offset by increases at the North
St. Paul, Minnesota facility related to the transfer of operations.

The following table summarizes severance and facility exit restructuring
charges and the associated accrual activity for the three years ended December
31, 2002 (in thousands):

|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |        |     | 
|---------------------------------- | ----------------------------- | --------------------------------------------- | --- | ------------- | - | ---------- | --- | ----- | --- | - | ----- | ------ | --- | 
|                                   |                               |                                               |     | Severance &   |   | Facility   |     |       |     |  
|                                   |                               |                                               |     | Related Costs |   | Exit Costs |     | Total
|                                   |                               |                                               |     |               |   |            |     |      
|Accrual balance, December 31, 1999 |                               | $                                             |    |               |   | $          |    |       |     | $ |      |       
|                                   | Severance and related charges |                                               |     | 2,157         |   |            |     |      |     |   |       | 2,157  |    
|                                   | Facility exit charges:        |                                               |     |               |   |            |     |       |     |   |       |        |    
|                                   |                               | Grand Prairie, TX facility                    |     |               |  |            |     |       | 385 |   |       |        | 385 | 
|                                   |                               | Lawrence, MA facility                         |     |               |  |            |     |       | 101 |   |       |        | 101 | 
|                                   |                               | Poway, CA facilities                          |     |               |  |            |     |       | 472 |   |       |        | 472 | 
|                                   | Cash payments                 |                                               |     | (1,666        | ) |            |     | (653  | )   |   |       | (2,319 | )  
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       
|Accrual balance, December 31, 2000 |                               |                                               | 491 |               |   |            | 305 |       |     |   | 796   |       
|                                   | Severance and related charges |                                               |     | 928           |   |            |     |      |     |   |       | 928    |    
|                                   | Facility exit charges:        |                                               |     |               |   |            |     |       |     |   |       |        |    
|                                   |                               | North St. Paul, MN facility                   |     |               |  |            |     |       | 606 |   |       |        | 606 | 
|                                   |                               | Grand Prairie, TX facility  accrual increase |     |               |  |            |     |       | 193 |   |       |        | 193 | 
|                                   | Cash payments                 |                                               |     | (1,015        | ) |            |     | (400  | )   |   |       | (1,415 | )  
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       
|Accrual balance, December 31, 2001 |                               |                                               | 404 |               |   |            | 704 |       |     |   | 1,108 |       
|                                   | Cash payments                 |                                               |     | (404          | ) |            |     | (329  | )   |   |       | (733   | )  
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       
|Accrual balance, December 31, 2002 |                               | $                                             |    |               |   | $          | 375 |       |     | $ | 375   |       
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       

In May 2002, we negotiated an early buyout and termination of the lease
for the vacant facility in Grand Prairie, Texas. The remaining $375,000
accrual for facility exit costs at December 31, 2002 is primarily related to
the vacated building in North St. Paul, Minnesota and we estimate the accrual
will be utilized at the rate of approximately $25,000 per quarter.

Other Income, Net:

Other income, net, which consists primarily of interest income from the
investment of excess funds, amounted to $91,000 in 2002, compared with $248,000
in 2001 and $429,000 in 2000. The decreases are attributable to lower average
cash balances during each year and generally declining interest rates.

Income Taxes:

In the fourth quarter of 2000, due to then recent operating losses and
weakening industry conditions in late 2000 and early 2001, we recorded a
valuation allowance against our deferred tax assets and we determined that we
would not record any income tax expense or benefit in the future until we are
consistently profitable on a quarterly basis. Therefore, no income tax benefit
related to current operations was recorded in 2002 and 2001. However, we did
record income tax benefits of $0.4 million in the third quarter of 2002 and
$0.2 million in the third quarter of 2001 related to refunds of income taxes
paid and expensed prior to 2001. Refunds received in 2002 resulted from tax
legislation enacted in 2002.

Financial Condition, Liquidity and Capital Resources:

Cash and cash equivalents decreased by $1.4 million in 2002 to $5.8
million. We used $1.3 million of cash in operating activities in 2002. The
major components of cash flows used in operating

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activities were a net loss of $9.3 million and decreases in other accrued
liabilities of $1.9 million, partially offset by $7.2 million in non-cash
goodwill impairment charges, $1.3 million in non-cash depreciation and
amortization expense and a decrease in inventories of $1.5 million. The
decrease in other accrued liabilities reflects payments of accrued severance
and other restructuring costs during the year and a decrease in customer
deposits and deferred revenue due primarily to lower sales volumes. Inventories
decreased throughout 2002 as a result of deliberate inventory reduction
initiatives implemented beginning in 2001.

Cash and cash equivalents decreased by $2.0 million in 2001 to $7.2
million. We used $1.9 million of cash in operating activities in 2001. The
major components of cash flows used in operating activities were a net loss of
$10.7 million and decreases in accounts payable of $3.2 million, accrued
compensation of $1.0 million, and other accrued liabilities of $1.9 million,
partially offset by $2.2 million in non-cash depreciation and amortization
expense, write-downs of the carrying value of inventories of $3.7 million,
restructuring charges of $1.7 million and a decrease in accounts receivable of
$6.5 million. The decreases in accounts payable and accounts receivable are
primarily attributable to lower production and revenue levels in late 2001
compared to the prior year due to the severe downturn in the semiconductor
industry. The decrease in accrued compensation is due to workforce reductions
and wage reductions we implemented in 2001 in response to the semiconductor
industry downturn.

Cash and cash equivalents decreased by $4.1 million in 2000 to $9.1
million. We used $3.7 million of cash in operating activities in 2000. The
major components of cash flows used in operating activities were a net loss of
$22.5 million, increases in accounts receivable of $1.9 million and inventories
of $3.3 million and a decrease in other accrued liabilities of $2.6 million,
partially offset by $2.6 million in non-cash depreciation and amortization
expense, a $15.4 million non-cash decrease in deferred taxes, $2.9 million in
write-downs of inventories and other assets and $3.1 million in restructuring
charges. Despite higher sales volume, receivables decreased in 2000 due to the
fourth quarter adoption of SAB101, which has the effect of shortening the
length of time receivables are outstanding because we do not record the
receivable upon shipment in cases where customer acceptance provisions cause us
to defer revenue recognition. Inventories and accounts payable increased in
2000 due to increased production and sales activity in late 2000 compared to
1999. Also, a portion of the increase in inventories is attributable to the
inclusion of equipment at customer sites for which revenue is deferred until
installation and/or acceptance is completed. The decrease in deferred taxes
resulted from the establishment of a valuation allowance in 2000.

Our use of cash in investing activities in 2002, 2001 and 2000 related
principally to expenditures for property and equipment, which amounted to
$41,000, $71,000, and $599,000, respectively. In November 2001, we purchased
426,410 shares of our common stock for $544,000 from a shareholder group. In
December 2001, we sold the same number of shares of our stock to the same group
for the same purchase price.

We believe our cash and short-term investments of $5.8 million at December
31, 2002 will be sufficient to meet capital expenditure and working capital
needs for at least the next twelve months. Historically, we have supported our
capital expenditure and working capital needs with cash generated from
operations, and in the long term we expect to continue to do the same. However,
a prolonged continuation of the current industry downturn or future
semiconductor industry downturns could negatively impact the demand for and
price of our products and adversely affect future cash flows. Also, we may
acquire other companies, product lines or technologies that are complementary
to our business, and our working capital needs may change as a result of such
acquisitions.

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As of December 31, 2002, we had no outstanding long-term debt. We have a
line of credit with a bank that provides for borrowings of up to the lesser of
$5.0 million, or 80% of eligible accounts receivable and 50% of eligible
inventory. The line of credit is collateralized by receivables and inventories.
There were no line of credit advances outstanding as of December 31, 2002 and
2001. At December 31, 2002, we had $1.8 million available to borrow under the
line of credit. Borrowings on this line of credit are on a demand basis.

Future minimum annual lease payments under operating leases as of December
31, 2002 are as follows (in thousands):

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|2003                         |  | $ | 620   | 
|2004                         |  |   | 437   | 
|2005                         |  |   | 437   | 
|2006                         |  |   | 55    | 
|                             |  |   |       | 
|Total minimum lease payments |  | $ | 1,549 | 
|                             |  |   |       | 

The above minimum lease payments have not been reduced by minimum sublease
rentals of $0.3 million due in the future under noncancellable subleases.

The above minimum lease payments do not include the facility lease that
has been assigned to a third party and on which we remain contingently liable.
The lease expires in January 2010 and minimum remaining payments amount to $3.8
million as of December 31, 2002.

In January 2003, we signed an agreement to extend the lease for our
facility in Dallas, Texas for three years. The lease provides for an initial annual base rent
of approximately $132,000 with increases of approximately 5% annually through
April 2006. The above minimum lease payments do not reflect this lease extension.

On March 5, 2003, we received a letter from The Nasdaq Stock Market, Inc.
regarding our noncompliance with the qualification standards for continued
listing of our common stock on The Nasdaq National Market as a result of the
closing bid price of our common stock being less than $1.00 for thirty
consecutive business days. As is more fully described under the caption
Business Risks and Uncertainties: Failure to meet The Nasdaq National Market
Listing Requirements in this Item 7, we may have until May 30, 2004 to regain
compliance with the minimum closing bid price requirement before being delisted
from The Nasdaq National and SmallCap Markets. We have no present plans to
raise capital through the equity markets. However, if our common stock is
delisted from The Nasdaq National and SmallCap Markets, the liquidity of our
common stock could be impaired, and prices for the shares of our common stock
could be lower than might otherwise prevail.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
141 also specifies the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart
from goodwill. We made no acquisitions after June 30, 2001 and, therefore, SFAS
No. 141 had no impact on our 2002 or 2001 results.

We adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets on January 1, 2002. SFAS 144 supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of; however, it retains the fundamental provisions of SFAS 121
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and

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the measurement of long-lived assets to be disposed of by sale. The
adoption of SFAS 144 had no impact on our financial position or results from
operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 requires that costs
associated with exit or disposal activities be recognized when they are
incurred rather than at the time of commitment to an exit or disposal plan.
SFAS 146 also changes the methods of measuring certain exit costs. SFAS 146 is
effective for all exit and disposal activities initiated after December 31,
2002. We will apply this standard to exit or disposal activities initiated
after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition Disclosure  an amendment of SFAS No.
123. This Statement amends SFAS 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the
effect of the method used on reported results. SFAS 148 is effective for fiscal
years ending after December 15, 2002, and disclosure requirements are effective
for interim periods beginning after December 15, 2002. We intend to continue
to account for stock-based compensation using the intrinsic value method
prescribed by APB Opinion No. 25 and related interpretations. We have included
disclosures required by SFAS 148 in our Consolidated Financial Statements included in this Annual Report on Form 10-K and will begin making the additional
disclosures required by SFAS 148 for interim period reporting in the first
quarter of 2003. Accordingly, the adoption of SFAS 148 will not impact our
financial position or results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures required in financial statements concerning obligations under
certain guarantees. It also clarifies the requirements related to the
recognition of liabilities by a guarantor at the inception of certain
guarantees. The disclosure requirements of this interpretation were effective
for Aetrium on December 31, 2002 and, accordingly, are reflected in our
financial statement disclosures related to accounting for warranty costs. The
recognition provisions of the interpretation are effective for Aetrium in 2003
and are applicable only to guarantees issued or modified after December 31,
2002. We do not expect the adoption of this interpretation to have a material
impact on our financial position or results of operations.

Business Risks and Uncertainties:

Several important risks and uncertainties exist which could have an impact
on our future operating results. These factors could cause our actual results
to differ materially from our anticipated results or results that are reflected
in any forward-looking statements in this Annual Report on Form 10-K. These
factors, and their impact on the success of our operations and our ability to
achieve our goals, include the following:

Market Fluctuations in the Semiconductor Industry

Our business and results of operations depend upon capital expenditures by
manufacturers of ICs and discrete electronic components. As a result, our
operating results are materially dependent upon economic and business
conditions in the semiconductor industry. This industry has been subject to
significant market fluctuations and has experienced periodic downturns, which
often have had a disproportionate effect on capital equipment suppliers, such
as Aetrium. In periods of excess capacity, the semiconductor industry sharply reduces
purchases of capital equipment, such as our products. A

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downturn or slowdown in the semiconductor industry could substantially
reduce our revenues and operating results and could harm our financial
condition. In 2001 and 2002, the semiconductor industry experienced a severe
downturn of unprecedented magnitude. The severe downturn experienced in the
semiconductor industry over the past several quarters has reduced our revenues,
and we expect that our revenues will remain at reduced levels until
semiconductor industry capital expenditures increase.

Fixed Cost Constraints on Reduction of Expenses

Many of our expenses, particularly those relating to properties, capital
equipment and certain manufacturing overhead items, are fixed in the short
term. Accordingly, reduced demand for our products and services causes our
fixed production costs to be allocated across reduced production volumes, which
negatively affects our gross margins and profitability. Our ability to reduce
expenses is further constrained because we must continue to invest in research
and development to maintain our competitive position and to maintain service
and support for our existing customer base. The cost reduction efforts we took
in 2001 resulted in an improvement in our gross margins in 2002. However, at
current revenue levels we expect that our gross margins will continue to be
negatively affected by reduced production volumes. Our current visibility on
our future operating results is severely limited given the continuing impact of
the semiconductor industry downturn in 2001 and 2002, and we cannot accurately
predict if or when the production volumes will increase or if or when our
operating results will improve.

Impact of Cost Reduction and Reorganization Actions

During the course of 2001 and 2002, as the downturn in the semiconductor
industry continued to deepen, we implemented cost reduction and reorganization
actions to address our declining revenues, such as workforce reductions,
consolidation of operations, pay freezes and reductions, and reductions in
other expenditures. In the event our revenue levels decline further, we may
elect to implement additional cost reduction actions to conserve our cash. Our
reduced personnel and expenditure levels and the loss of the capabilities of
personnel we have terminated could inhibit us in the timely completion of
product development efforts, the effective service of and responsiveness to
customer requirements, and the timely ramp up of production in response to
eventual improving market conditions.

Successful Development and Introduction of New Products and Product Improvements

We operate in an industry that is highly competitive with respect to
timely product innovations. The market for our products is characterized by
rapid technological change and evolving industry standards. The development of
more complex ICs has driven the need for new equipment and processes to produce
such devices at an acceptable cost. We believe that our future success will
depend in part upon our ability to anticipate changes in technologies, IC and
discrete electronic component package types, market trends and industry
standards. If we cannot successfully develop and introduce new and enhanced
cost-effective products on a timely basis that are accepted in the marketplace,
our business and operating results would likely suffer.

Reliance on Significant Customers

We rely on a limited number of customers for a substantial percentage of
our net sales. A reduction, delay or cancellation of orders from one or more of
these significant customers, or the loss of one or more of these customers,
would likely negatively impact our operating results.

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Reduction in the Sales Efforts by our Current Distributors

We market and sell our test handlers and reliability test products outside
of the United States primarily through international distributors that are not
under our direct control. We have limited internal sales personnel. A
reduction in the sales efforts by our current distributors, or the termination
of one or more of these relationships with Aetrium, could negatively affect our
operating results.

Reduction in our International Sales

We expect that international sales will continue to account for a
significant portion of our net sales. As a result, our operations are subject
to a number of risks inherent in international business activities, which could
negatively impact our operating results

Failure to Retain our IC Processing Equipment OEMs

We market our Automation Modules product line to a limited number of IC
processing equipment OEMs. Our ability to retain our OEM customers and attract
new OEM customers depends upon a number of factors, including the changing
needs and financial condition of these customers. Our failure to retain OEM
customers could result in the loss of Automation Modules product line sales, as
well as the loss of outstanding receivables due from such OEM customers. Our
revenues from our Automation Modules product line were severely impacted by the
record industry downturn in 2001 and 2002 as our OEM customers experienced the
same business conditions that we were experiencing. Because of the excess
capacity that continues to exist for our OEM customers products, we expect
that future revenues from this product line will be increasingly dependent on
our success in having our Automation Modules incorporated into new OEM customer
product introductions.

Supply of Significant Components for our Products

Certain significant components used in our products, including certain
contactor components, printed circuit boards, and refrigeration systems, are
currently available only from sole or limited sources. We do not maintain
long-term supply agreements with most of our suppliers and we purchase most of
our components through individual purchase orders. Our inability to obtain
components in required quantities or of acceptable quality could result in
delays or reductions in product introductions or shipments, which could damage
our relationships with our customers and cause our operating results to suffer.

Failure to meet The Nasdaq National Market Listing Requirements

On March 5, 2003, we received a letter from The Nasdaq Stock Market, Inc.
regarding our noncompliance with the qualification standards for continued
listing of our common stock on The Nasdaq National Market as a result of the
closing bid price of our common stock being less than $1.00 for thirty
consecutive business days. We will be able to maintain our listing if the
closing bid price of our common stock meets or exceeds $1.00 for at least 10
and up to 20 consecutive trading days during the 180 day period ending
September 2, 2003. If we fail to meet such requirement but we submit an
application to transfer our common stock to The Nasdaq SmallCap Market by
September 2, 2003 and our transfer application is approved, and provided our
shareholders equity as of June 30, 2003 is at least $5 million, we would have
an additional 180 days, or until March 1, 2004, to meet the The Nasdaq SmallCap
Market minimum bid requirement to maintain our listing. Under The Nasdaq
SmallCap Market requirement, we would be able to maintain our listing if the
closing bid price of our common stock meets or exceeds $1.00 for 10 consecutive
trading days during this period. If we failed to meet this requirement by March
1, 2004, but our shareholders equity as of September 30, 2003 is at least $5
million, we would be afforded an additional 90 days, or until May 30, 2004, to
meet The Nasdaq SmallCap Market minimum bid

32



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requirement to maintain our listing. If we transfer our common stock to
The Nasdaq SmallCap Market, we may transfer our common stock back to The Nasdaq
National Market without satisfying initial inclusion criteria (which we
currently do not satisfy), if certain conditions are satisfied. These
conditions are that (a) during the 360 day period ending March 4, 2004, the
closing bid price of our common stock meets or exceeds $1.00 for thirty
consecutive trading days, and (b) during the period we are on The National
SmallCap Market we continually maintain compliance with all other requirements
for continued listing on The Nasdaq National Market. For us these requirements
are that (i) we have at least 750,000 shares of common stock publicly held,
(ii) the market value of our publicly held shares is at least $5 million, (iii)
our shareholders equity is at least $10 million, (iv) we have at least 400
shareholders of round lots, and (v) we have at least two registered and active
market makers. We currently meet these criteria.

If our common stock is delisted from The Nasdaq National and SmallCap
Markets, any trading in our common stock would thereafter be conducted in the
over-the-counter market in what are commonly referred to as the pink sheets
or the National Association of Securities Dealers Electronic Bulletin Board.
Consequently, the liquidity of our common stock could be impaired, not only in
the number of shares which could be bought and sold, but also through delays in
the timing of the transactions. As a result, prices for the shares of our
common stock could be lower than might otherwise prevail.

We have no obligation to update the above information, including the
forward-looking statements, in this Annual Report on Form 10-K.




|         |  |                                                            
|-------- |  | -----------------------------------------------------------
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our exposure to interest rate risk relates primarily to our investment
portfolio. As of December 31, 2002, our portfolio consisted primarily of high
quality taxable instruments, such as corporate notes and bonds, money market
funds, and bank repurchase agreements, all with original maturities of less
than three months. Given the short duration of our investments and the size of
our investment portfolio, we do not believe a change in interest rates would
have a significant impact on our financial condition or results of operations.
We generally conduct business in U.S. dollars and, therefore, risks associated
with changes in foreign currency rates are insignificant.




|        |  |                                             
|------- |  | --------------------------------------------
|ITEM 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our Consolidated Financial Statements and the report of our independent
accountants are included elsewhere in this Annual Report on Form 10-K. The
index to this report and the financial statements is included in Item 14 (a)
(1) below.




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

None.

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##### Table of Contents






PART III




|         |  |                                                    
|-------- |  | ---------------------------------------------------
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors of the Registrant

The information under the captions Election of Directors  Information
About Nominees and Election of Directors  Other Information About Nominees
in our 2003 Proxy Statement is incorporated herein by reference.

Executive Officers of the Registrant

The information under the caption Item 4A. Executive Officers of the
Registrant located elsewhere in this Annual Report on Form 10K is incorporated
herein by reference.

Compliance with Section 16(a) of the Exchange Act

The information under the caption Section 16(a) Beneficial Ownership
Reporting Compliance in our 2003 Proxy Statement is incorporated herein by
reference.




|         |  |                        
|-------- |  | -----------------------
|ITEM 11. |  | EXECUTIVE COMPENSATION.

The information under the captions Election of Directors  Compensation
of Directors and Executive Compensation and Other Benefits in our 2003 Proxy
Statement is incorporated herein by reference.




|         |  |                                                                
|-------- |  | ---------------------------------------------------------------
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information under the captions Security Ownership of Certain
Beneficial Owners and Management and Proposal to Approve
the Aetrium Incorporated 2003 Stock Incentive Plan  Equity Compensation Plan Information in
our 2003 Proxy Statement is incorporated herein by reference.




|         |  |                                                
|-------- |  | -----------------------------------------------
|ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information under the caption Certain Relationships and Related
Transactions in our 2003 Proxy Statement is incorporated herein by reference.




|         |  |                         
|-------- |  | ------------------------
|ITEM 14. |  | CONTROLS AND PROCEDURES.

Our President and Chief Executive Officer, our Chief Administrative
Officer and our Treasurer conducted an evaluation of our disclosure controls
and procedures (as defined in Securities Exchange Act Rules 13a-14 and 15d-14)
as of March 1, 2003. Based on their evaluation, they concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of this evaluation.

34



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##### Table of Contents






PART IV




|         |  |                                                                 
|-------- |  | ----------------------------------------------------------------
|ITEM 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  1. Financial Statements of Registrant.

The following Consolidated Financial Statements of Aetrium and the
Independent Accountants Report thereon are included herein:

|                                           |                                                            |      |            |     | 
|------------------------------------------ | ---------------------------------------------------------- | ---- | ---------- | --- | 
|Description                                |                                                            | Page
|                                           |                                                            |     
|Report of Independent Accountants          |                                                            |      | F-1        |    
|                                           |                                                            |      |            |    
|Consolidated Financial Statements:         |                                                            |      |            |    
|                                           |                                                            |      |            |    
|                                           | Consolidated Statements of Operations                      |      |            | F-2 | 
|                                           |                                                            |      |            |    
|                                           | Consolidated Balance Sheets                                |      |            | F-3 | 
|                                           |                                                            |      |            |    
|                                           | Consolidated Statements of Changes in Shareholders Equity |      |            | F-4 | 
|                                           |                                                            |      |            |    
|                                           | Consolidated Statements of Cash Flows                      |      |            | F-5 | 
|                                           |                                                            |      |            |    
|Notes to Consolidated Financial Statements |                                                            |      | F-6  F-21 |    

(a)  2. Financial Statement Schedules of Registrant.

The following financial statement schedule is included herein and should
be read in conjunction with the financial statements referred to above:

Financial Statement Schedule: II. Valuation and Qualifying Accounts

Years ended December 31, 2000, 2001 and 2002 (in thousands)

|                                           |      |      |              |           |  |            |   |       |  |  |   |        |            |  |   |       | 
|------------------------------------------ | ---- | ---- | ------------ | --------- |  | ---------- | - | ----- |  |  | - | ------ | ---------- |  | - | ----- | 
|                                           |      |      | Balance at   |           |  |            |   |       |  |  |   |        | Balance at
|                                           |      |      | beginning of |           |  |            |   |       |  |  |   |        | end of    
|Description                                |      | year |              | Additions |  | Deductions |   | year 
|                                           |      |      |              |           |  |            |   |      
|Allowance for doubtful accounts:           |      |      |              |           |  |            |   |       |  |  |   |        |            |  |   |      
|                                           | 2000 |      | $            | 519       |  |            | $ | 0     |  |  | $ | (5     | )          |  | $ | 514   | 
|                                           | 2001 |      |              | 514       |  |            |   | 0     |  |  |   | (119   | )          |  |   | 395   | 
|                                           | 2002 |      |              | 395       |  |            |   | 0     |  |  |   | (115   | )          |  |   | 280   | 
|Inventory excess and
obsolescence reserve: |      |      |              |           |  |            |   |       |  |  |   |        |            |  |   |      
|                                           | 2000 |      | $            | 3,490     |  |            | $ | 1,749 |  |  | $ | (2,981 | )          |  | $ | 2,258 | 
|                                           | 2001 |      |              | 2,258     |  |            |   | 3,657 |  |  |   | (1,744 | )          |  |   | 4,171 | 
|                                           | 2002 |      |              | 4,171     |  |            |   | 100   |  |  |   | (270   | )          |  |   | 4,001 | 
|Warranty reserve:                          |      |      |              |           |  |            |   |       |  |  |   |        |            |  |   |      
|                                           | 2000 |      | $            | 821       |  |            | $ | 802   |  |  | $ | (1,190 | )          |  | $ | 433   | 
|                                           | 2001 |      |              | 433       |  |            |   | 503   |  |  |   | (481   | )          |  |   | 455   | 
|                                           | 2002 |      |              | 455       |  |            |   | 333   |  |  |   | (383   | )          |  |   | 405   | 

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All other schedules are omitted as the required information is
inapplicable or the information is presented in the financial statements or
related notes.

(a)  3. Exhibits.

The exhibits to this Annual Report on Form 10-K are listed in the Exhibit
Index attached hereto.

If you were one of our shareholders on March 31, 2003 and you want a copy
of any of the exhibits listed or referred to above, we will furnish it to you
at a reasonable cost upon your written request sent to Aetrium Incorporated,
2350 Helen Street, North St. Paul, Minnesota 55109; Attn.: Shareholder
Relations.

The following is a list of each management contract or compensatory plan
or arrangement we are required to file as an exhibit to this Annual Report on
Form 10-K pursuant to Item 14(a)(3):



|1. |  | Form of Incentive Stock Option Agreement (incorporated by reference to
Exhibit 10.6 to our Form 10-KSB for the year ended December 31, 1993)
(File No. 0-22166).                       
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Form of Non-Statutory Stock Option Agreement (incorporated by
reference to Exhibit 10.7 our Form 10-KSB for the year ended December
31, 1993) (File No. 0-22166).                      
|  
|3. |  | 1993 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.2 to our Annual Report on Form 10-K for year ended December
31, 1997) (File No. 0-22166).               
|  
|4. |  | Salary Savings Plan (incorporated by reference to Exhibit 10.3 to our
Registration Statement on Form SB-2) (File No. 33-64962C).                                                       
|  
|5. |  | Employee Stock Purchase Plan (incorporated by reference to Exhibit
99.1 to our Registration Statement on Form S-8) (File No. 33-74616).                                                
|  
|6. |  | Employment Agreement dated April 1, 1986 between Joseph C. Levesque
and us (incorporated by reference to Exhibit 10.6 to our Registration
Statement on Form SB-2) (File No. 33-64962C).
|  
|7. |  | 2003 Stock Incentive Plan (filed herewith electronically).                                                                                                                             

(b)  Reports on Form 8-K.

We did not file any Current Reports on Form 8-K during the fourth quarter
of 2002.

36



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##### Table of Contents



FINANCIAL STATEMENTS AND NOTES THERETO

Report of Independent Accountants

To the Shareholders and Board of Directors of Aetrium Incorporated

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Aetrium Incorporated and its subsidiaries (the Company)
at December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002,
in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement
schedule appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

As described in Note 2 to the consolidated financial statements, effective
January 1, 2000, the Company adopted the provisions of the Securities and
Exchange Commissions Staff Accounting Bulletin No. 101 relating to revenue
recognition.

As described in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota
January 31, 2003

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AETRIUM INCORPORATED
Consolidated Statements of Operations

|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |             |          |            | 
|---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ------------------------ | --------- | ---------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ----------- | -------- | ---------- | 
|Year Ended December 31,                                                            |                                                                                         | 2002                                                                                    |                          | 2001      |            | 2000      
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |           
|Net sales                                                                          |                                                                                         | $                                                                                       | 12,687,755               |           |            | $          | 20,013,852  |            |   | $          | 46,051,881  |            
|                                                                                   | Cost of goods sold                                                                      |                                                                                         |                          | 5,920,062 |            |            |             | 13,032,316 |   |            |             | 23,395,023  |         
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Gross profit                                                                       |                                                                                         |                                                                                         | 6,767,693                |           |            |            | 6,981,536   |            |   |            | 22,656,858  |            
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Operating expenses:                                                                |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|                                                                                   | Selling, general and administrative                                                     |                                                                                         |                          | 7,099,306 |            |            |             | 11,227,602 |   |            |             | 17,473,987  |         
|                                                                                   | Research and development                                                                |                                                                                         |                          | 2,299,089 |            |            |             | 4,694,477  |   |            |             | 8,530,804   |         
|                                                                                   | Goodwill impairment charge                                                              |                                                                                         |                          | 705,731   |            |            |             |           |   |            |             |            |         
|                                                                                   | Unusual charges                                                                         |                                                                                         |                          |          |            |            |             | 2,202,630  |   |            |             | 4,075,536   |         
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|                                                                                   |                                                                                         |                                                                                         | Total operating expenses |           |            | 10,104,126 |             |            |   | 18,124,709 |             |             |          | 30,080,327 | 
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Loss from operations                                                               |                                                                                         |                                                                                         | (3,336,433               | )         |            |            | (11,143,173 | )          |   |            | (7,423,469  | )          
|                                                                                   | Other income, net                                                                       |                                                                                         |                          | 90,506    |            |            |             | 247,864    |   |            |             | 428,917     |         
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Loss before income taxes and cumulative effect of a
change in accounting principle |                                                                                         |                                                                                         | (3,245,927               | )         |            |            | (10,895,309 | )          |   |            | (6,994,552  | )          
|                                                                                   | Income tax benefit (provision)                                                          |                                                                                         |                          | 440,000   |            |            |             | 226,000    |   |            |             | (14,710,000 | )       
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Loss before cumulative effect of a change in
accounting principle                  |                                                                                         |                                                                                         | (2,805,927               | )         |            |            | (10,669,309 | )          |   |            | (21,704,552 | )          
|                                                                                   |                                                                                         | Cumulative effect of a change in accounting principle, net of taxes (See Notes 2 and 5) |                          |           | (6,486,000 | )          |             |            |  |            |             |             | (824,228 | )         
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Net loss                                                                           |                                                                                         | $                                                                                       | (9,291,927               | )         |            | $          | (10,669,309 | )          |   | $          | (22,528,780 | )          
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Loss per common share (basic and diluted):                                         |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|                                                                                   | Loss before cumulative effect of a change in
accounting principle                       |                                                                                         | $                        | (0.30     | )          |            | $           | (1.13      | ) |            | $           | (2.29       | )       
|                                                                                   | Cumulative effect of a change in accounting
principle, net of taxes (See Notes 2 and 5) |                                                                                         |                          | (0.68     | )          |            |             |           |   |            |             | (0.09       | )       
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Net loss                                                                           |                                                                                         | $                                                                                       | (0.98                    | )         |            | $          | (1.13       | )          |   | $          | (2.38       | )          
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            
|Weighted average common shares outstanding
(basic and diluted)                     |                                                                                         |                                                                                         | 9,476,000                |           |            |            | 9,438,000   |            |   |            | 9,466,000   |            
|                                                                                   |                                                                                         |                                                                                         |                          |           |            |            |             |            |   |            |             |            

See accompanying notes to the consolidated financial statements.

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AETRIUM INCORPORATED
Consolidated Balance Sheets

|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |            |            | 
|------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------------------- | ----------- | ---------- | ---------- | --------- | ----------- | ---------- | ---------- | 
|December 31,                                |                                                                                                                                  | 2002                                       |                      | 2001       
|                                            |                                                                                                                                  |                                            |                      |            
|ASSETS                                      |                                                                                                                                  |                                            |                      |             |            |            |           |            
|Current assets:                             |                                                                                                                                  |                                            |                      |             |            |            |           |            
|                                            | Cash and cash equivalents                                                                                                        |                                            | $                    | 5,795,916   |            |            | $         | 7,180,576   |           
|                                            | Accounts receivable, net of allowance for
doubtful accounts of $280,000 and $395,000,
respectively                               |                                            |                      | 1,628,483   |            |            |           | 1,505,182   |           
|                                            | Inventories                                                                                                                      |                                            |                      | 7,358,874   |            |            |           | 8,956,014   |           
|                                            | Other current assets                                                                                                             |                                            |                      | 151,613     |            |            |           | 131,262     |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  |                                            | Total current assets |             |            | 14,934,886 |           |             |            | 17,773,034 | 
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|Property and equipment:                     |                                                                                                                                  |                                            |                      |             |            |            |           |            
|                                            | Furniture and fixtures                                                                                                           |                                            |                      | 597,628     |            |            |           | 597,628     |           
|                                            | Equipment                                                                                                                        |                                            |                      | 2,654,887   |            |            |           | 3,090,780   |           
|                                            | Less accumulated depreciation & amortization                                                                                     |                                            |                      | (2,780,911  | )          |            |           | (2,841,933  | )         
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  | Property and equipment, net                |                      |             | 471,604    |            |           |             | 846,475    |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |            
|Goodwill                                    |                                                                                                                                  |                                            |                     |             |            |            | 7,139,665 |            
|Identifiable intangible assets, net         |                                                                                                                                  |                                            | 2,634,338            |             |            |            | 3,570,892 |            
|Other assets                                |                                                                                                                                  |                                            | 40,670               |             |            |            | 56,362    |            
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  | Total assets                               |                      | $           | 18,081,498 |            |           | $           | 29,386,428 |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |            
|LIABILITIES AND SHAREHOLDERS EQUITY        |                                                                                                                                  |                                            |                      |             |            |            |           |            
|Current liabilities:                        |                                                                                                                                  |                                            |                      |             |            |            |           |            
|                                            | Trade accounts payable                                                                                                           |                                            | $                    | 596,683     |            |            | $         | 676,306     |           
|                                            | Accrued compensation                                                                                                             |                                            |                      | 441,811     |            |            |           | 493,274     |           
|                                            | Other accrued liabilities                                                                                                        |                                            |                      | 1,815,071   |            |            |           | 3,701,163   |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  | Total current liabilities                  |                      |             | 2,853,565  |            |           |             | 4,870,743  |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|Commitments and contingencies (See Note 10) |                                                                                                                                  |                                            |                      |             |            |            |           |            
|Shareholders equity:                       |                                                                                                                                  |                                            |                      |             |            |            |           |            
|                                            | Common stock, $.001 par value; 30,000,000
shares authorized; 9,477,044 and 9,474,566
shares issued and outstanding, respectively |                                            |                      | 9,477       |            |            |           | 9,475       |           
|                                            | Additional paid-in capital                                                                                                       |                                            |                      | 60,250,173  |            |            |           | 60,246,000  |           
|                                            | Accumulated deficit                                                                                                              |                                            |                      | (45,031,717 | )          |            |           | (35,739,790 | )         
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  | Total shareholders equity                 |                      |             | 15,227,933 |            |           |             | 24,515,685 |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           
|                                            |                                                                                                                                  | Total liabilities and shareholders equity |                      | $           | 18,081,498 |            |           | $           | 29,386,428 |           
|                                            |                                                                                                                                  |                                            |                      |             |            |            |           |             |           

See accompanying notes to the consolidated financial statements.

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AETRIUM INCORPORATED
Consolidated Statements of Changes in Shareholders Equity

|                                                                                                |                           |  |              |          |            |   |                 |      |               |   |            |          |       |   |             |   |  |   |             |          |  
|----------------------------------------------------------------------------------------------- | ------------------------- |  | ------------ | -------- | ---------- | - | --------------- | ---- | ------------- | - | ---------- | -------- | ----- | - | ----------- | - |  | - | ----------- | -------- | -
|                                                                                                |                           |  | Common Stock |          |            |   |                 |      |               |   |            |          | Total
|                                                                                                |                           |  |              |          | Additional |   | Accumulated     |      | Shareholders
|                                                                                                |                           |  | Shares       |          | Amount     |   | Paid-in Capital |      | Deficit       |   | Equity    
|                                                                                                |                           |  |              |          |            |   |                 |      |               |   |           
|Balance, December 31, 1999                                                                      |                           |  | 9,436,035    |          |            | $ | 9,436           |      |               | $ | 59,962,417 |          |       | $ | (2,541,701  | ) |  | $ | 57,430,152  |         
|Exercise of stock options                                                                       |                           |  | 39,864       |          |            |   | 40              |      |               |   | 286,336    |          |       |   |            |   |  |   | 286,376     |         
|Surrender of common stock
in connection with exercise
of stock options                          |                           |  | (1,333       | )        |            |   | (1              | )    |               |   | (13,537    | )        |       |   |            |   |  |   | (13,538     | )       
|Tax benefit related to
exercise of stock options                                                |                           |  |             |          |            |   |                |      |               |   | 10,784     |          |       |   |            |   |  |   | 10,784      |         
|Net loss                                                                                        |                           |  |             |          |            |   |                |      |               |   |           |          |       |   | (22,528,780 | ) |  |   | (22,528,780 | )       
|                                                                                                |                           |  |              |          |            |   |                 |      |               |   |            |          |       |   |             |   |  |   |             |         
|Balance, December 31, 2000                                                                      |                           |  | 9,474,566    |          |            |   | 9,475           |      |               |   | 60,246,000 |          |       |   | (25,070,481 | ) |  |   | 35,184,994  |         
|Purchase and sale of common
shares pursuant to stock
purchase and sale agreement
(See Note 11): |                           |  |              |          |            |   |                 |      |               |   |            |          |       |   |             |   |  |   |             |         
|                                                                                                | Purchase of common shares |  |              | (426,410 | )          |   |                 | (426 | )             |   |            | (543,247 | )     |   |             |  |  |   |             | (543,673 | )
|                                                                                                | Sale of common shares     |  |              | 426,410  |            |   |                 | 426  |               |   |            | 543,247  |       |   |             |  |  |   |             | 543,673  |  
|Net loss                                                                                        |                           |  |             |          |            |   |                |      |               |   |           |          |       |   | (10,669,309 | ) |  |   | (10,669,309 | )       
|                                                                                                |                           |  |              |          |            |   |                 |      |               |   |            |          |       |   |             |   |  |   |             |         
|Balance, December 31, 2001                                                                      |                           |  | 9,474,566    |          |            |   | 9,475           |      |               |   | 60,246,000 |          |       |   | (35,739,790 | ) |  |   | 24,515,685  |         
|Exercise of stock options                                                                       |                           |  | 2,478        |          |            |   | 2               |      |               |   | 4,173      |          |       |   |            |   |  |   | 4,175       |         
|Net loss                                                                                        |                           |  |             |          |            |   |                |      |               |   |           |          |       |   | (9,291,927  | ) |  |   | (9,291,927  | )       
|                                                                                                |                           |  |              |          |            |   |                 |      |               |   |            |          |       |   |             |   |  |   |             |         
|Balance, December 31, 2002                                                                      |                           |  | 9,477,044    |          |            | $ | 9,477           |      |               | $ | 60,250,173 |          |       | $ | (45,031,717 | ) |  | $ | 15,227,933  |         
|                                                                                                |                           |  |              |          |            |   |                 |      |               |   |            |          |       |   |             |   |  |   |             |         

See accompanying notes to the consolidated financial statements.

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##### Table of Contents



AETRIUM INCORPORATED
Consolidated Statements of Cash Flows

|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |            |            |          |            |  
|--------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------------------- | ----------------------------------------- | ------------------------------------- | ---------- | ------- | ----------- | --------- | ---------- | ------ | ----------- | ---------- | ---------- | -------- | ---------- | -
|Year Ended December 31,                                                     |                                                                      | 2002                      |                                           | 2001                                  |            | 2000   
|                                                                            |                                                                      |                           |                                           |                                       |            |        
|Cash flows from operating activities:                                       |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|Net loss                                                                    |                                                                      | $                         | (9,291,927                                | )                                     |            | $       | (10,669,309 | )         |            | $      | (22,528,780 | )         
|Adjustments to reconcile net loss to net cash
used in operating activities: |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|                                                                            | Depreciation and amortization                                        |                           |                                           | 1,299,970                             |            |         |             | 2,186,643 |            |        |             | 2,624,316  |           
|                                                                            | Provision for excess and obsolete inventories                        |                           |                                           | 100,000                               |            |         |             | 3,657,017 |            |        |             | 1,749,300  |           
|                                                                            | Write-downs of goodwill, other intangibles,
equipment and leaseholds |                           |                                           | 705,731                               |            |         |             | 214,793   |            |        |             | 1,180,899  |           
|                                                                            | Restructuring charges                                                |                           |                                           |                                      |            |         |             | 1,727,000 |            |        |             | 3,115,000  |           
|                                                                            | Cumulative effect of a change in accounting
principle, net of taxes  |                           |                                           | 6,486,000                             |            |         |             |          |            |        |             | 824,228    |           
|                                                                            | Deferred taxes                                                       |                           |                                           |                                      |            |         |             |          |            |        |             | 15,362,059 |           
|                                                                            | Changes in assets and liabilities:                                   |                           |                                           |                                       |            |         |             |           |            |        |             |            |           
|                                                                            |                                                                      | Accounts receivable       |                                           |                                       | (123,301   | )       |             |           | 6,479,133  |        |             |            | (1,878,279 | )       
|                                                                            |                                                                      | Refundable income taxes   |                                           |                                       |           |         |             |           | 345,329    |        |             |            | (345,329   | )       
|                                                                            |                                                                      | Inventories               |                                           |                                       | 1,497,140  |         |             |           | 70,169     |        |             |            | (3,278,494 | )       
|                                                                            |                                                                      | Other current assets      |                                           |                                       | (20,351    | )       |             |           | 56,364     |        |             |            | 45,402     |         
|                                                                            |                                                                      | Other assets              |                                           |                                       | 15,692     |         |             |           | 29,871     |        |             |            | 78,975     |         
|                                                                            |                                                                      | Trade accounts payable    |                                           |                                       | (79,623    | )       |             |           | (3,186,201 | )      |             |            | 1,946,070  |         
|                                                                            |                                                                      | Accrued compensation      |                                           |                                       | (51,463    | )       |             |           | (1,004,302 | )      |             |            | (69,597    | )       
|                                                                            |                                                                      | Other accrued liabilities |                                           |                                       | (1,886,092 | )       |             |           | (1,854,606 | )      |             |            | (2,552,163 | )       
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|                                                                            |                                                                      |                           |                                           | Net cash used in operating activities |            |         | (1,348,224  | )         |            |        | (1,948,099  | )          |            |          | (3,726,393 | )
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|Cash flows from investing activities:                                       |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|                                                                            | Purchase of property and equipment                                   |                           |                                           | (40,611                               | )          |         |             | (70,798   | )          |        |             | (598,599   | )         
|                                                                            | Proceeds from sale of equipment                                      |                           |                                           |                                      |            |         |             | 67,341    |            |        |             |           |           
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|                                                                            |                                                                      |                           | Net cash used in investing activities     |                                       |            | (40,611 | )           |           |            | (3,457 | )           |            |            | (598,599 | )         
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|Cash flows from financing activities:                                       |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|                                                                            | Net proceeds from sale of common stock                               |                           |                                           | 4,175                                 |            |         |             | 543,673   |            |        |             | 286,376    |           
|                                                                            | Repurchases of common stock                                          |                           |                                           |                                      |            |         |             | (543,673  | )          |        |             | (13,538    | )         
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|                                                                            |                                                                      |                           | Net cash provided by financing activities |                                       |            | 4,175   |             |           |            |       |             |            |            | 272,838  |           
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|Decrease in cash and cash equivalents                                       |                                                                      |                           | (1,384,660                                | )                                     |            |         | (1,951,556  | )         |            |        | (4,052,154  | )         
|Cash and cash equivalents at beginning of year                              |                                                                      |                           | 7,180,576                                 |                                       |            |         | 9,132,132   |           |            |        | 13,184,286  |           
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           
|Cash and cash equivalents at end of year                                    |                                                                      | $                         | 5,795,916                                 |                                       |            | $       | 7,180,576   |           |            | $      | 9,132,132   |           
|                                                                            |                                                                      |                           |                                           |                                       |            |         |             |           |            |        |             |           

See accompanying notes to the consolidated financial statements.

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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

|        |  |                     
|------- |  | --------------------
|NOTE 1: |  | BUSINESS DESCRIPTION

Aetrium designs, manufactures and markets a variety of electromechanical
equipment used by the semiconductor industry to handle and test ICs and
discrete electronic components.

|        |  |                                           
|------- |  | ------------------------------------------
|NOTE 2: |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation:The consolidated financial statements include the
accounts of Aetrium Incorporated and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.

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

Reclassifications:Certain previously reported amounts have been reclassified
to conform to the current year presentation. Such reclassifications had no
impact on previously reported net loss, shareholders equity or cash flows.

Cash Equivalents:Cash equivalents include highly liquid investments purchased
with an original maturity of less than three months.

Inventories:Inventories are valued at the lower of cost or market, with cost
determined on a first-in, first-out basis.

Property and Equipment:Furniture, fixtures and equipment are recorded at cost
and are depreciated using the double declining balance method over estimated
useful lives ranging from three to seven years. When assets are retired or
disposed of, the cost and accumulated depreciation are removed from the
accounts. Depreciation expense was $0.4 million, $0.6 million and $1.0 million
for the years ended December 31, 2002, 2001 and 2000, respectively. Maintenance
and repairs are charged to expense as incurred.

Goodwill and Other Intangible Assets:Effective January 1, 2002, we adopted
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. SFAS 142 provides that goodwill is no longer
amortized, but rather is reviewed for impairment at the beginning of the fiscal
year in which the standard is adopted and at least annually thereafter. SFAS
142 requires a two-step process in the review of goodwill for impairment. In
step one we compare the fair value of our single reporting unit (i.e., Aetrium)
with the net carrying value of our assets, including goodwill. If our fair
value is less than our net asset carrying value, we perform the second step of
the impairment test. In step two, we compare the aggregate fair values of our
non-goodwill assets and liabilities with the fair value of Aetrium in order to
determine the implied fair value of goodwill. See Note 5 for additional
information regarding our adoption of SFAS 142 and the results of our
transitional and annual impairment tests. Prior to January 1, 2002, goodwill,
which reflects the excess of the purchase price of certain entities over the
fair value of the net assets acquired, was amortized on a straight-line basis
primarily over 15 years. Identifiable intangible assets, consisting primarily
of acquired technology, are capitalized at their respective fair values, which
are generally determined using discounted future cash flow techniques and
assumptions appropriate to each situation. Such intangibles are amortized on a
straight-line basis over their estimated useful lives of seven to fifteen
years.

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

Valuation of Long-Lived Assets:Aetrium reviews its identifiable intangible and
other long-lived assets for impairment whenever an event or change in
circumstances indicates that the carrying value of an asset may not be
recoverable. If such an event or change in circumstances occurs and potential
impairment is indicated because the carrying values exceed the estimated future
undiscounted cash flows, we would measure the impairment loss as the amount by
which the carrying value of the asset exceeds its fair value.

Revenue Recognition:Aetriums policy is to recognize revenue on product sales
upon shipment if contractual obligations have been substantially met,
collection of the proceeds is assessed as being reasonably assured, and title
and risk of loss have passed to the customer, which is generally the case for
sales of spare parts, accessories, change kits and some equipment and equipment
upgrade sales. Some equipment or equipment upgrade sales contracts, however,
may include post-shipment obligations to be performed by Aetrium and/or
contractual terms that can only be satisfied after shipment, such as
installation and meeting customer-specified acceptance requirements at the
customers site. In these cases, revenue is not recognized until such
obligations have been completed and there is objective evidence that the
applicable contract terms have been met. In situations where equipment is
shipped but revenue and the related receivable are not recognized, the cost of
the equipment is included in inventories on our balance sheet. We often
receive payments from customers prior to recognizing revenue. For example, we
may receive partial payments prior to shipment, which we record as customer
deposits, or we may receive partial payments after shipment but prior to
recognizing revenue, which we record as deferred revenue. Customer deposits
and deferred revenue are recorded as liabilities and included in Other accrued
liabilities in our consolidated balance sheet. See Notes 7 and 8.

Our revenue recognition policy described above reflects a change in policy that
we implemented in 2000 for certain types of equipment sales. The accounting
change was made in response to guidance provided in SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, or SAB101,
which was issued in final form in late 2000. SAB101 summarizes the SECs views
in applying generally accepted accounting principles to various revenue
recognition issues, including issues related to equipment installation and
customer acceptance. Prior to 2000, our policy was to recognize revenue for
equipment sales upon shipment if title and risk of loss had passed to the
customer, contractual obligations were substantially complete, post-delivery
obligations were inconsequential, and customer acceptance and payment were
reasonably assured. The assessment of whether customer acceptance and payment
were reasonably assured was based on the nature of the acceptance criteria, our
history of acceptance with the equipment and the individual customer, and the
nature and cost of any remaining obligations necessary to obtain acceptance.
In cases where these criteria were not met at the time of shipment, we deferred
all of the revenue on the equipment sale until customer acceptance or payment
was received.

As provided for in SAB101, the accounting change in 2000 was recorded as a
change in accounting principle retroactive to January 1, 2000. The cumulative
effect of the accounting change was an after-tax charge of $0.8 million ($.09 per
share), which included revenue of approximately $3.0 million less cost of sales
and certain related expenses such as commissions. Substantially all of the $3.0
million in deferred revenue was recognized in 2000.

Warranty Costs:Estimated warranty costs are accrued in the period that the
related revenue is recognized. The following table summarizes product warranty
liability accruals and settlements for the three years ended December 31, 2002
(in thousands):

|     |  |              |     |              |  |             |     |        |  |            |        |   |  |   |     | 
|---- |  | ------------ | --- | ------------ |  | ----------- | --- | ------ |  | ---------- | ------ | - |  | - | --- | 
|     |  | Balance at   |     | Accruals for |  |             |     |        |  | Balance at
|     |  | beginning of |     | warranties   |  | Settlements |     | end of
|     |  | year         |     | issued       |  | made        |     | year  
|     |  |              |     |              |  |             |     |       
|2000 |  | $            | 821 |              |  | $           | 802 |        |  | $          | (1,190 | ) |  | $ | 433 | 
|2001 |  |              | 433 |              |  |             | 503 |        |  |            | (481   | ) |  |   | 455 | 
|2002 |  |              | 455 |              |  |             | 333 |        |  |            | (383   | ) |  |   | 405 | 

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

There were no changes in estimates to prior period accruals for any of the
years presented.

Research and Development:Research and development expenditures, which include
software development costs, are expensed as incurred. SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed,
requires the capitalization of certain software development costs once
technological feasibility is established, which we define as the completion of
a working model. To date, the period between achieving technological
feasibility and the general availability of such software that is embedded in
our equipment has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, we have not capitalized
any software development costs.

Income Taxes:Income taxes are accounted for in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred tax assets are recognized for
deductible temporary differences and tax credit carryforwards and deferred tax
liabilities are recognized for taxable temporary differences. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized, or the application of SFAS 109 does not permit management
to conclude thereunder that it is more likely than not that some portion or all
of the deferred tax assets will be realized.

Net Income (Loss) Per Common Share:Basic net income (loss) per share is
computed by dividing net income (loss) by the weighted-average number of common
shares outstanding during each year. Diluted net income (loss) per share is
computed by dividing net income (loss) by the weighted-average number of common
shares and potentially dilutive shares outstanding during each year.
Potentially dilutive shares include stock options using the treasury stock
method. Stock options are not included in the diluted loss per share
calculations in 2002, 2001 and 2000 because they are antidilutive. As of
December 31, 2002, 2001 and 2000, respectively, there were 1,498,746, 1,124,000
and 1,529,417 outstanding stock options that could have potentially impacted
diluted earnings per share.

Stock-Based Employee Compensation:Aetrium has a stock incentive plan that is described
more fully in Note 12. We account for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is
reflected in our consolidated statements of operations, as all options granted
under the plan had an exercise price equal to the market value of the
underlying common stock on the date of grant and all options vest based only
upon continuing employment. The following table illustrates the effect on net
loss and net loss per share if we had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation,to
stock-based compensation (in thousands, except per share amounts):

|                                                                                                                                            |             |      |        |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---- | ------ | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|Year ended Dec. 31,                                                                                                                         |             | 2002 |        | 2001  |   | 2000
|                                                                                                                                            |             |      |        |       |   |     
|Net loss, as reported                                                                                                                       |             | $    | (9,292 | )     |   | $    | (10,669 | )     |   | $ | (22,529 | )    
|Deduct: Total stock-based employee compensation
expense determined under fair value
based method for all grants, net of
related tax effects |             |      | (641   | )     |   |      | (702    | )     |   |   | (439    | )    
|                                                                                                                                            |             |      |        |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                                                          |             | $    | (9,933 | )     |   | $    | (11,371 | )     |   | $ | (22,968 | )    
|                                                                                                                                            |             |      |        |       |   |      |         |       |   |   |         |      
|                                                                                                                                            |             |      |        |       |   |      |         |       |   |   |         |      
|Net loss per basic and diluted share:                                                                                                       |             |      |        |       |   |      |         |       |   |   |         |      
|                                                                                                                                            | As reported |      | $      | (0.98 | ) |      | $       | (1.13 | ) |   | $       | (2.38 | )
|                                                                                                                                            | Pro forma   |      | $      | (1.05 | ) |      | $       | (1.20 | ) |   | $       | (2.43 | )

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

Comprehensive Income (Loss):Aetriums comprehensive loss is equal to its net
loss for all periods presented.

Repurchases of Common Stock:Aetrium accounts for repurchased shares as
retirements. The par value of repurchased shares is charged to the common
stock account and the excess of the purchase cost over par value is charged to
additional paid-in capital.

|        |  |                                 
|------- |  | --------------------------------
|NOTE 3: |  | RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
141 also specifies the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and reported apart
from goodwill. We made no acquisitions after June 30, 2001 and, therefore, SFAS
No. 141 had no impact on our 2002 or 2001 results.

We adopted SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets on January 1, 2002. SFAS 144 supercedes SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of; however, it retains the fundamental provisions of SFAS 121
related to the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. The adoption of SFAS 144 had no impact on our financial
statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 requires that costs associated
with exit or disposal activities be recognized when they are incurred rather
than at the time of commitment to an exit or disposal plan. SFAS 146 is
effective for all exit and disposal activities initiated after December 31,
2002. We will apply this standard to exit or disposal activities initiated
after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition Disclosure  an amendment of SFAS No. 123. This
Statement amends SFAS 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. SFAS 148 is effective for fiscal years ending after December
15, 2002, and disclosure requirements are effective for interim periods
beginning after December 15, 2002. We intend to continue to account for
stock-based compensation using the intrinsic value method prescribed by APB
Opinion No. 25 and related interpretations. We have included disclosures
required by SFAS 148 in our consolidated financial statements for the year
ended December 31, 2002 and will begin making the additional disclosures
required by SFAS 148 for interim period reporting in the first quarter of 2003.
Accordingly, the adoption of SFAS 148 will not impact our financial position
or results of operations.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures required in financial statements concerning obligations under
certain guarantees. It also clarifies the requirements related to the
recognition of liabilities by a guarantor at the inception of certain
guarantees. The disclosure requirements of this interpretation were effective
for Aetrium on December 31, 2002 and, accordingly, are reflected in our
financial statement disclosures related to accounting for warranty costs. The
recognition provisions of the interpretation are effective for Aetrium in 2003
and are applicable only to guarantees issued or modified after December 31,
2002. We

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

do not expect the adoption of this interpretation to have a material impact on
our financial position or results of operations.

|        |  |                                                 
|------- |  | ------------------------------------------------
|NOTE 4: |  | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash payments (refunds) for interest and income taxes were as follows (in
thousands):

|                             |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|Year ended Dec. 31,          |  | 2002 |      | 2001 |  | 2000
|                             |  |      |      |      |  |     
|Interest paid                |  | $    | 11   |      |  | $    | 11   |   |  | $ | 19   |  
|Income taxes (refunded), net |  | $    | (440 | )    |  | $    | (631 | ) |  | $ | (307 | )

|        |  |                                                                      
|------- |  | ---------------------------------------------------------------------
|NOTE 5: |  | GOODWILL AND OTHER INTANGIBLE ASSETS  CHANGE IN ACCOUNTING PRINCIPLE

Effective January 1, 2002, Aetrium adopted SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS 142 provides that goodwill is no longer amortized, but
rather is reviewed for impairment at the beginning of the fiscal year in which
the standard is adopted and at least annually thereafter. In accordance with
SFAS 142, we evaluated our existing goodwill and intangible assets as of
January 1, 2002 and determined that certain intangibles did not meet the
criteria for recognition apart from goodwill as set forth in SFAS 141,
Business Combinations. Therefore, the aggregate carrying value of these
intangibles as of January 1, 2002 in the amount of $51,966 was reclassified to
goodwill. We also reassessed the useful lives of our acquired identifiable
intangible assets at January 1, 2002 and determined that no adjustments to the
remaining amortization periods were necessary.

The adoption of SFAS 142 required that we complete a transitional goodwill
impairment test as of January 1, 2002 using a two-step process. We completed
step one of the impairment test by comparing the fair value of our single
reporting unit (i.e., Aetrium) with the net carrying value of our assets,
including goodwill. The fair value of Aetrium was determined based on quoted
market prices of our common stock, as adjusted for a control premium. Since the
carrying value of our net assets exceeded their fair value, we concluded that
there was a potential impairment. Because there was an indication of a
potential impairment, we completed step two of the impairment test in order to
measure the amount of any impairment loss. In performing the second step of the
impairment test, we compared the aggregate fair values of our non-goodwill
assets and liabilities with the fair value of Aetrium in order to determine the
implied fair value of goodwill. Step two of the impairment test indicated that
the carrying value of our goodwill exceeded its implied fair value by $6.5
million. In accordance with SFAS 142, this impairment charge (net of income
taxes of $0) was recorded in our consolidated statement of operations as a
change in accounting principle effective January 1, 2002.

Aetrium completed its annual goodwill impairment test at December 31, 2002,
again using the prescribed two-step process. We completed step one of the
impairment test by comparing the fair value of Aetrium with the net carrying
value of our assets, including goodwill. The fair value of Aetrium was
determined based on quoted market prices of our common stock, as adjusted for a
control premium consistent with that applied in performing our impairment test
at January 1, 2002. Since the carrying value of our net assets exceeded their
fair value, indicating potential impairment, we completed the second step of
the test in order to measure the amount of any impairment loss. In performing
the second step of the impairment test, we compared the aggregate fair values
of our non-goodwill assets and liabilities with the fair value of Aetrium in
order to determine the implied fair value of goodwill. Step two of the
impairment test indicated that the carrying value of our goodwill exceeded its
implied fair value by $0.7 million. This impairment charge is included in
operating expenses in our consolidated statement of operations for the year
ended December 31, 2002. We believe that the following were the most
significant factors that led to

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

the decrease in the public trading market value of our common stock and the
resulting goodwill impairment: the continued weakness of the world economies;
the possibility and uncertainty of war with Iraq; the continued depressed
average selling prices and excess capacity in the semiconductor industry; the
resulting continuation of a record downturn in the semiconductor equipment
industry; the impact of these factors on our financial position and the results
of our operations; and the decline in the public trading market value of
semiconductor equipment companies in general in 2002.

The change in the carrying amount of goodwill for the year ended December 31,
2002 was as follows (in thousands):

|                                                                                            |                                                                                                 |   |       |        |  
|------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | - | ----- | ------ | -
|Goodwill balance at December 31, 2001                                                       |                                                                                                 | $ | 7,140 |       
|Intangible assets reclassified to goodwill at
January 1, 2002 upon the adoption of SFAS 142 |                                                                                                 |   | 52    |       
|Goodwill impairment charges:                                                                |                                                                                                 |   |       |       
|                                                                                            |  Impairment charge recorded as a change in accounting
principle upon the adoption of SFAS 142  |   |       | (6,486 | )
|                                                                                            |  Impairment charge recorded at December
31, 2002 upon the completion of annual
impairment test |   |       | (706   | )
|                                                                                            |                                                                                                 |   |       |       
|Goodwill balance at December 31, 2002                                                       |                                                                                                 | $ |      |       
|                                                                                            |                                                                                                 |   |       |       

Identifiable intangible assets are comprised of the following (in thousands):

|                                                   |       |      |       |       |              |   |             |        |       |   |              |       |     |   |       |       |             |   |        |        |   |   |       |       | 
|-------------------------------------------------- | ----- | ---- | ----- | ----- | ------------ | - | ----------- | ------ | ----- | - | ------------ | ----- | --- | - | ----- | ----- | ----------- | - | ------ | ------ | - | - | ----- | ----- | 
|December 31,                                       |       | 2002 |       | 2001 
|                                                   |       |      |       |      
|                                                   |       |      |       |       |              |   | Accumulated |        |       |   |              |       |     |   |       |       | Accumulated |   |        |        |  
|                                                   |       |      | Gross |       | amortization |   | Net         |        | Gross |   | amortization |       | Net
|                                                   |       |      |       |       |              |   |             |        |       |   |              |       |    
|Developed technology                               |       | $    | 2,600 |       |              | $ | (1,799      | )      |       | $ | 801          |       |     | $ | 2,600 |       |             | $ | (1,442 | )      |   | $ | 1,158 |      
|Core technology                                    |       |      | 3,167 |       |              |   | (1,962      | )      |       |   | 1,205        |       |     |   | 3,167 |       |             |   | (1,556 | )      |   |   | 1,611 |      
|Customer list                                      |       |      | 1,100 |       |              |   | (523        | )      |       |   | 577          |       |     |   | 1,100 |       |             |   | (413   | )      |   |   | 687   |      
|Intangible assets
reclassified
to goodwill in 2002 |       |      |      |       |              |   |            |        |       |   |             |       |     |   | 123   |       |             |   | (71    | )      |   |   | 52    |      
|Other                                              |       |      | 99    |       |              |   | (48         | )      |       |   | 51           |       |     |   | 99    |       |             |   | (36    | )      |   |   | 63    |      
|                                                   |       |      |       |       |              |   |             |        |       |   |              |       |     |   |       |       |             |   |        |        |   |   |       |      
|                                                   | Total |      | $     | 6,966 |              |   | $           | (4,332 | )     |   | $            | 2,634 |     |   | $     | 7,089 |             |   | $      | (3,518 | ) |   | $     | 3,571 | 
|                                                   |       |      |       |       |              |   |             |        |       |   |              |       |     |   |       |       |             |   |        |        |   |   |       |      

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

The following table shows adjusted results if goodwill had not been amortized
for the years ended December 31, 2001 and 2000 (in thousands, except per share
amounts):

|                                      |                                 |  |      |         |      |  |   |         |  
|------------------------------------- | ------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                      |                                 |  | 2001 |         | 2000
|                                      |                                 |  |      |         |     
|Net loss:                             |                                 |  |      |         |      |  |   |        
|                                      | Reported net loss               |  | $    | (10,669 | )    |  | $ | (22,529 | )
|                                      | Add back: goodwill amortization |  |      | 713     |      |  |   | 713     |  
|                                      |                                 |  |      |         |      |  |   |         |  
|                                      | Adjusted net loss               |  | $    | (9,956  | )    |  | $ | (21,816 | )
|                                      |                                 |  |      |         |      |  |   |         |  
|                                      |                                 |  |      |         |      |  |   |        
|Net loss per basic and diluted share: |                                 |  |      |         |      |  |   |        
|                                      | Reported net loss               |  | $    | (1.13   | )    |  | $ | (2.38   | )
|                                      | Add back: goodwill amortization |  |      | .08     |      |  |   | .08     |  
|                                      |                                 |  |      |         |      |  |   |         |  
|                                      | Adjusted net loss               |  | $    | (1.05   | )    |  | $ | (2.30   | )
|                                      |                                 |  |      |         |      |  |   |         |  

Goodwill and intangible amortization expense amounted to $0.8 million, $1.6
million and $1.6 million in 2002, 2001 and 2000, respectively. Estimated
amortization expense for the next five years is as follows: 2003  $0.9
million; 2004  $0.9 million; 2005  $0.5 million; 2006  $0.2 million; 2007 -
$0.2 million.

|        |  |                
|------- |  | ---------------
|NOTE 6: |  | UNUSUAL CHARGES

Fiscal 2001

During 2001, as Aetrium continued to be impacted by the downturn in the
semiconductor equipment industry that began in late 2000, we continued various
restructuring activities to improve operating efficiencies and reduce costs.
In 2001, we completed the transfer of our operations in Poway, California to
North St. Paul, Minnesota; we restructured our operations in Minnesota; we
reduced our facility costs through the consolidation of operations; and we
significantly reduced our workforce. Unusual charges recorded in 2001 related
to these activities were as follows (in thousands):

|                                           |                               |                                               |                             |     |     |       | 
|------------------------------------------ | ----------------------------- | --------------------------------------------- | --------------------------- | --- | --- | ----- | 
|Restructuring charges:                     |                               |                                               |                             |    
|                                           | Severance and related charges |                                               | $                           | 928 |    
|                                           | Facility exit charges:        |                                               |                             |     |    
|                                           |                               | North St. Paul, MN facility                   |                             |     | 606 |      
|                                           |                               | Grand Prairie, TX facility  accrual increase |                             |     | 193 |      
|                                           |                               |                                               |                             |     |    
|                                           |                               |                                               | Total restructuring charges |     |     | 1,727 | 
|Write-down of equipment and leaseholds     |                               |                                               | 215                         |    
|Moving expenses and other transition costs |                               |                                               | 261                         |    
|                                           |                               |                                               |                             |     |    
|                                           |                               |                                               | Total unusual charges       |     | $   | 2,203 | 
|                                           |                               |                                               |                             |     |    

During 2001, in response to declining revenue levels throughout the year, we
implemented workforce reductions in March, April, June, and December. These
workforce reductions included the elimination of 98 positions in manufacturing,
sales, administration, and engineering. We recorded charges of $928,000 for
severance and related costs associated with these terminations. The charges
were recorded in the periods when the restructuring plans were approved by
management, severance benefits were determined, and the affected employees were
notified.

In May 2001, we consolidated our North St. Paul, Minnesota operations from two
buildings into one and vacated a building that is under lease through February
2006. We recorded facility exit charges of $606,000 for estimated future
non-cancelable lease payments and other facility costs we expected to incur
related to the vacated building. Also, in connection with the vacated facility,
we recorded a charge of $215,000 for abandoned leaseholds and losses on the
sale of certain equipment.

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

Aetrium conducted operations in a leased facility in Grand Prairie, Texas until
that business was transferred to our Dallas, Texas facility in early 2000. We
recorded a facility exit charge in 2000 related to the vacated Grand Prairie
facility, for which the lease term ended in June 2003. In late 2001, due to our
inability to locate a subtenant and due to softening economic conditions, we
recorded an additional facility exit charge of $193,000 to cover the
non-cancelable lease payments and other costs we estimated we would incur until
a subtenant could be found.

In 2001, we incurred moving and other transition costs amounting to $261,000
that were related to restructuring our operations. Of this amount,
approximately $203,000 was incurred in the first quarter primarily related to
the relocation and other final costs associated with the transfer of operations
from Poway, California to Minnesota and $58,000 was related to moving expenses
incurred in the second quarter when we combined our operations in Minnesota
from two buildings into one.

Fiscal 2000

During 2000, we initiated a number of activities to reduce costs and improve
operating efficiencies. These actions included consolidating our two
operations in Texas, closing our Lawrence, Massachusetts facility, and
restructuring our operations in Poway, California. Unusual charges recorded in
2000 related to these activities were as follows (in thousands):

|                                       |                        |                             |                            |                       |       |     |       | 
|-------------------------------------- | ---------------------- | --------------------------- | -------------------------- | --------------------- | ----- | --- | ----- | 
|Restructuring charges:                 |                        |                             |                            |                      
|Severance and related charges          |                        | $                           | 2,157                      |                      
|                                       | Facility exit charges: |                             |                            |                       |      
|                                       |                        |                             | Grand Prairie, TX facility |                       |       | 385 |      
|                                       |                        |                             | Lawrence, MA facility      |                       |       | 101 |      
|                                       |                        |                             | Poway, CA facilities       |                       |       | 472 |      
|                                       |                        |                             |                            |                      
|                                       |                        | Total restructuring charges |                            |                       | 3,115 |    
|Write-down of equipment and leaseholds |                        |                             | 495                        |                      
|Write-down of intangible assets        |                        |                             | 415                        |                      
|Other                                  |                        |                             | 51                         |                      
|                                       |                        |                             |                            |                      
|                                       |                        |                             |                            | Total unusual charges |       | $   | 4,076 | 
|                                       |                        |                             |                            |                      

Consolidation of Texas Operations.

During the first quarter of 2000, we consolidated our two operations in Texas.
Strategically significant manufacturing and development activities being
conducted at our Grand Prairie facility were transferred to our facility in
Dallas. The transfer was completed in mid-March 2000 and the Grand Prairie
facility was closed in late March 2000.

Charges related to this restructuring included the following: approximately
$565,000 for severance and related costs associated with the termination of 56
employees; $385,000 for facility exit costs, including estimated non-cancelable
lease payments and other facility costs we expected to incur during the
estimated time needed to find a sub-tenant; $121,000 related to the write-down
of abandoned leaseholds and equipment; and $186,000 related to the write-down
of impaired intangibles, primarily capitalized trained workforces.

Closure of Lawrence, Massachusetts Facility.

During the first quarter of 2000, we decided to close our Lawrence,
Massachusetts facility. Development activities associated with our proprietary
conductive thermal technology were transferred to our North St. Paul, Minnesota
facility. We sold or licensed certain assets associated with the Lawrence
operation,

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

including the environmental test equipment product line. Consideration received
for these assets was the transferees assumption of certain future obligations
related to the transferred product line and royalties on future sales. As
indicated below, the transferee of the product line subsequently bought out the
royalty contract later in the year. We ceased operations at our Lawrence
facility in late March 2000 and the facility was vacated in May 2000.

Charges related to closing this facility included approximately $844,000 for
severance and related costs associated with the termination of 38 employees and
$101,000 for facility exit costs, including rent, taxes and other facility
expenses we incurred during the six weeks from the time operations ceased until
we moved out of the facility. In addition, we recorded charges in the first
quarter of $229,000 related to impaired intangibles associated with the
transferred product line and $672,000 for losses on the sale of the business
assets and abandoned leaseholds. The charge related to the loss on the sale of
the business assets was subsequently reduced by $629,000 in the second half of
2000 for cash proceeds we received pursuant to the royalty contract, resulting
in a net charge of $43,000.

Poway, California Restructuring.

In the second quarter of 2000, we announced that we would transfer
manufacturing and certain administrative functions at our Poway, California
facility to our North St. Paul, Minnesota operation. Certain marketing and
engineering activities were to remain in Poway. The restructuring plan
included a workforce reduction, vacating a leased 45,000 square-foot building,
and transferring the remaining marketing and engineering personnel to a 10,000
square-foot facility nearby. This action resulted in the elimination of 20
positions in manufacturing, engineering, accounting and administration. The
lease for the 45,000 square-foot facility was subsequently assigned to a third
party.

In October 2000, we announced our intention to transfer the remaining marketing
and engineering operations in Poway to North St. Paul and to close the Poway
facility. Prior to December 31, 2000, management approved the restructuring
plan that included the elimination of an additional 20 positions in engineering
and administration and closing the facility by March 31, 2001. The affected
employees were identified and notified of the terminations and related
severance benefits prior to December 31, 2000. Some employees were terminated
prior to December 31, 2000 with the remaining termination dates scheduled for
March 31, 2001 or sooner. We subleased the 10,000 square-foot facility to a
third party, effective April 1, 2001.

Charges related to the Poway restructuring during 2000 included approximately
$748,000 for severance and related costs, $472,000 for facility exit costs, and
$331,000 related to the write-down of abandoned leaseholds and equipment. The
severance costs were related to the elimination of a total of 40 positions. The
facility exit costs were related to exiting both facilities and included
noncancellable lease payments and other operating costs incurred after vacating
as well as costs incurred to sublease the facilities.

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

The following table summarizes severance and facility exit restructuring
charges and the associated accrual activity for the three years ended December
31, 2002 (in thousands):

|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |        |     | 
|---------------------------------- | ----------------------------- | --------------------------------------------- | --- | ------------- | - | ---------- | --- | ----- | --- | - | ----- | ------ | --- | 
|                                   |                               |                                               |     | Severance &   |   | Facility   |     |       |     |  
|                                   |                               |                                               |     | Related Costs |   | Exit Costs |     | Total
|                                   |                               |                                               |     |               |   |            |     |      
|Accrual balance, December 31, 1999 |                               | $                                             |    |               |   | $          |    |       |     | $ |      |       
|                                   | Severance and related charges |                                               |     | 2,157         |   |            |     |      |     |   |       | 2,157  |    
|                                   | Facility exit charges:        |                                               |     |               |   |            |     |       |     |   |       |        |    
|                                   |                               | Grand Prairie, TX facility                    |     |               |  |            |     |       | 385 |   |       |        | 385 | 
|                                   |                               | Lawrence, MA facility                         |     |               |  |            |     |       | 101 |   |       |        | 101 | 
|                                   |                               | Poway, CA facilities                          |     |               |  |            |     |       | 472 |   |       |        | 472 | 
|                                   | Cash payments                 |                                               |     | (1,666        | ) |            |     | (653  | )   |   |       | (2,319 | )  
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       
|Accrual balance, December 31, 2000 |                               |                                               | 491 |               |   |            | 305 |       |     |   | 796   |       
|                                   | Severance and related charges |                                               |     | 928           |   |            |     |      |     |   |       | 928    |    
|                                   | Facility exit charges:        |                                               |     |               |   |            |     |       |     |   |       |        |    
|                                   |                               | North St. Paul, MN facility                   |     |               |  |            |     |       | 606 |   |       |        | 606 | 
|                                   |                               | Grand Prairie, TX facility  accrual increase |     |               |  |            |     |       | 193 |   |       |        | 193 | 
|                                   | Cash payments                 |                                               |     | (1,015        | ) |            |     | (400  | )   |   |       | (1,415 | )  
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       
|Accrual balance, December 31, 2001 |                               |                                               | 404 |               |   |            | 704 |       |     |   | 1,108 |       
|                                   | Cash payments                 |                                               |     | (404          | ) |            |     | (329  | )   |   |       | (733   | )  
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       
|Accrual balance, December 31, 2002 |                               | $                                             |    |               |   | $          | 375 |       |     | $ | 375   |       
|                                   |                               |                                               |     |               |   |            |     |       |     |   |       |       

In May 2002, we negotiated an early buyout and termination of the lease for the
vacant facility in Grand Prairie, Texas. The remaining $375,000 accrual for
facility exit costs at December 31, 2002 is primarily related to the vacated
building in North St. Paul, Minnesota and we estimate the accrual will be
utilized at the rate of approximately $25,000 per quarter.

|        |  |            
|------- |  | -----------
|NOTE 7: |  | INVENTORIES

A summary of the composition of inventories is as follows (in thousands):

|                                                  |                   |      |       |       |  |   |       |       | 
|------------------------------------------------- | ----------------- | ---- | ----- | ----- |  | - | ----- | ----- | 
|December 31,                                      |                   | 2002 |       | 2001 
|                                                  |                   |      |       |      
|Purchased parts and completed subassemblies       |                   | $    | 3,247 |       |  | $ | 4,095 |      
|Work-in-process                                   |                   |      | 2,613 |       |  |   | 2,480 |      
|Finished goods, including demonstration equipment |                   |      | 955   |       |  |   | 1,455 |      
|Equipment shipped, subject to revenue deferral    |                   |      | 544   |       |  |   | 926   |      
|                                                  |                   |      |       |       |  |   |       |      
|                                                  | Total inventories |      | $     | 7,359 |  |   | $     | 8,956 | 
|                                                  |                   |      |       |       |  |   |       |      

We recorded inventory excess and obsolescence charges in cost of goods sold
amounting to $0.1 million, $3.7 million, and $1.7 million in 2002, 2001, and
2000, respectively, which included unusual charges related to significant
discrete circumstances as well as charges related to product design changes
made in the ordinary course of our business.

In the fourth quarter of 2001, we recorded an unusual inventory write-down of
$2.7 million. As a result of the severe semiconductor industry downturn that
began in late 2000 and continued throughout 2001 and the resulting excess
capacity in the market segments served by some of our older test handler
products, we wrote down the value of our inventories for these older products
to their estimated net realizable values based upon a revised expectation of
limited future sales of these products.

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

In 2000, we recorded unusual inventory write-downs totaling $0.9 million. The
write-downs were primarily related to inventories for dynamic random access
memory, or DRAM, test handler applications, a market segment that we decided
not to pursue further. In the second quarter, we recorded an inventory
write-down of $0.4 million related to our decision to discontinue marketing and
manufacturing our oldest DRAM test handler, the model M3200. As a result of
this decision, all inventories related to the production of the M3200 were
written down to scrap value and were substantially disposed of by December 31,
2000. In the fourth quarter, we recorded an inventory charge of $0.5 million.
This charge was primarily related to our decision to discontinue marketing our
DTX thermal test handler product to the DRAM market segment and rather focus
the DTX on high power logic semiconductor applications, which required
significant product design changes. As a result of this decision, DTX-related
inventories were evaluated and written down to estimated net realizable value.

The unusual inventory write-downs in 2001 and 2000 were determined through a
detailed analysis of inventories with consideration given to anticipated usage
through future equipment and spares sales, and the potential use of common
parts in other products.

In addition to the unusual inventory charges discussed above, we regularly
record inventory charges due to the evolving nature of our products. Our
products are continually improved and modified to better meet evolving market
requirements. These ongoing product improvements and modifications result in
parts inventory obsolescence as parts are replaced due to the product changes.
To address this recurring obsolescence, we recorded inventory charges of $0.1
million in 2002, $1.0 million in 2001, and $0.8 million in 2000, in addition to
the unusual inventory charges discussed above.

|        |  |                           
|------- |  | --------------------------
|NOTE 8: |  | OTHER ACCRUED LIABILITIES:

Other accrued liabilities are comprised of the following (in thousands):

|                                       |                                 |      |     |       |  |   |       |       | 
|-------------------------------------- | ------------------------------- | ---- | --- | ----- |  | - | ----- | ----- | 
|December 31,                           |                                 | 2002 |     | 2001 
|                                       |                                 |      |     |      
|Accrued commissions                    |                                 | $    | 51  |       |  | $ | 189   |      
|Accrued warranty                       |                                 |      | 405 |       |  |   | 455   |      
|Customer deposits and deferred revenue |                                 |      | 687 |       |  |   | 1,527 |      
|Accrued restructuring costs            |                                 |      | 375 |       |  |   | 1,108 |      
|Other                                  |                                 |      | 297 |       |  |   | 422   |      
|                                       |                                 |      |     |       |  |   |       |      
|                                       | Total other accrued liabilities |      | $   | 1,815 |  |   | $     | 3,701 | 
|                                       |                                 |      |     |       |  |   |       |      

|        |  |                                    
|------- |  | -----------------------------------
|NOTE 9: |  | LONGTERM DEBT AND CREDIT AGREEMENT

As of December 31, 2002, we had no outstanding long-term debt. We have a line
of credit with a bank that provides for borrowings of up to the lesser of $5
million, or 80% of eligible accounts receivable and 50% of eligible inventory.
The line of credit is collateralized by receivables and inventories. There were
no line of credit advances outstanding as of December 31, 2002 and 2001.

|         |  |                  
|-------- |  | -----------------
|NOTE 10: |  | LEASE OBLIGATIONS

Aetrium leases two adjacent buildings in North St. Paul, Minnesota from a
partnership controlled by certain of our shareholders under two lease
agreements, each of which expires in 2006. None of the shareholders in the
partnership are directors or officers of Aetrium, or, to our knowledge, own
more than five percent of our common stock. During 2001, we vacated one of the
buildings in connection with a restructuring of operations. We have subleased
approximately half of this building to two outside parties.

In 2000, we vacated a leased 45,000 square-foot facility in Poway, California
when we relocated the operation to a 10,000 square-foot facility. The lease
for the larger facility was assigned to a third party

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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

and we are contingently liable for the lease if the assignee defaults. The
10,000 square-foot facility was vacated and subleased to a third party on April
1, 2001.

Aetrium also leases certain equipment and other facilities under various
operating leases. Rent expense under all operating leases was as follows (in
thousands):

|                               |  |      |      |      |  |      |      |   |  |   |       | 
|------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ----- | 
|Year ended Dec. 31,            |  | 2002 |      | 2001 |  | 2000
|                               |  |      |      |      |  |     
|Paid to shareholders           |  | $    | 438  |      |  | $    | 438  |   |  | $ | 584   | 
|Paid to others                 |  |      | 473  |      |  |      | 561  |   |  |   | 775   | 
|Sublease/assigned lease income |  |      | (351 | )    |  |      | (164 | ) |  |   |      | 
|                               |  |      |      |      |  |      |      |   |  |   |       | 
|Total net rent expense         |  | $    | 560  |      |  | $    | 835  |   |  | $ | 1,359 | 
|                               |  |      |      |      |  |      |      |   |  |   |       | 

As of December 31, 2002, future minimum annual lease payments under operating
leases were as follows (in thousands):

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|2003                         |  | $ | 620   | 
|2004                         |  |   | 437   | 
|2005                         |  |   | 437   | 
|2006                         |  |   | 55    | 
|                             |  |   |       | 
|Total minimum lease payments |  | $ | 1,549 | 
|                             |  |   |       | 

The above minimum lease payments have not been reduced by minimum sublease
rentals of $0.3 million due in the future under noncancellable subleases.

The above minimum lease payments do not include the Poway, California facility
lease that has been assigned to a third party and on which we remain
contingently liable. The lease expires in January 2010 and minimum remaining
payments amount to $3.8 million as of December 31, 2002.

In January 2003, we signed an agreement to extend the lease for our facility in
Dallas, Texas for three years. The lease provides for an initial annual base rent of
approximately $132,000 with increases of approximately 5% annually through
April 2006. The above minimum lease payments do not reflect this lease extension.

|         |  |                                            
|-------- |  | -------------------------------------------
|NOTE 11: |  | RELATED PARTY AND COMMON STOCK TRANSACTIONS

We purchase machined parts from two suppliers in which one of our executive
officers has a minority ownership interest. Purchases from these suppliers
amounted to $0.2 million, $0.2 million and $0.7 million in 2002, 2001 and 2000,
respectively. Purchases from these suppliers are made under terms that are
competitive with unrelated suppliers.

In November 2001, we repurchased 426,410 shares of our common stock from a
group of shareholders that included certain employees of our Dallas operation
and certain of their relatives in exchange for $544,000 and an option to
require this shareholder group to purchase 426,410 shares of our common stock
for $544,000, which we could exercise from December 31, 2001 to January 31,
2002. On December 31, 2001, we exercised our option to require the shareholder
group to purchase 426,410 shares of our common stock.

|         |  |              
|-------- |  | -------------
|NOTE 12: |  | STOCK OPTIONS

In 1993, Aetriums shareholders approved the adoption of the 1993 Stock
Incentive Plan. Employees, officers, directors, consultants and independent
contractors providing services to us are eligible to receive awards under our
stock incentive plan. The number of shares available for issuance under our
stock incentive plan is equal to 17.5% of the aggregate number of shares of
common stock outstanding less the total number of shares of common stock
issuable upon the exercise or conversion of any stock options,

F-17



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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

warrants or other stock rights. Our stock incentive plan is administered by the
Compensation Committee of our board of directors and provides for the granting
of: (a) stock options; (b) stock appreciation rights; (c) restricted stock; (d)
performance awards; and (e) stock awards valued in whole or in part by
reference to or otherwise based upon our stock. Options granted under our stock
incentive plan may be incentive stock options or nonqualified stock options.
Our stock incentive plan provides that the Compensation Committee may, at its
discretion, allow the exercise price of stock options to be paid, in whole or
in part, by tendering previously acquired shares that have been held by the
option holder for at least six months. Our stock incentive plan will terminate
on June 8, 2003.

Using the Black-Scholes option-pricing model, the weighted-average fair value
of options granted in 2002, 2001, and 2000 was $0.99, $0.81, and $2.62,
respectively. Assumptions used in applying the Black-Scholes option-pricing
model to estimate the fair value of options granted are as follows:

|                                 |  |      |     |      |  |      |     |   |  |  |     |  
|-------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                 |  | 2002 |     | 2001 |  | 2000
|                                 |  |      |     |      |  |     
|Expected dividend level          |  |      | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Expected stock price volatility  |  |      | 65  | %    |  |      | 63  | % |  |  | 54  | %
|Risk-free interest rate          |  |      | 3.0 | %    |  |      | 4.0 | % |  |  | 5.9 | %
|Expected life of options (years) |  |      | 3.5 |      |  |      | 3.5 |   |  |  | 3.5 |  
|                                 |  |      |     |      |  |      |     |   |  |  |     |  

The following table summarizes activity under our stock incentive plan:

|                                            |                   |  |                     |          |                 |   |                  |                |  |   |      |      | 
|------------------------------------------- | ----------------- |  | ------------------- | -------- | --------------- | - | ---------------- | -------------- |  | - | ---- | ---- | 
|                                            |                   |  | Outstanding Options
|                                            |                   |  |                    
|                                            |                   |  | Number              |          | Range of        |   | Weighted Average
|                                            |                   |  | of Shares           |          | Exercise Prices |   | Exercise Price  
|                                            |                   |  |                     |          |                 |   |                 
|Balance, December 31, 1999                  |                   |  | 1,470,836           |          |                 | $ | 5.63 to 18.81    |                |  | $ | 8.01 |     
|                                            | Options granted   |  |                     | 356,500  |                 |   |                  | 5.69 to   6.54 |  |   |      | 5.81 | 
|                                            | Options exercised |  |                     | (39,864  | )               |   |                  | 5.63 to 10.25  |  |   |      | 7.18 | 
|                                            | Options forfeited |  |                     | (258,055 | )               |   |                  | 5.63 to 10.25  |  |   |      | 6.95 | 
|                                            |                   |  |                     |          |                 |   |                  |                |  |   |      |     
|Balance, December 31, 2000                  |                   |  | 1,529,417           |          |                 |   | 5.63 to 18.81    |                |  |   | 7.70 |     
|                                            | Options granted   |  |                     | 332,000  |                 |   |                  | 1.69           |  |   |      | 1.69 | 
|                                            | Options forfeited |  |                     | (737,417 | )               |   |                  | 1.69 to 18.81  |  |   |      | 9.25 | 
|                                            |                   |  |                     |          |                 |   |                  |                |  |   |      |     
|Balance, December 31, 2001                  |                   |  | 1,124,000           |          |                 |   | 1.69 to   7.08   |                |  |   | 4.91 |     
|                                            | Options granted   |  |                     | 545,300  |                 |   |                  | 1.03 to   2.06 |  |   |      | 2.02 | 
|                                            | Options exercised |  |                     | (2,478   | )               |   |                  | 1.69           |  |   |      | 1.69 | 
|                                            | Options forfeited |  |                     | (168,076 | )               |   |                  | 1.69 to   7.08 |  |   |      | 5.47 | 
|                                            |                   |  |                     |          |                 |   |                  |                |  |   |      |     
|Balance, December 31, 2002                  |                   |  | 1,498,746           |          |                 | $ | 1.03 to   7.08   |                |  | $ | 3.80 |     
|                                            |                   |  |                     |          |                 |   |                  |                |  |   |      |     
|Options exercisable as of
December 31, 2002 |                   |  | 990,929             |          |                 | $ | 1.03 to   7.08   |                |  | $ | 4.19 |     
|                                            |                   |  |                     |          |                 |   |                  |                |  |   |      |     

The following table summarizes information related to stock options outstanding
at December 31, 2002, all of which are nonqualified options and expire five
years after the grant date and of which 382,035 options were fully exercisable
when granted and 1,116,711 options become exercisable over a four to five-year
period:

|                    |              |                     |  |                  |           |                |  |             |  |                |      |  |  |  |         |  |  |   |      |  |  | 
|------------------- | ------------ | ------------------- |  | ---------------- | --------- | -------------- |  | ----------- |  | -------------- | ---- |  |  |  | ------- |  |  | - | ---- |  |  | 
|Options Outstanding |              | Options Exercisable
|                    |              |                    
|                    |              |                     |  |                  |           |                |  | Weighted    |  |                |      |  |  |  |         |  |  |   |      | 
|Range of            |              | Number              |  | Average          |           | Weighted       |  | Number      |  | Weighted      
|Exercise            |              | Outstanding         |  | Remaining        |           | Average        |  | Exercisable |  | Average       
|Prices              |              | at 12/31/02         |  | Contractual Life |           | Exercise Price |  | at 12/31/02 |  | Exercise Price
|                    |              |                     |  |                  |           |                |  |             |  |               
|$                   | 1.03 to 2.06 |                     |  |                  | 831,746   |                |  | 4.0 years   |  | $              | 1.90 |  |  |  | 462,627 |  |  | $ | 1.86 | 
|                    | 5.63 to 7.08 |                     |  |                  | 667,000   |                |  | 1.6 years   |  |                | 6.17 |  |  |  | 528,302 |  |  |   | 6.23 | 
|                    |              |                     |  |                  |           |                |  |             |  |                |      |  |  |  |         |  |  |   |      | 
|$                   | 1.03 to 7.08 |                     |  |                  | 1,498,746 |                |  | 2.9 years   |  | $              | 3.80 |  |  |  | 990,929 |  |  | $ | 4.19 | 
|                    |              |                     |  |                  |           |                |  |             |  |                |      |  |  |  |         |  |  |   |      | 

F-18



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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

During the year ended December 31, 2000, employees surrendered 1,333 shares of
common stock ($13,538 fair market value) as payment for withholding tax
obligations in connection with certain stock option exercises.

We recorded a tax benefit of $10,784 for the year ended December 31, 2000
related to the exercise of nonqualified stock options, which was credited to
Additional Paid-in Capital.

|         |  |                                                 
|-------- |  | ------------------------------------------------
|NOTE 13: |  | EMPLOYEE SAVINGS 401(k) AND STOCK PURCHASE PLANS

We have a 401(k) employee savings plan, which covers full-time employees who
are at least 21 years of age. Our contributions to the savings plan, which are
at the discretion of management, amounted to $108,893 and $140,907 in 2001 and
2000, respectively. We made no contributions to the plan in 2002.

We also have a nonqualified employee stock purchase plan. Full-time eligible
employees may purchase shares of common stock by contributing to our stock
purchase plan through payroll deductions. Employee contributions to our stock
purchase plan are limited to 10% of each employees base compensation. Our
stock purchase plan purchases shares on the open market at fair market value.
At managements discretion, we may choose to make matching contributions to our
stock purchase plan. We contributed $1,361, $4,984, and $12,983 to our stock
purchase plan in 2002, 2001 and 2000, respectively.

|         |  |             
|-------- |  | ------------
|NOTE 14: |  | INCOME TAXES

The provision (benefit) for income taxes is made up of the following components
(in thousands):

|                                           |         |                                    |      |      |      |      |      |      |      |   |        |        |        | 
|------------------------------------------ | ------- | ---------------------------------- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | - | ------ | ------ | ------ | 
|Year ended December 31,                    |         | 2002                               |      | 2001 |      | 2000
|                                           |         |                                    |      |      |      |     
|Current tax provision (benefit):           |         |                                    |      |      |      |      |      |      |      |   |        |       
|                                           | Federal |                                    | $    | (440 | )    |      | $    | (226 | )    |   | $      |       |       
|                                           | State   |                                    |      |     |      |      |      |     |      |   |        |       |       
|                                           |         |                                    |      |      |      |      |      |      |      |   |        |        |       
|                                           |         | Total current provision (benefit)  |      |      | (440 | )    |      |      | (226 | ) |        |        |       | 
|                                           |         |                                    |      |      |      |      |      |      |      |   |        |        |       
|Deferred tax provision (benefit):          |         |                                    |      |      |      |      |      |      |      |   |        |       
|                                           | Federal |                                    |      |     |      |      |      |     |      |   |        | 14,408 |       
|                                           | State   |                                    |      |     |      |      |      |     |      |   |        | 302    |       
|                                           |         |                                    |      |      |      |      |      |      |      |   |        |        |       
|                                           |         | Total deferred provision (benefit) |      |      |     |      |      |      |     |   |        |        | 14,710 | 
|                                           |         |                                    |      |      |      |      |      |      |      |   |        |        |       
|Total provision (benefit) for income taxes |         | $                                  | (440 | )    |      | $    | (226 | )    |      | $ | 14,710 |       
|                                           |         |                                    |      |      |      |      |      |      |      |   |        |        |       

The cumulative effect of a change in accounting principle included in the 2000
consolidated statement of operations is net of a $550,000 deferred tax benefit
which is not included in the table above.

F-19



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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

A reconciliation of income tax benefit computed using the federal statutory
rate to the tax benefit reported in our consolidated statements of operations
is as follows (in thousands):

|                                               |                                   |      |        |       |  |      |        |       |   |   |        |        |  
|---------------------------------------------- | --------------------------------- | ---- | ------ | ----- |  | ---- | ------ | ----- | - | - | ------ | ------ | -
|Year ended December 31,                        |                                   | 2002 |        | 2001  |  | 2000
|                                               |                                   |      |        |       |  |     
|Tax benefit computed at federal
statutory rate |                                   | $    | (3,309 | )     |  | $    | (3,704 | )     |   | $ | (2,378 | )     
|State taxes, net of federal benefit            |                                   |      | (217   | )     |  |      | (273   | )     |   |   | (72    | )     
|Increase (decrease) in tax from:               |                                   |      |        |       |  |      |        |       |   |   |        |       
|                                               | Goodwill amortization             |      |        |      |  |      |        | 19    |   |   |        | 19     |  
|                                               | Foreign sales corporation benefit |      |        |      |  |      |        | (24   | ) |   |        | (56    | )
|                                               | Tax-exempt interest income        |      |        |      |  |      |        | (10   | ) |   |        |       |  
|                                               | Business meals and entertainment  |      |        | 15    |  |      |        | 23    |   |   |        | 40     |  
|                                               | Tax credits                       |      |        |      |  |      |        | (284  | ) |   |        | (147   | )
|                                               | Valuation allowance change        |      |        | 3,066 |  |      |        | 4,113 |   |   |        | 17,338 |  
|                                               | Other, net                        |      |        | 5     |  |      |        | (86   | ) |   |        | (34    | )
|                                               |                                   |      |        |       |  |      |        |       |   |   |        |       
|Provision (benefit) for income taxes           |                                   | $    | (440   | )     |  | $    | (226   | )     |   | $ | 14,710 |       
|                                               |                                   |      |        |       |  |      |        |       |   |   |        |       

Deferred tax assets (liabilities) are comprised of the following (in
thousands):

|                                                                                                                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|December 31,                                                                                                                                                          |  | 2002 |         | 2001 |  | 2000
|                                                                                                                                                                      |  |      |         |      |  |     
|Accounts receivable, principally due to
allowances for doubtful accounts                                                                                              |  | $    | 95      |      |  | $    | 134     |   |  | $ | 158     |  
|Inventories, principally due to
reserves
for excess and obsolete inventories
and additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986 |  |      | 1,416   |      |  |      | 1,483   |   |  |   | 898     |  
|Employee compensation and benefits
accrued for financial reporting
purposes                                                                                           |  |      | 57      |      |  |      | 75      |   |  |   | 137     |  
|Amortization of intangibles                                                                                                                                           |  |      | 7,970   |      |  |      | 6,110   |   |  |   | 6,257   |  
|NOL and tax credit carryforwards                                                                                                                                      |  |      | 15,198  |      |  |      | 13,707  |   |  |   | 10,287  |  
|Restructuring reserves                                                                                                                                                |  |      | 127     |      |  |      | 304     |   |  |   | 260     |  
|Other, net                                                                                                                                                            |  |      | 204     |      |  |      | 188     |   |  |   | (109    | )
|                                                                                                                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Deferred tax asset  gross                                                                                                                                            |  | $    | 25,067  |      |  | $    | 22,001  |   |  | $ | 17,888  |  
|Less, valuation allowance                                                                                                                                             |  |      | (25,067 | )    |  |      | (22,001 | ) |  |   | (17,888 | )
|                                                                                                                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Net deferred tax asset                                                                                                                                                |  | $    |        |      |  | $    |        |   |  | $ |        |  
|                                                                                                                                                                      |  |      |         |      |  |      |         |   |  |   |         |  

Aetrium has federal net operating loss carryforwards of approximately $39
million that will begin to expire in 2020 if not utilized. We also have state
net operating loss carryforwards of approximately $19 million that will expire
at various times, beginning in 2003, if not utilized.

In the fourth quarter of 2000, in accordance with Statement of Financial
Accounting Standards No. 109, due to then recent operating losses, reduced
sales order activity in late 2000, and softening industry conditions in early
2001, we recorded a valuation allowance against our deferred tax assets. We
continued to maintain a valuation allowance to fully reserve our deferred tax
assets in 2001 and 2002. We do not expect to record any tax expense or benefit
in the future until we are consistently profitable on a quarterly basis.
However, we did record income tax benefits of $0.4 million in the third quarter
of 2002 and $0.2 million in the third quarter of 2001 related to refunds of
income taxes paid and expensed prior to 2001. Refunds received in 2002 resulted
from tax legislation enacted in 2002.

F-20



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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements

|         |  |                                                                                                    
|-------- |  | ---------------------------------------------------------------------------------------------------
|NOTE 15: |  | BUSINESS SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION, AND CONCENTRATION OF CREDIT RISK

We view our operations and manage our business as one segment, supplying
electromechanical equipment to the semiconductor industry. Factors used to
identify our single operating segment include our organizational structure and
the financial information used by our executive management in making decisions
about how to allocate resources and assess performance. The following table
sets forth the various components of net sales by product line as a percentage
of total sales:

|                                    |       |      |    |      |   |      |    |     |   |  |    |     |  
|----------------------------------- | ----- | ---- | -- | ---- | - | ---- | -- | --- | - |  | -- | --- | -
|Year ended December 31,             |       | 2002 |    | 2001 |   | 2000
|                                    |       |      |    |      |   |     
|Test handlers                       |       |      | 51 | %    |   |      | 53 | %   |   |  | 52 | %  
|Semiconductor automation products   |       |      | 8  |      |   |      | 16 |     |   |  | 22 |    
|Reliability test equipment products |       |      | 18 |      |   |      | 18 |     |   |  | 13 |    
|Change kits and spare parts         |       |      | 23 |      |   |      | 13 |     |   |  | 13 |    
|                                    |       |      |    |      |   |      |    |     |   |  |    |    
|                                    | Total |      |    | 100  | % |      |    | 100 | % |  |    | 100 | %
|                                    |       |      |    |      |   |      |    |     |   |  |    |    

Foreign sales from the United States were as follows (in thousands):

|                        |       |      |       |       |  |      |       |       |  |   |        |        | 
|----------------------- | ----- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ------ | ------ | 
|Year ended December 31, |       | 2002 |       | 2001  |  | 2000
|                        |       |      |       |       |  |     
|Asia                    |       | $    | 5,419 |       |  | $    | 4,275 |       |  | $ | 12,253 |       
|Europe                  |       |      | 714   |       |  |      | 1,282 |       |  |   | 1,701  |       
|Other                   |       |      | 616   |       |  |      | 1,757 |       |  |   | 988    |       
|                        |       |      |       |       |  |      |       |       |  |   |        |       
|                        | Total |      | $     | 6,749 |  |      | $     | 7,314 |  |   | $      | 14,942 | 
|                        |       |      |       |       |  |      |       |       |  |   |        |       

Sales to a single customer represented 31.5%, 22.6% and 10.2% of total net
sales in 2002, 2001 and 2000, respectively. Sales to a second customer
represented 13.8% of total net sales in 2000. As of December 31, 2002,
outstanding accounts receivable due from a single customer represented 39.4% of
our total accounts receivable, and outstanding accounts receivable from a
second customer represented 14.8% of our total accounts receivable. As of
December 31, 2001, outstanding accounts receivable due from a third customer
represented 18.5% of our total accounts receivable, and outstanding accounts
receivable from a fourth customer represented 14.6% of our total accounts
receivable.

We sell our products principally to manufacturers of ICs, discrete electronic
components, and semiconductor equipment. Our accounts receivable balance is
concentrated with customers principally in one industry; however, we regularly
monitor the creditworthiness of our customers in order to manage this
collection risk.

F-21



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                    |  |                      |  |                                                                                       
|------------------- |  | -------------------- |  | --------------------------------------------------------------------------------------
|                    |  | AETRIUM INCORPORATED
|                    |  |                      |  |                                                                                       
|Date:March 28, 2003 |  | By:                  |  | /s/ Joseph C. Levesque                                                                
|                    |  |                      |  |                                                                                       
|                    |  |                      |  | Joseph C. Levesque
Chief Executive Officer and President
(principal executive officer)
|                    |  |                      |  |                                                                                       
|                    |  | By:                  |  | /s/ Paul H. Askegaard                                                                 
|                    |  |                      |  |                                                                                       
|                    |  |                      |  | Paul H. Askegaard
Treasurer
(principal financial and accounting officer)              

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 28, 2003 by the following persons on
behalf of the registrant and in the capacities indicated.

|                                                 |  |                      
|------------------------------------------------ |  | ---------------------
|Signature                                        |  | Title                
|                                                 |  |                      
|/s/ Joseph C. LevesqueJoseph C. Levesque         |  | Chairman of the Board
|                                                
|/s/ Darnell L. BoehmDarnell L. Boehm             |  | Director             
|                                                
|/s/ Terrence W. GlarnerTerrence W. Glarner       |  | Director             
|                                                
|/s/ Andrew J. GreenshieldsAndrew J. Greenshields |  | Director             
|                                                
|/s/ Douglas L. HemerDouglas L. Hemer             |  | Director             





---



##### Table of Contents






Certification by Chief Executive Officer

I, Joseph C. Levesque, Chairman of the Board, President and Chief Executive
Officer of Aetrium Incorporated, certify that:

1.     I have reviewed this annual report on Form 10-K of Aetrium Incorporated;

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

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

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| |  | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                                                       
|-------------------- |  | ------------------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | /s/ Joseph C. Levesque
Joseph C. Levesque
Chairman of the Board, President
and Chief Executive Officer





---



##### Table of Contents



Certification by Chief Administrative Officer

I, Douglas L. Hemer, Chief Administrative Officer of Aetrium Incorporated,
certify that:

1.     I have reviewed this annual report on Form 10-K of Aetrium Incorporated;

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

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

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |  | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                   
|-------------------- |  | ------------------------------------------------------------------
|Date: March 28, 2003 |  | /s/ Douglas L. Hemer
Douglas L. Hemer
Chief Administrative Officer





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##### Table of Contents



Certification by Treasurer

I, Paul H. Askegaard, Treasurer of Aetrium Incorporated, certify that:

1.     I have reviewed this annual report on Form 10-K of Aetrium Incorporated;

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

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

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |  | a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and                                                                                                  
|
| |  | c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  | a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |                                                                                               
|-------------------- |  | ----------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | /s/ Paul H. Askegaard
Paul H. Askegaard
Treasurer (principal financial and accounting
officer)





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##### Table of Contents



AETRIUM INCORPORATED
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

|     |  |                                                                             |  |                                                                                                                                       
|---- |  | --------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Item |  |                                                                             |  |                                                                                                                                       
|No.  |  | Item                                                                        |  | Method of Filing                                                                                                                      
|3.1  |  | Our Restated Articles of Incorporation, as
amended                          |  | Incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form SB-2 (File No. 33-64962C).                             
|     |  |                                                                             |  |                                                                                                                                       
|3.2  |  | Amendment to Restated Articles of Incorporation                             |  | Incorporated by reference to Exhibit 3.2 to our Quarterly
Report for the quarter ended September 30, 1998 (File No.
0-22166).         
|     |  |                                                                             |  |                                                                                                                                       
|3.3  |  | Our Bylaws, as amended                                                      |  | Incorporated by reference to Exhibit 3.2 to our
Registration Statement on Form SB-2 (File No. 33-64962C).                             
|     |  |                                                                             |  |                                                                                                                                       
|4.1  |  | Specimen Form of our Common Stock Certificate                               |  | Incorporated by reference to Exhibit 4.1 to our
Registration Statement on Form SB-2 (File No. 33-64962C).                             
|     |  |                                                                             |  |                                                                                                                                       
|10.1 |  | 1993 Stock Incentive Plan, as amended                                       |  | Incorporated by reference to Exhibit 10.2 to our Annual
Report on Form 10-K for year ended December 31, 1997 (File
No. 0-22166).      
|     |  |                                                                             |  |                                                                                                                                       
|10.2 |  | Salary Savings Plan                                                         |  | Incorporated by reference to Exhibit 10.3 to our
Registration Statement on Form SB-2 (File No. 33-64962C).                            
|     |  |                                                                             |  |                                                                                                                                       
|10.3 |  | Form of Incentive Stock Option Agreement                                    |  | Incorporated by reference to Exhibit 10.6 to our Annual
Report on Form 10-KSB for the year ended December 31, 1993
(File No. 0-22166).
|     |  |                                                                             |  |                                                                                                                                       
|10.4 |  | Form of Non-Statutory Option Agreement                                      |  | Incorporated by reference to Exhibit 10.7 to our Annual
Report on Form 10-KSB for the year ended December 31, 1993
(File No. 0-22166).
|     |  |                                                                             |  |                                                                                                                                       
|10.5 |  | Employment Agreement dated April 1, 1986,
between Joseph C. Levesque and us |  | Incorporated by reference to Exhibit 10.6 to our
Registration Statement on Form SB-2 (File No. 33-64962C).                            
|     |  |                                                                             |  |                                                                                                                                       
|10.6 |  | Credit Agreement dated August 11, 1989, between
Harris Bank and us          |  | Incorporated by reference to Exhibit 10.7 to our
Registration Statement on Form SB-2 (File No. 33-64962C).                            
|     |  |                                                                             |  |                                                                                                                                       
|10.7 |  | Lease Agreement, dated July 19, 1995, between
KAMKO Investments and us      |  | Incorporated by reference to Exhibit 10.12 to our
Registration Statement on Form SB-2 (File No. 33-98040).                            

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##### Table of Contents



|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|Item  |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|No.   |  | Item                                                                                                                                                                                                      |  | Method of Filing                                                                                                                     
|10.8  |  | Amendment to Lease Agreement, dated September
26, 1995, between KAMKO Investments and us                                                                                                                  |  | Incorporated by reference to Exhibit 10.13 to our
Registration Statement on Form SB-2 (File No. 33-98040).                           
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.9  |  | Employee Stock Purchase Plan                                                                                                                                                                              |  | Incorporated by reference to Exhibit 99.1 to our
Registration Statement on Form S-8 (File No. 33-74616).                             
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.10 |  | Indenture dated June 25, 1998 between KAMKO
Investments and the company                                                                                                                                   |  | Incorporated by reference to Exhibit 10.19 to our Annual
Report on Form 10-K for the year ended December 31, 1998
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.11 |  | Standard Industrial/Commercial Single-Tenant
Lease, dated September 18, 1998, between W.H.
Pomerado, LLC and us, including addendum and
material exhibits to lease.                                       |  | Incorporated by reference to Exhibit 10.16 to our Annual
Report on Form 10-K for the year ended December 31, 1999
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.12 |  | Standard Lease Agreement, dated December 19,
1987, between Crow-Markison 22-27, Limited
Partnership and WEB Technology, Inc., including
all supplements and amendments thereto through
December 27, 1999. |  | Incorporated by reference to Exhibit 10.17 to our Annual
Report on Form 10-K for the year ended December 31, 1999
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.13 |  | Assignment and Assumption of Lease Agreement,
dated August 8, 2000, by and between us and
Littlefeet, Inc.                                                                                                |  | Incorporated by reference to Exhibit 10.16 to our Annual
Report on Form 10-K for the year ended December 31, 2000
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.14 |  | Bill of Sale, Assignment and Assumption and Lease
Agreement, dated March 31, 2000, by and between
Aetrium-EJ Inc. and Daniel Gamelin and Mark
Woodman.                                                    |  | Incorporated by reference to Exhibit 10.17 to our Annual
Report on Form 10-K for the year ended December 31, 2000
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.15 |  | Assignment, dated August 31, 2000, by and between
Aetrium-EJ Inc. and Daniel Gamelin and Mark
Woodman                                                                                                     |  | Incorporated by reference to Exhibit 10.18 to our Annual
Report on Form 10-K for the year ended December 31, 2000
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.16 |  | Agreement, dated November 30, 2001, by and among
Aetrium and certain shareholders                                                                                                                         |  | Incorporated by reference to Exhibit 10.16 to our Annual
Report on Form 10-K for the year ended December 31, 2001
(File No. 0-22166).
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.17 |  | Amendment dated January 27, 2003, between
Crow-Markison 22-27, Limited Partnership and
Aetrium-WEB Technology, LP to Standard Lease
Agreement scheduled herein as item 10.12.                             |  | Filed herewith electronically.                                                                                                       
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|10.18 |  | 2003 Stock Incentive Plan                                                                                                                                                                                 |  | Filed herewith electronically.                                                                                                       
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|21.1  |  | Subsidiaries of the Registrant                                                                                                                                                                            |  | Incorporated by reference to Exhibit 21.1 to our Annual
Report on Form 10-K for the year ended December 31, 1997
(File No. 0-22166). 
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|23.1  |  | Independent Accountants Consent                                                                                                                                                                          |  | Filed herewith electronically.                                                                                                       
|      |  |                                                                                                                                                                                                           |  |                                                                                                                                      
|99.1  |  | Certifications pursuant to Section 906 of the Sarbanes Oxley Act of 2002                                                                                                                                  |  | Filed herewith electronically.                                                                                                       

E-2