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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
  FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2003
 OR
 [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No. 0-22166 AETRIUM INCORPORATED  Minnesota
(State or other jurisdiction of
incorporation or organization)
    
    41-1439182
(I.R.S. Employer
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 [  ]. 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 30, 2003, which is the last business day of the
Registrants most recently completed second fiscal quarter, as reported by The
Nasdaq Stock Market was $13,931,000. As of March 19, 2004, 9,534,919 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 2004 Annual Meeting of
Stockholders to be held May 19, 2004 (the 2004 Proxy Statement).




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Form 10-K For the fiscal year ended December 31, 2003 TABLE OF CONTENTS PART IITEM 1.
    
    BUSINESS
    
    
    1ITEM 2.
    
    PROPERTIES
    
    
    12ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    12ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    12ITEM 4A.
    
    EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    13PART IIITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    14ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    15ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    17ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    30ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    30ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    30ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    30PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    31ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    31ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    31ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    31ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    32PART IVITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    
    33EXHIBIT INDEX
    
    
    
    
    E-1Form of Change of Control AgreementAssignment AgreementSales Incentive ProgramCode of Business Conduct EthicsSubsidiaries of the RegistrantIndependent Accountants' ConsentCertification of Chief Executive OfficerCertification of Chief Administrative OfficerCertification of TreasurerCertification Pursuant to 18 U.S.C. Section 1350
  (i)




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PART I This Form 10-K contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. 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. We undertake no obligation to correct or update any
forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any future
disclosures we may make on related subjects in future filings with the SEC.
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. Change kits 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.




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
    
    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. Test handler products accounted for 52%, 51% and 53% of our net sales in
2003, 2002 and 2001, respectively. Semiconductor automation products accounted
for 11%, 8% and 16% of our net sales in 2003, 2002 and 2001, respectively.
Reliability test equipment accounted for 20%, 18% and 18% of our net sales in
2003, 2002 and 2001, respectively. Change kits and spare parts accounted for
17%, 23% and 13% of our net sales in 2003, 2002 and 2001, respectively. 2003 was another year of tremendous challenge for us, as the semiconductor
industry entered the third 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 approximately 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 2003 compared to 2000
levels, reduced our workforce from 225 employees at the end of 2000 to 85
employees at the end of 2003, and maintained our working capital at levels that
will support our growth as our industry recovers. At the same time, we
continued our product development efforts, which were focused on the newest and
fastest growing IC package types and the latest semiconductor processes. As
2003 progressed, conditions gradually improved in the semiconductor industry,
and by years end the growing recovery in the semiconductor industry was
fueling the beginnings of a recovery in the semiconductor equipment industry.
We believe that the improvements we have made to our cost structure, the
product introductions we made during the industry downturn and the working
capital position we have been able to maintain position us to take full
advantage of the industry upturn that we believe is now proceeding. 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., which
we have since expanded and advanced through internal product development. 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. 2




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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. 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, through internal development we have expanded this series of
products and developed and introduced the 55V6 series of gravity feed test
handlers. Both series 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. Our
telephone number is (651) 770-2000. Our web site address is www.aetrium.com. We
make available free of charge through our website our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports 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 SEC. Our website is
not intended to be a part of, nor are we incorporating it by reference into,
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 Items 6 and 15 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. 3




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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 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: 4




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
    
    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.
    
    55V8 Series.Currently in prototype evaluation and
verification, our 55V8 Series of single, dual and quad site gravity
feed test handlers for analog and logic IC applications addresses a
wide range of IC packages including SOPs and MLPs. The 55V8 Series
offers the advantages of the 55V6 Series, including our high speed
test site actuator.
    
    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
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 feed 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. 5




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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 degrees
C. These handlers are configured and equipped 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. 6




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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. 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 meets 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 sizes of 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 a continuing
migration to copper materials for the increasingly minute circuitry 7




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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 19 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
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
and Rasco AG. 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. 8




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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,
Texas facility. Our manufacturing operations consist of procurement and
inspection of components and subassemblies, assembly and extensive testing 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 2003, Maxim Integrated Products, Inc. and MB Electronique
S.A. each accounted for more than 10% of net sales. Maxim Integrated Products,
Inc. also accounted for more than 10% of net sales in 2002 and 2001. 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,
domestic independent sales representatives and international distributors. Our
direct sales organization, comprised of eight salespeople, is responsible for
most domestic sales, and coordinates the activities of our domestic independent
sales representatives and international distributors and actively participates
with them in selling efforts. This enables us to establish strong direct ties
with our customers. 9




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We maintain sales and service locations in North St. Paul, Minnesota,
Santa Clara, California, San Diego, California, Dallas, Texas, Boise, Idaho,
and Saugus, Massachusetts. As of December 31, 2003, 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 domestic independent sales
representatives, international distributors and direct salespeople. International shipments accounted for 54%, 59% and 37% of our net sales in
2003, 2002 and 2001, 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. Our research and development is conducted at both our
North St. Paul, Minnesota and Dallas, Texas facilities. Due to the record
industry downturn that extended into 2003 and the resulting decline in and
continuing low level of 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 2003, we
concentrated our new product development efforts on:  
    
    developing the 55V8 Series quad test site gravity feed handlers;
    
    adapting our high speed test site actuator for the 55V8 Series of test handlers;
    
    developing additional input capability for the Model 8832 test handler;
    
    developing a new model burn in board loader/unloader for the 4800 Series; and
    
    developing 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. 10




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We expense all research and development costs, including costs for
software development, as incurred. In 2003, 2002 and 2001, our expenses
relating to research and development were approximately $2.6 million, $2.3
million and $4.7 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 2003 where
our research and development spending as a percentage of net sales was 19%. We
employed 25 engineering personnel as of December 31, 2003. Intellectual Property 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 $6.4 million at the end of 2003 and $2.3 million at the
end of 2002. 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 in 2004 all of our
backlog as of the end of 2003. Employees As of December 31, 2003, we had 85 employees, consisting of 32 in
manufacturing, 25 in engineering and product development, 16 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. 11




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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 February 2006. We have an option under the lease,
exercisable at any time during the initial lease term, to require construction
of approximately 45,000 additional 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 have the following continuing lease obligations:  
    
    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
two-thirds 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 45,000 square foot facility in Poway, California
in 2000. This lease expires in January 2010. 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. 
 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 2003. 12




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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT. Our executive officers, their ages and the offices they held as of March
1, 2004 are as follows: Name
    
    Age
    
    PositionJoseph C. Levesque
    
    
    59
    
    
    Chairman of the Board, President and Chief Executive OfficerDouglas L. Hemer
    
    
    57
    
    
    Chief Administrative Officer, Secretary and DirectorDaniel M. Koch
    
    
    50
    
    
    Vice President  Worldwide SalesJohn J. Pollock
    
    
    44
    
    
    Vice President  General Manager, North St. Paul OperationsKeith E. Williams
    
    
    60
    
    
    President  Dallas OperationsPaul H. Askegaard
    
    
    52
    
    
    Treasurer
 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. 13




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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 QuarterFiscal 2003
    
    High
    
    $
    1.06
    
    
    $
    1.76
    
    
    $
    2.78
    
    
    $
    4.20Low
    
    $
    0.70
    
    
    $
    0.88
    
    
    $
    1.26
    
    
    $
    2.06Fiscal 2002
    
    High
    
    $
    2.78
    
    
    $
    2.87
    
    
    $
    1.35
    
    
    $
    1.20Low
    
    $
    1.16
    
    
    $
    1.25
    
    
    $
    0.98
    
    
    $
    0.65
 Holders As of March 19, 2004, there were approximately 225 shareholders of record.
We estimate that an additional 3,500 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. Securities Authorized for Issuance Under Equity Compensation Plans The information required to be disclosed by Item 201(d) of Regulation S-K,
Securities Authorized for Issuance Under Equity Compensation Plans, is
included under Item 12 of Part III of this Annual Report on Form 10-K. Recent Sale of Unregistered Securities We did not have any unregistered sales of equity securities during fiscal
year 2003. 14




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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,
    
    2003
    
    2002
    
    2001
    
    2000
    
    19998Statement of operations data:Net sales
    
    $
    14,089
    
    
    $
    12,688
    
    
    $
    20,014
    
    
    $
    46,052
    
    
    $
    37,188Loss from operations
    
    
    (1,600
    )1,2
    
    
    (3,336
    )2,3
    
    
    (11,143
    )2,5
    
    
    (7,423
    )2,6
    
    
    (15,628
    )2Loss before cumulative effect of
a change in accounting principle
    
    
    (1,559
    )1,2
    
    
    (2,806
    )2,3

    
    
    (10,669
    )2,5
    
    
    (21,705
    )2,6,7
    
    
    (9,013
    )2Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    (6,486
    )4
    
    
    
    
    
    
    (824
    )8
    
    
    Net loss
    
    
    (1,559
    )1,2
    
    
    (9,292
    )2,3,4
    
    
    (10,669
    )2,5
    
    
    (22,529
    )2,6,7,8
    
    
    (9,013
    )2Per basic and diluted share:Loss before cumulative effect
of a change in accounting principle
    
    
    (0.16
    )
    
    
    (0.30
    )
    
    
    (1.13
    )
    
    
    (2.29
    )
    
    
    (0.95
    )Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    (0.68
    )
    
    
    
    
    
    
    (0.09
    )
    
    
    Net loss
    
    $
    (0.16
    )
    
    $
    (0.98
    )
    
    $
    (1.13
    )
    
    $
    (2.38
    )
    
    $
    (0.95
    )Weighted average common shares outstanding (basic and
diluted)
    
    
    9,477
    
    
    
    9,476
    
    
    
    9,438
    
    
    
    9,466
    
    
    
    9,470December 31,
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Balance sheet data:Total assets
    
    $
    16,469
    
    
    $

    18,081
    
    
    $
    29,386
    
    
    $
    44,374
    
    
    $
    63,604Long-term debt, less current portion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   1.
    
    Includes a $0.1 million restructuring charge. See Note 6 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 or 2003. Goodwill
amortization expense amounted to $0.7 million in 2001, $0.7 million in 2000, and $0.9 million in 1999. See Note 5 to the Consolidated Financial Statements.3.
    
    Includes a $0.7 million goodwill impairment charge. See Note 5 to the Consolidated Financial Statements.4.
    
    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.5.
    
    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.6.
    
    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.7.
    
    Includes a $17.3 million charge to record a valuation reserve against deferred tax assets. See Note 14 to the Consolidated Financial Statements.8.
    
    In 2000, we implemented a change in accounting for revenue for certain types of equipment sales. The cumulative effect of the change in accounting
principle was an after-tax charge of $0.8 million. Unaudited estimated pro forma results if the accounting change was in effect for the year ended December
31, 1999 would have been as follows: 15




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1999Unaudited pro forma (in thousands,
except per share data):Net sales
    
    $
    39,575Net loss
    
    
    (8,497
    )Net loss per diluted share
    
    $
    (0.90
    )
 Quarterly Financial Data (Unaudited)
(in thousands, except per share data) First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter2003 Net sales
    
    $
    3,070
    
    
    $
    3,243
    
    
    $
    3,325
    
    
    $
    4,451Gross profit
    
    
    1,571
    
    
    
    1,665
    
    
    
    1,737
    
    
    
    2,467Net income (loss)1
    
    
    (630
    )
    
    
    (511
    )
    
    
    (516
    )
    
    
    98Net income (loss) per share (basic and diluted)
    
    
    (0.07
    )
    
    
    (0.05
    )
    
    
    (0.05
    )
    
    
    0.012002 Net sales
    
    $
    3,117
    
    
    $
    3,177
    
    
    $
    3,219
    
    
    $
    3,175Gross profit
    
    
    1,706
    
    
    
    1,744
    
    
    
    1,727
    
    
    
    1,591Loss before cumulative effect of a
change in accounting principle 2
    
    
    (661
    )
    
    
    (583
    )
    
    
    (215
    )
    
    
    (1,347
    )Net loss 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
    )
   1.
    
    Includes a $0.1 million restructuring charge in the first quarter related to a workforce reduction. See Note 6
to the Consolidated Financial Statements.2.
    
    Includes an income tax benefit of $0.4 million in the third quarter related to a refund and a goodwill impairment
charge of $0.7 million in the fourth quarter. See Notes 5 and 14 to the Consolidated Financial Statements.3.
    
    Includes a $6.5 million charge related to a change in accounting principle in the first quarter, an income tax
benefit of $0.4 million in the third quarter related to a refund and a goodwill impairment charge of $0.7 million
in the fourth quarter. See Notes 5 and 14 to the Consolidated Financial Statements. 16




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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 2001, 2002 and
2003 may not be indicative of future operating results. Following a very strong year in calendar 2000, the semiconductor equipment
industry experienced a deep and prolonged business downturn during the
three-year period ended December 31, 2003. During most of this period, U.S. and
global economic conditions were generally weak and many semiconductor
manufacturers experienced significantly reduced demand for their products,
resulting in elevated inventory levels and significant excess production
capacity. These factors led to a dramatic cutback in capital spending,
resulting in the most severe downturn in the history of the semiconductor
equipment industry. In 2001, semiconductor manufacturers experienced a significant decrease in
demand for their products. 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%. This led semiconductor
manufacturers to sharply reduce capital spending and reschedule or cancel many
existing equipment orders. Revenues for the test, assembly and packaging, or
TAP, segment of the semiconductor equipment industry dropped approximately 61%
in 2001 from 2000 levels. Aetriums 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 ICs 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 21% from 2001 totals, for an aggregate decrease of
approximately 70% from 2000 levels. 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. In 2003, semiconductor industry business conditions remained very weak
although there were signs of improvement as the year progressed, including
increasing shipments of semiconductors, decreasing inventory levels, improving
capacity utilization rates and an improving economic climate. As the end of
the year approached, these factors led to increased capital spending at levels
that suggest the beginning of an industry recovery. Aetriums revenues
remained relatively flat through the first three
quarters of 2003 and increased in the fourth quarter as 17




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##### Table of Contents



equipment orders
increased significantly. As a result of the stronger fourth quarter, our 2003
revenues of $14.1 million were up 11% compared with 2002, which was comparable
to the percentage increase in capital spending by the worldwide semiconductor
industry as a whole in 2003. 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 of America. 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 upgrades. In
instances where title does not pass upon shipment, revenue is recognized upon
delivery or customer acceptance based upon the terms of the sales agreement.
In instances where equipment or equipment upgrade sales contracts 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, 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, 2003, our allowance
for doubtful accounts was $0.2 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, 2003, our inventory excess and
obsolescence reserve was $3.4 million. 18




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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. Step one requires
that 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. 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, 2003, the carrying value of our
identifiable intangible assets was $1.7 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, 2003, our warranty reserve
was $0.2 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 weakening 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, 2003, our valuation allowance was
$25.6 million. 19




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##### Table of Contents



Results of Operations: Selected statement of operations items as a percentage of our net sales
for 2003, 2002 and 2001 were as follows: 2003
    
    2002
    
    2001Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    47.2
    
    
    
    46.7
    
    
    
    65.1Gross profit
    
    
    52.8
    
    
    
    53.3
    
    
    
    34.9Operating expenses:Selling, general and administrative
    
    
    44.4
    
    
    
    55.9
    
    
    
    56.1Research and development
    
    
    18.8
    
    
    
    18.1
    
    
    
    23.5Goodwill impairment charge
    
    
    
    
    
    
    5.6
    
    
    
    Unusual charges
    
    
    1.0
    
    
    
    
    
    
    
    11.0Total operating expenses
    
    
    64.2
    
    
    
    79.6
    
    
    
    90.6Loss from operations
    
    
    (11.4
    )
    
    
    (26.3
    )
    
    
    (55.7
    )Other income, net
    
    
    .3
    
    
    
    .7
    
    
    
    1.3Loss before income taxes
    
    
    (11.1
    )
    
    
    (25.6
    )
    
    
    (54.4
    )Income tax benefit
    
    
    
    
    
    
    3.5
    
    
    
    1.1Net loss before cumulative effect of a
change in accounting principle
    
    
    (11.1
    )
    
    
    (22.1
    )
    
    
    (53.3
    )Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    (51.1
    )
    
    
    Net loss
    
    
    (11.1
    )%
    
    
    (73.2
    )%
    
    
    (53.3
    )%
 Net Sales: Our net sales by product line as a percentage of total sales for 2003,
2002 and 2001 were as follows: 2003
    
    2002
    
    2001Test handlers
    
    
    52
    %
    
    
    51
    %
    
    
    53
    %Semiconductor automation products
    
    
    11
    
    
    
    8
    
    
    
    16Reliability test equipment products
    
    
    20
    
    
    
    18
    
    
    
    18Change kits and spare parts
    
    
    17
    
    
    
    23
    
    
    
    13Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Aetriums net sales increased to $14.1 million in 2003 compared with $12.7
million in 2002, an increase of 11%. Quarterly revenue levels were relatively
flat in the first three quarters of the year, ranging from $3.1 to $3.3
million, and were comparable to revenue levels in each of the first three
quarters of 2002. Orders for new equipment increased significantly late in the
year with net sales amounting to $4.5 million in the fourth quarter. For the
year, equipment net sales increased across all product lines. Test handler net
sales, representing 52% of total net sales, increased 12% compared to 2002.
Net sales of our semiconductor automation products, representing 11% of total
net sales, increased 61% with increases in sales of both burn-in board
loaders/unloaders and automation products to OEM customers. Net sales of our
reliability test equipment, representing 20% of total net sales, increased 26%
in 2003 compared to 2002. Net sales of change kits and spare parts,
representing 17% of total net sales, decreased 23% compared to 2002. 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 net 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. Net 20




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##### Table of Contents



sales of test handlers, representing 51% of total net sales in 2002,
decreased 39% relative to 2001. Net sales of our reliability test equipment
decreased 36% in 2002 compared to 2001. Net 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 had also been adversely impacted by the industry downturn. Net sales
of spare parts and change kits increased 13% in 2002 from 2001 levels,
reflecting improving capacity utilization for some customers and certain
product applications. Gross Profit: Gross profit, as a percentage of net sales, was 52.8% in 2003 compared
with 53.3% in 2002 and 34.9% in 2001. Results for 2001 included an inventory
write-down of $2.7 million recorded in the fourth quarter. At that time,
following the terrorist attacks of September 11, 2001 and the ensuing economic
uncertainties, industry forecasters predicted that a significant recovery of
the semiconductor equipment industry would not occur for at least six months
and any improvement would be gradual. Based on these forecasts, we determined
that 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 in 2001 for these older products to
their estimated net realizable values based upon a revised expectation of
limited future sales of these products. The write-down amount was 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. This write-down reduced our 2001 gross
profit by 13.5%. Gross margins decreased in 2003 compared to 2002 primarily due to a higher
mix of automation equipment sales and a lower mix of change kits and spare
parts sales. Gross margins improved in 2002 relative to 2001 despite lower
revenue levels primarily due to lower costs resulting from restructuring
activities, including the restructuring of our North St. Paul, Minnesota
operations in December 2001, which resulted in lower costs for all of 2002. Selling, General and Administrative Expenses: Selling, general and administrative, or SG&A, expenses were $6.2 million
in 2003 compared with $7.1 million in 2002 and $11.2 million in 2001. In 2003,
wages decreased approximately $0.1 million due to a workforce reduction early
in the year. Commissions expense decreased approximately $0.2 million in 2003
partially due to the termination of our U.S. independent sales representatives
in 2002, although in the second half of 2003 we re-signed an independent
representative in one domestic territory. Warranty expense decreased
approximately $0.3 million in 2003 due to reduced warranty claims resulting
from product improvements and the settlement of a warranty claim with a
customer. The decrease in SG&A expenses in 2002 compared with 2001 resulted
primarily from a full year of cost savings realized from the restructuring
activities implemented in 2001, 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. Workforce reductions during 2001
resulted in a decrease in the number of our SG&A employees from 70 at December
31, 2000 to 42 at December 31, 2001. 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. 21




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Research and Development Expenses: Research and development expenses were $2.6 million in 2003 compared with
$2.3 million in 2002 and $4.7 million in 2001. The increase in 2003 relative to
2002 is attributed to higher materials costs of approximately $0.1 million and
higher contract services of approximately $0.2 million primarily associated
with the development of our new Model 55V8 test handler. The decrease in 2002
research and development expenses relative to 2001 reflects reductions in
wages, materials and contract services, including a full year of cost savings
realized from restructuring activities implemented in 2001. Workforce
reductions during 2001 resulted in a decrease in the number of research and
development employees from 62 at December 31, 2000 to 26 at December 31, 2001.
As a percentage of net sales, research and development expenses were 18.8%,
18.1% and 23.5% in 2003, 2002 and 2001, respectively, which were periods of
reduced sales due to the industry downturn. If industry conditions continue to
improve and our revenues increase accordingly, we would expect future research
and development expenses to approximate 13% to 15% of net sales. Goodwill Impairment Charges: 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 $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 22




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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 in 2002 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
    
    $
    7,140Intangible assets reclassified to goodwill at
January 1, 2002 upon the adoption of SFAS 142
    
    
    52Goodwill 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: Aetrium has been significantly impacted by the prolonged downturn in the
semiconductor equipment industry that began in late 2000 and continued through
2001, 2002 and into 2003. During this period, we implemented a number of
actions to improve operating efficiencies and reduce costs, including
restructuring of operations, workforce reductions, and facility consolidations. Fiscal 2003 In the quarter ended March 31, 2003, we terminated 6 employees in sales,
engineering, and administration. We recorded severance and related costs of
$149,000 in connection with this workforce reduction, which amount is included
in the unusual charges caption in our statement of operations. The workforce
reduction resulted in quarterly cost savings of approximately $129,000. Fiscal 2001 During 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): 23




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##### Table of Contents



Restructuring charges:Severance and related charges
    
    $
    928Facility exit charges:North St. Paul, MN facility
    
    
    606Grand Prairie, TX facility  accrual increase
    
    
    193Total restructuring charges
    
    
    1,727Write-down of equipment and leaseholds
    
    
    215Moving expenses and other transition costs
    
    
    261Total 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 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 weakening economic
conditions at the time, 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 May 2002, we
negotiated an early termination of the lease for a payment of $99,000. In 2001, we incurred moving and other transition costs of $261,000 related
to restructuring our operations. Approximately $203,000 was incurred in the
first quarter related primarily to the relocation and other final costs
associated with completing the transfer of operations from Poway, California to
North St. Paul, Minnesota. An additional $58,000 was related to moving
expenses incurred in the second quarter when we combined our operations in
Minnesota from two buildings into one. The following table summarizes severance and facility exit restructuring
charges and the associated accrual activity for the three years ended December
31, 2003 (in thousands): 24




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##### Table of Contents



Severance &
    
    FacilityRelated Costs
    
    Exit Costs
    
    TotalAccrual balance, December 31, 2000
    
    $
    491
    
    
    $
    305
    
    
    $
    796Severance and related charges
    
    
    928
    
    
    
    
    
    
    
    928Facility exit charges:North St. Paul, MN facility
    
    
    
    
    
    
    606
    
    
    
    606Grand Prairie, TX facility  accrual increase
    
    
    
    
    
    
    193
    
    
    
    193Cash payments
    
    
    (1,015
    )
    
    
    (400
    )
    
    
    (1,415
    )Accrual balance, December 31, 2001
    
    
    404
    
    
    
    704
    
    
    
    1,108Cash payments
    
    
    (404
    )
    
    
    (329
    )
    
    
    (733
    )Accrual balance, December 31, 2002
    
    
    
    
    
    
    375
    
    
    
    375Severance and related charges
    
    
    149
    
    
    
    
    
    
    
    149Cash payments
    
    
    (149
    )
    
    
    (151
    )
    
    
    (300
    )Accrual balance, December 31, 2003
    
    $
    
    
    
    $
    224
    
    
    $
    224
 The remaining $224,000 accrual for facility exit costs at December 31, 2003 is
primarily related to the vacated building in North St. Paul, Minnesota. 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 $41,000 in 2003, compared with $91,000
in 2002 and $248,000 in 2001. The decreases are attributable to lower average
cash balances during each year and generally declining interest rates. Income Taxes: In 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 2001 through 2003. 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. The refund claim in 2002 resulted from Federal
income tax law changes incorporated in the Job Creation and Worker Assistance
Act enacted in 2002. Financial Condition, Liquidity and Capital Resources: Cash and cash equivalents decreased by approximately $1.7 million in 2003
to $4.1 million at December 31, 2003. We used $1.5 million to fund operating
activities during this period. The major components of cash flows used in
operating activities were a net loss of $1.6 million, a $1.7 million increase
in accounts receivable and a $1.0 million decrease in accrued liabilities
partially offset by non-cash depreciation and amortization expense of $1.1
million, a $0.6 million decrease in inventories, and a $0.9 million increase in
accounts payable. Accounts receivable increased $1.7 million primarily due to
a 40% increase in net sales in the fourth quarter of 2003 compared with the
fourth quarter of 2002 and also due to the timing of certain collections. We
received approximately $0.7 million in customer payments at the end of December
2002 that resulted in a relatively low accounts receivable balance at December
31, 2002. Although we increased inventory purchases in December 2003 to support
increased order activity, inventory levels decreased throughout 2003 as we
continued inventory reduction initiatives first implemented during fiscal 2001.
Accounts payable increased primarily due to increased inventory purchases in
the fourth quarter of 2003 25




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as discussed above. Accrued liabilities
decreased
primarily due to a reduction in deferred revenue associated with two equipment sales for
which a total of $0.6 million in progress payments was received prior to
December 31, 2002 and revenue was recognized in 2003 upon final acceptance of
the equipment. Cash and cash equivalents decreased by $1.4 million in 2002 to $5.8
million at December 31, 2002. We used $1.3 million of cash in operating
activities in 2002. The major components of cash flows used in operating
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 at December 31, 2001. 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. Our use of cash in investing activities in 2003, 2002 and 2001 related
principally to expenditures for equipment, which amounted to $163,000, $41,000,
and $71,000, respectively. In the fourth quarter of 2003, we purchased
equipment for approximately $140,000 to upgrade our data processing
capabilities at our North St. Paul, Minnesota facility. 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. In addition to the data processing equipment purchased for our North St.
Paul facility in the fourth quarter of 2003, we expect to spend approximately
$100,000 in the first quarter of 2004 for additional equipment, including
equipment to upgrade our data processing capabilities at our Dallas, Texas
facility. In January 2004, we obtained a demand bank loan that provides for
borrowings of up to $190,000 to finance these equipment purchases. Such
borrowings bear interest at prime plus 1.5% and are due on July 16, 2004. The
prime interest rate was 4.0% at the inception of the loan. The loan agreement
provides that we may, at our option, convert any borrowings under the loan
agreement to a long term installment loan bearing interest at prime plus 1.5%,
with a minimum rate of 5.5% and maximum rate of 7.5%. Accordingly, prior to
June 30, 2004, we expect to convert borrowings under the agreement to a
five-year term loan with principal and interest installments payable monthly. With the exception of the data processing upgrades discussed above, we do
not anticipate significant capital spending in the next twelve months.
Historically we have supported our capital expenditure and working capital
needs with cash generated from operations and, in recent periods, with our
existing cash and cash equivalents. We believe our cash and cash equivalents of
$4.1 million at December 31, 2003 and the equipment financing described above
will be sufficient to meet capital expenditure and working capital needs at
least through 2004. However, if the apparent industry recovery proves to be
unsustainable and/or other factors, including future industry cycles,
negatively impact the 26




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demand for our products, future cash flows could be adversely affected.
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. As of December 31, 2003, we had no outstanding long-term debt. We do not
presently have a bank line of credit or other working capital financing.
However, we have had preliminary discussions with banks regarding obtaining
such financing if the need should arise. Although we believe we will be able
to secure such financing to fund future growth if needed, there can be no
assurance that such financing will be available with terms favorable to Aetrium
or at all. Our contractual obligations as of December 31, 2003 are summarized below
(in thousands): Payments Due By PeriodContractual Obligations
    
    Total
    
    2004
    
    2005
    
    2006Non-cancelable operating leases
    
    $
    1,258
    
    
    $
    574
    
    
    $
    581
    
    
    $
    103Purchase order commitments
    
    
    1,483
    
    
    
    1,483
    
    
    
    
    
    
    
    Total
    
    $
    2,741
    
    
    $
    2,057
    
    
    $
    581
    
    
    $
    103
 The above minimum operating lease payments have not been reduced by
minimum sublease rentals of $0.3 million due in the future under noncancellable
subleases. Purchase order commitments are related primarily to inventory
purchases in the ordinary course of business. In 2000, we vacated a leased 45,000 square-foot facility in Poway,
California. The lease was assigned to an unrelated company in 2000 and Aetrium
continued to be contingently liable under the lease if the assignee were to
default. In January 2004, we were notified by the lease assignee that it would
be discontinuing operations. We negotiated a termination of the lease
assignment for a lump sum payment and credit of $452,000 and the lease was
re-assigned to Aetrium. Approximately one-half of the facility is subleased to
two unrelated parties through March 2005. We are actively seeking a new tenant
for the vacant portion of the facility. This lease obligation and the future
minimum sublease rentals of approximately $0.3 million are not included in the
above table of future minimum lease payments.The Poway facility lease expires
in January 2010 and future minimum lease payments are as follows (in
thousands): 2004  $481; 2005:  $497; 2006  $515;
2007  $533; 2008  $551;
thereafter  $619. Recent Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS 150 requires that an issuer classify certain financial
instruments within its scope as a liability (or an asset in some
circumstances). Effective July 1, 2003, Aetrium adopted SFAS 150. Adoption of
this interpretation did not have an impact on our financial position or results
of operations. In May 2003, Emerging Issues Task Force (EITF) No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables was finalized. This issue
addresses certain aspects of accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. The guidance in
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. In December 2003, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, which codifies and rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this interpretive guidance consistent
with EITF 00-21. Adoption of this interpretation did not have an impact on our
financial position or results of operations. 27




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In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46
was revised in December, 2003 and clarifies the application of ARB 51 to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. The application of FIN 46 may require that an entity be subject to
consolidation even though the investor does not have a controlling financial
interest that, under ARB 51, was usually deemed to exist through ownership of a
majority voting interest. FIN 46, as revised, is generally effective for all
entities subject to the interpretation no later than the end of the first
reporting period that ends after March 15, 2004. Aetrium has no investments in
entities within the scope of FIN 46 and, therefore, we do not believe its
application will have a material effect on our financial statements. 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 downturn or
slowdown in the semiconductor industry could substantially reduce our revenues
and operating results and could harm our financial condition. It appears that
the semiconductor equipment industry has entered the beginning of a recovery
cycle. However, there can be no assurance about how long the recovery cycle
will continue or how robust it will be. Impact of Cost Reduction and Reorganization Actions During the course of 2001-2003, 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. We believe we have maintained the necessary infrastructures
to allow us to take full advantage of the industry recovery that appears to
have begun. However, there can be no assurance that our reduced personnel and
expenditure levels and the loss of the capabilities of personnel we have
terminated will not 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 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 28




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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 have a negative impact on our operating results. 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. Accordingly, in the event of a
reduction in our revenues, resulting from an industry downturn or otherwise, we
may not be able to maintain profitable operations. 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 conducting business internationally, which if
any of them occur 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 2001-2003 as our OEM customers experienced the same
business conditions that we were experiencing. As products incorporating our
Automation Modules continue to age, 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 29




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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 our product introductions or shipments, which could
damage our relationships with our customers and cause our operating results to
suffer. 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 short-term
investment of excess funds which, as of December 31, 2003, consisted primarily
of bank repurchase agreements 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
auditors are included in this Annual Report on Form 10-K beginning on page F-1.
The index to this report and the financial statements is included in Item
15(a)(1) below. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 
 ITEM 9A. CONTROLS AND PROCEDURES. Our President and Chief Executive Officer, our Chief Administrative
Officer and our Treasurer conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2003.
Based on their evaluation, they concluded that our disclosure controls and
procedures were effective and designed to give reasonable assurance that the
information required to be disclosed by us in reports that we file or submit
under the Exchange Act was made known to them by others and was recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms. There was no change in our internal controls that occurred
during the fourth fiscal quarter in the period covered by this Annual Report on
Form 10-K that has materially affected, or is reasonably likely to affect, our
internal controls over financial reporting. 30




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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, Election of Directors  Other Information About Nominees and
Election of DirectorsAdditional Information About the Board and Its
Committees in our 2004 Proxy Statement is incorporated in this Annual Report
on Form 10-K 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 2004 Proxy Statement is incorporated in this
Annual Report on Form 10-K by reference. Identification of Audit Committee; Audit Committee Financial Expert The information under the caption Executive Compensation and Other
Benefits  Audit Committee Report  Membership and Role of the Audit Committee
in our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K
by reference. Code of Ethics The information under the caption Code of Ethics in our 2004 Proxy
Statement is incorporated in this Annual Report on Form 10-K 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 2004 Proxy
Statement is incorporated in this Annual Report on Form 10-K 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 Executive Compensation and Other
BenefitsSecurities Authorized for Issuance Under Equity Compensation Plans in
our 2004 Proxy Statement is incorporated in this Annual Report on Form 10-K by
reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption Certain Relationships and Related
Transactions in our 2004 Proxy Statement is incorporated in this Annual Report
on Form 10-K by reference. 31




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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES. The information concerning principal accountant fees and services and the
audit committees pre-approval polices and procedures under the captions
Independent AuditorsAudit and Non-Audit Fees and Independent
AuditorsPre-approval Policies and Procedures in our 2004 Proxy Statement is
incorporated in this Annual Report on Form 10-K by reference. 32




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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 Auditors Report thereon are included herein: Description
    
    PageReport of Independent Auditors
    
    
    F-1Consolidated
Financial Statements:Consolidated Statements of Operations
    
    
    F-2Consolidated Balance Sheets
    
    
    F-3Consolidated Statements of Changes in Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6  F-18
 (a) 2. Financial Statement Schedule of Registrant. Schedule II   Valuation and Qualifying Accounts
    
    
    S-1 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 beginning on page E-1 of this Annual Report on Form 10-K. If you were one of our shareholders on March 31, 2004 and you want a copy
of any of the exhibits listed or referred to in the Exhibit Index, 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 15(c): 33




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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 (incorporated by reference to Exhibit 10.18
to our Annual Report on Form 10-K for the year ended December 31,
2002) File No. 0-22166).8.
    
    Form of Change of Control Agreement (filed herewith electronically).9.
    
    Sales Incentive Program (filed herewith electronically). (b) Reports onForm 8-K. In the fourth quarter of 2003 we filed a Current Report on Form 8-K dated
October 16, 2003 on our financial results for the quarter ended September 30,
2003, which included our press release of the same date and the financial
statements included therein for the quarter ended September 30, 2003. 34




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FINANCIAL STATEMENTS AND NOTES THERETO 
 Report of Independent Auditors 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, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003,
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 5 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangibles Assets. /s/ PricewaterhouseCoopers LLP Minneapolis, Minnesota
January 30, 2004 F-1




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AETRIUM INCORPORATED 
 Consolidated
Statements of Operations
 Year Ended December 31,
    
    2003
    
    2002
    
    2001Net sales
    
    $
    14,088,883
    
    
    $
    12,687,755
    
    
    $
    20,013,852Cost of goods sold
    
    
    6,648,671
    
    
    
    5,920,062
    
    
    
    13,032,316Gross profit
    
    
    7,440,212
    
    
    
    6,767,693
    
    
    
    6,981,536Operating expenses:Selling, general and administrative
    
    
    6,249,855
    
    
    
    7,099,306
    
    
    
    11,227,602Research and development
    
    
    2,641,803
    
    
    
    2,299,089
    
    
    
    4,694,477Goodwill impairment charge
    
    
    
    
    
    
    705,731
    
    
    
    Unusual charges
    
    
    149,000
    
    
    
    
    
    
    
    2,202,630Total operating expenses
    
    
    9,040,658
    
    
    
    10,104,126
    
    
    
    18,124,709Loss from operations
    
    
    (1,600,446
    )
    
    
    (3,336,433
    )
    
    
    (11,143,173
    )Other income, net
    
    
    41,294
    
    
    
    90,506
    
    
    
    247,864Loss before income taxes and cumulative effect of a
change in accounting principle
    
    
    (1,559,152
    )
    
    
    (3,245,927
    )
    
    
    (10,895,309
    )Income tax benefit
    
    
    
    
    
    
    440,000
    
    
    
    226,000Loss before cumulative effect of a change in
accounting principle
    
    
    (1,559,152
    )
    
    
    (2,805,927
    )
    
    
    (10,669,309
    )Cumulative effect of a change in accounting
principle, net of taxes (See Notes 2 and 5)
    
    
    
    
    
    
    (6,486,000
    )
    
    
    Net loss
    
    $
    (1,559,152
    )
    
    $
    (9,291,927
    )
    
    $
    (10,669,309
    )Loss per common share (basic and diluted):Loss before cumulative effect of a change in
accounting principle
    
    $
    (0.16
    )
    
    $
    (0.30
    )
    
    $
    (1.13
    )Cumulative effect of a change in accounting
principle, net of taxes (See Notes 2 and 5)
    
    
    
    
    
    
    (0.68
    )
    
    
    Net loss
    
    $
    (0.16
    )
    
    $
    (0.98
    )
    
    $
    (1.13
    )Weighted average common shares outstanding
(basic and diluted)
    
    
    9,477,000
    
    
    
    9,476,000
    
    
    
    9,438,000
 The accompanying notes are an integral part of the consolidated financial statements. F-2




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AETRIUM INCORPORATED 
 Consolidated Balance
Sheets
 December 31,
    
    2003
    
    2002ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,087,439
    
    
    $
    5,795,916Accounts receivable, net of allowance for
doubtful accounts of $237,000 and $280,000,
respectively
    
    
    3,320,345
    
    
    
    1,628,483Inventories
    
    
    6,688,728
    
    
    
    7,358,874Other current assets
    
    
    209,182
    
    
    
    151,613Total current assets
    
    
    14,305,694
    
    
    
    14,934,886Property and equipment:Furniture and fixtures
    
    
    597,628
    
    
    
    597,628Equipment
    
    
    2,497,810
    
    
    
    2,654,887Less accumulated depreciation and amortization
    
    
    (2,709,686
    )
    
    
    (2,780,911
    )Property and equipment, net
    
    
    385,752
    
    
    
    471,604Identifiable intangible assets, net
    
    
    1,749,870
    
    
    
    2,634,338Other assets
    
    
    27,774
    
    
    
    40,670Total assets
    
    $
    16,469,090
    
    
    $
    18,081,498LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Trade accounts payable
    
    $
    1,539,636
    
    
    $
    596,683Accrued compensation
    
    
    312,028
    
    
    
    441,811Other accrued liabilities
    
    
    946,865
    
    
    
    1,815,071Total current liabilities
    
    
    2,798,529
    
    
    
    2,853,565Commitments
and contingencies (See Note 10)Shareholders equity:Common stock, $.001 par value; 30,000,000
shares authorized; 9,477,910 and 9,477,044
shares issued and outstanding, respectively
    
    
    9,478
    
    
    
    9,477Additional paid-in capital
    
    
    60,251,952
    
    
    
    60,250,173Accumulated deficit
    
    
    (46,590,869
    )
    
    
    (45,031,717
    )Total shareholders equity
    
    
    13,670,561
    
    
    
    15,227,933Total liabilities and shareholders equity
    
    $
    16,469,090
    
    
    $
    18,081,498
 The accompanying notes are an integral part of the consolidated financial statements. F-3




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AETRIUM INCORPORATED 
 Consolidated
Statements of Changes in Shareholders Equity
 Common Stock
    
    
    
    
    
    
    
    
    
    TotalAdditional
    
    Accumulated
    
    ShareholdersShares
    
    Amount
    
    Paid-in Capital
    
    Deficit
    
    EquityBalance, December 31, 2000
    
    
    9,474,566
    
    
    $
    9,475
    
    
    $
    60,246,000
    
    
    $
    (25,070,481
    )
    
    $
    35,184,994Purchase 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
    
    
    
    
    
    
    
    543,673Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,669,309
    )
    
    
    (10,669,309
    )Balance, December 31, 2001
    
    
    9,474,566
    
    
    
    9,475
    
    
    
    60,246,000
    
    
    
    (35,739,790
    )
    
    
    24,515,685Exercise of stock options
    
    
    2,478
    
    
    
    2
    
    
    
    4,173
    
    
    
    
    
    
    
    4,175Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,291,927
    )
    
    
    (9,291,927
    )Balance, December 31, 2002
    
    
    9,477,044
    
    
    
    9,477
    
    
    
    60,250,173
    
    
    
    (45,031,717
    )
    
    
    15,227,933Exercise of stock options
    
    
    866
    
    
    
    1
    
    
    
    1,779
    
    
    
    
    
    
    
    1,780Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,559,152
    )
    
    
    (1,559,152
    )Balance, December 31, 2003
    
    
    9,477,910
    
    
    $
    9,478
    
    
    $
    60,251,952
    
    
    $
    (46,590,869
    )
    
    $
    13,670,561
 The accompanying notes are an integral part of the consolidated financial statements. F-4




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AETRIUM INCORPORATED 
 Consolidated
Statements of Cash Flows
 Year Ended December 31,
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net loss
    
    $
    (1,559,152
    )
    
    $
    (9,291,927
    )
    
    $
    (10,669,309
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    1,133,278
    
    
    
    1,299,970
    
    
    
    2,186,643Provision for excess and obsolete inventories
    
    
    80,000
    
    
    
    100,000
    
    
    
    3,657,017Write-downs of goodwill, equipment and leaseholds
    
    
    
    
    
    
    705,731
    
    
    
    214,793Restructuring charges
    
    
    
    
    
    
    
    
    
    
    1,727,000Cumulative effect of a change in accounting
principle, net of taxes
    
    
    
    
    
    
    6,486,000
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (1,691,862
    )
    
    
    (123,301
    )
    
    
    6,479,133Refundable income taxes
    
    
    
    
    
    
    
    
    
    
    345,329Inventories
    
    
    590,146
    
    
    
    1,497,140
    
    
    
    70,169Other current assets
    
    
    (57,569
    )
    
    
    (20,351
    )
    
    
    56,364Other assets
    
    
    12,896
    
    
    
    15,692
    
    
    
    29,871Trade accounts payable
    
    
    942,953
    
    
    
    (79,623
    )
    
    
    (3,186,201
    )Accrued compensation
    
    
    (129,783
    )
    
    
    (51,463
    )
    
    
    (1,004,302
    )Other accrued liabilities
    
    
    (868,206
    )
    
    
    (1,886,092
    )
    
    
    (1,854,606
    )Net cash used in operating activities
    
    
    (1,547,299
    )
    
    
    (1,348,224
    )
    
    
    (1,948,099
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (162,958
    )
    
    
    (40,611
    )
    
    
    (70,798
    )Proceeds from sale of equipment
    
    
    
    
    
    
    
    
    
    
    67,341Net cash used in investing activities
    
    
    (162,958
    )
    
    
    (40,611
    )
    
    
    (3,457
    )Cash flows from financing activities:Net proceeds from sale of common stock
    
    
    1,780
    
    
    
    4,175
    
    
    
    543,673Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    (543,673
    )Net cash provided by financing activities
    
    
    1,780
    
    
    
    4,175
    
    
    
    Decrease in cash and cash equivalents
    
    
    (1,708,477
    )
    
    
    (1,384,660
    )
    
    
    (1,951,556
    )Cash and cash equivalents at beginning of year
    
    
    5,795,916
    
    
    
    7,180,576
    
    
    
    9,132,132Cash and cash equivalents at end of year
    
    $
    4,087,439
    
    
    $
    5,795,916
    
    
    $
    7,180,576
 The accompanying notes are an integral part of the consolidated financial statements. F-5




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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
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
of America 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. Cash Equivalents:Cash equivalents include highly liquid investments purchased
with an original maturity of three months or less. 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 $0.2 million, $0.4 million and $0.6 million
for the years ended December 31, 2003, 2002 and 2001, respectively. Maintenance
and repairs are charged to expense as incurred. Goodwill:Effective January 1, 2002, Aetrium 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. Step one requires that Aetrium
compare the fair value of its single reporting unit (i.e., Aetrium) with the
net carrying value of its assets, including goodwill. If the fair value is less
than the net asset carrying value, Aetrium performs the second step of the
impairment test. In step two, Aetrium compares the aggregate fair values of
non-goodwill assets and liabilities with the fair value of Aetrium in order to
determine the implied fair value of goodwill. If the carrying value of goodwill
exceeds its implied value, an impairment loss is recorded. See Note 5 for
additional information regarding the adoption of SFAS 142 and the results of
the transitional and annual impairment tests. Other Intangible Assets: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. 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, Aetrium would measure the impairment loss as the amount by which
the carrying value of the asset exceeds its fair value. F-6




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements 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
upgrades. In instances where title does not pass upon shipment, revenue is
recognized upon delivery or customer acceptance based upon the terms of the
sales agreement. In instances where equipment or equipment upgrade sales
contracts 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, 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 in our consolidated 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. 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, 2003
(in thousands): Balance at
    
    Accruals for
    
    
    
    
    
    Balance atbeginning of
    
    warranties
    
    Settlements
    
    end ofyear
    
    issued
    
    made
    
    year2001
    
    $
    433
    
    
    $
    503
    
    
    $
    (481
    )
    
    $
    4552002
    
    
    455
    
    
    
    333
    
    
    
    (383
    )
    
    
    4052003
    
    
    405
    
    
    
    81
    
    
    
    (281
    )
    
    
    205
 There were no changes in estimated warranty 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 F-7




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements stock options using the treasury stock
method. Stock options are not included in the diluted loss per share
calculations in 2003, 2002 and 2001 because they are antidilutive. As of
December 31, 2003, 2002 and 2001, respectively, there were 1,895,299,
1,498,746, and 1,124,000 outstanding stock options that could have potentially
impacted diluted earnings per share. Stock-Based Employee Compensation:Aetrium accounts for its stock incentive
plans 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 to employees and directors under our plans
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,
    
    2003
    
    2002
    
    2001Net loss, as reported
    
    $
    (1,559
    )
    
    $
    (9,292
    )
    
    $
    (10,669
    )Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all grants, net of related tax
effects
    
    
    (311
    )
    
    
    (641
    )
    
    
    (702
    )Pro forma net loss
    
    $
    (1,870
    )
    
    $
    (9,933
    )
    
    $
    (11,371
    )Net loss per basic and diluted share:As reported
    
    $
    (0.16
    )
    
    $
    (0.98
    )
    
    $
    (1.13
    )Pro forma
    
    $
    (0.20
    )
    
    $
    (1.05
    )
    
    $
    (1.20
    )
 Using the Black-Scholes option-pricing model, the weighted-average fair value
of options granted in 2003, 2002, and 2001 was $1.31, $0.99, and $0.81,
respectively. Weighted average assumptions used in applying the Black-Scholes
option-pricing model to estimate the fair value of options granted were as
follows: 2003
    
    2002
    
    2001Expected dividend level
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected stock price volatility
    
    
    66
    %
    
    
    65
    %
    
    
    63
    %Risk-free interest rate
    
    
    2.6
    %
    
    
    3.0
    %
    
    
    4.0
    %Expected life of options (years)
    
    
    3.5
    
    
    
    3.5
    
    
    
    3.5
 See Note 12 for additional information regarding Aetriums stock option plans. 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 May 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS 150 requires that an issuer classify certain financial instruments within
its scope as a liability (or an asset in some circumstances). Effective July 1,
2003, Aetrium adopted SFAS 150. Adoption of this interpretation did not have
an impact on our financial position or results of operations. F-8




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements In May 2003, Emerging Issues Task Force (EITF) No. 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables was finalized. This issue
addresses certain aspects of accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. The guidance in
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. In December 2003, the Securities and Exchange
Commission issued Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, which codifies and rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this interpretive guidance consistent
with EITF 00-21. Adoption of this interpretation did not have an impact on our
financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (FIN 46). FIN 46
was revised in December, 2003 and clarifies the application of ARB 51 to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support. The application of FIN 46 may require that an entity be subject to
consolidation even though the investor does not have a controlling financial
interest that, under ARB 51, was usually deemed to exist through ownership of a
majority voting interest. FIN 46, as revised, is generally effective for all
entities subject to the interpretation no later than the end of the first
reporting period that ends after March 15, 2004. Aetrium has no investments in
entities within the scope of FIN 46 and, therefore, we do not believe its
application will have a material effect on our financial statements. 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,
    
    2003
    
    2002
    
    2001Interest paid
    
    $
    5
    
    
    $
    11
    
    
    $
    11Income taxes (refunded), net
    
    $
    
    
    
    $
    (440
    )
    
    $
    (631
    )
 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 $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 F-9




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements 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 in 2002 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
    
    $
    7,140Intangible assets reclassified to goodwill at
January 1, 2002 upon the adoption of SFAS 142
    
    
    52Goodwill 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,
    
    2003
    
    2002Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    amortization
    
    Net
    
    Gross
    
    amortization
    
    NetDeveloped technology
    
    $
    2,600
    
    
    $
    (2,155
    )
    
    $
    445
    
    
    $
    2,600
    
    
    $
    (1,799
    )
    
    $
    801Core technology
    
    
    3,167
    
    
    
    (2,368
    )
    
    
    799
    
    
    
    3,167
    
    
    
    (1,962
    )
    
    
    1,205Customer list
    
    
    1,100
    
    
    
    (633
    )
    
    
    467
    
    
    
    1,100
    
    
    
    (523
    )
    
    
    577Other
    
    
    99
    
    
    
    (60
    )
    
    
    39
    
    
    
    99
    
    
    
    (48
    )
    
    
    51Total
    
    $
    6,966
    
    
    $
    (5,216
    )
    
    $
    1,750
    
    
    $
    6,966
    
    
    $
    (4,332
    )
    
    $
    2,634
 F-10




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements As explained above, in accordance with the adoption of SFAS 142 in 2002, we
recorded no goodwill amortization expense in 2002 and 2003. Prior to January 1,
2002, we amortized goodwill on a straight-line basis primarily over 15 years.
The following table shows pro forma results for the year ended December 31,
2001 if goodwill had not been amortized (in thousands, except per share
amounts): 2001Net loss:Reported net loss
    
    $
    (10,669
    )Add back: goodwill amortization
    
    
    713Pro forma net loss
    
    $
    (9,956
    )Net loss per basic and diluted share:Reported net loss
    
    $
    (1.13
    )Add back: goodwill amortization
    
    
    .08Pro forma net loss
    
    $
    (1.05
    )
 Amortization expense amounted to $0.9 million, $0.9 million and $1.6 million in
2003, 2002 and 2001, respectively. Estimated amortization expense in future
years is as follows: 2004  $0.9 million; 2005  $0.5 million; 2006  $0.2
million; 2007  $0.1 million. NOTE 6: UNUSUAL CHARGES Aetrium has been significantly impacted by the prolonged downturn in the
semiconductor equipment industry that began in late 2000 and continued through
2001, 2002 and into 2003. During this period, we implemented a number of
actions to improve operating efficiencies and reduce costs, including
restructuring of operations, workforce reductions, and facility consolidations. Fiscal 2003 In the quarter ended March 31, 2003, we terminated 6 employees in sales,
engineering, and administration. We recorded severance and related costs of
$149,000 in connection with this workforce reduction. Fiscal 2001 During 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
    
    $
    928Facility exit charges:North St. Paul, MN facility
    
    
    606Grand Prairie, TX facility  accrual increase
    
    
    193Total restructuring charges
    
    
    1,727Write-down of equipment and leaseholds
    
    
    215Moving expenses and other transition costs
    
    
    261Total 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 F-11




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements 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. 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 weakening economic conditions at the
time, 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 May 2002, we negotiated an early termination of
the lease for a payment of $99,000. In 2001, we incurred moving and other transition costs of $261,000 related to
restructuring our operations. Approximately $203,000 was incurred in the first
quarter related primarily to the relocation and other final costs associated
with completing the transfer of operations from Poway, California to No. St.
Paul, Minnesota. An additional $58,000 was related to moving expenses incurred
in the second quarter when we combined our operations in Minnesota from two
buildings into one. The following table summarizes severance and facility exit restructuring
charges and the associated accrual activity for the three years ended December
31, 2003 (in thousands): Severance &
    
    FacilityRelated Costs
    
    Exit Costs
    
    TotalAccrual balance, December 31, 2000
    
    $
    491
    
    
    $
    305
    
    
    $
    796Severance and related charges
    
    
    928
    
    
    
    
    
    
    
    928Facility exit charges:North St. Paul, MN facility
    
    
    
    
    
    
    606
    
    
    
    606Grand Prairie, TX facility  accrual increase
    
    
    
    
    
    
    193
    
    
    
    193Cash payments
    
    
    (1,015
    )
    
    
    (400
    )
    
    
    (1,415
    )Accrual balance, December 31, 2001
    
    
    404
    
    
    
    704
    
    
    
    1,108Cash payments
    
    
    (404
    )
    
    
    (329
    )
    
    
    (733
    )Accrual balance, December 31, 2002
    
    
    
    
    
    
    375
    
    
    
    375Severance and related charges
    
    
    149
    
    
    
    
    
    
    
    149Cash payments
    
    
    (149
    )
    
    
    (151
    )
    
    
    (300
    )Accrual balance, December 31, 2003
    
    $
    
    
    
    $
    224
    
    
    $
    224
 The remaining $224,000 accrual for facility exit costs at December 31, 2003 is
primarily related to the vacated building in North St. Paul, Minnesota. We
estimate that the accrual will be utilized at the rate of approximately $25,000
per quarter. F-12




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements NOTE 7: INVENTORIES A summary of the composition of inventories is as follows (in thousands): December 31,
    
    2003
    
    2002Purchased parts and completed subassemblies
    
    $
    3,127
    
    
    $
    3,247Work-in-process
    
    
    2,414
    
    
    
    2,613Finished goods, including demonstration equipment
    
    
    824
    
    
    
    955Equipment shipped, subject to revenue deferral
    
    
    324
    
    
    
    544Total inventories
    
    $
    6,689
    
    
    $
    7,359
 We recorded inventory excess and obsolescence charges in cost of goods sold
amounting to $0.1 million, $0.1 million, and $3.7 million in 2003, 2002, and
2001, respectively. These charges included write-downs related to product
design changes made in the ordinary course of our business. 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. The 2001 charges
also include an unusual inventory write-down of $2.7 million. As a result of
the severe semiconductor industry downturn that began in late 2000 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 in 2001 for
these older products to their estimated net realizable values based upon a
revised expectation of limited future sales of these products. The inventory
write-down was 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. NOTE 8: OTHER ACCRUED LIABILITIES: Other accrued liabilities are comprised of the following (in thousands): December 31,
    
    2003
    
    2002Accrued commissions
    
    $
    146
    
    
    $
    51Accrued warranty
    
    
    205
    
    
    
    405Customer deposits and deferred revenue
    
    
    71
    
    
    
    687Accrued restructuring costs
    
    
    224
    
    
    
    375Other
    
    
    301
    
    
    
    297Total other accrued liabilities
    
    $
    947
    
    
    $
    1,815
 NOTE 9: LONG-TERM DEBT AND EQUIPMENT FINANCING AGREEMENT As of December 31, 2003, we had no long-term debt. In January 2004, we
obtained a demand bank loan that provides for borrowings of up to $190,000 to
finance data processing equipment purchases. The loan agreement provides that
we may, at our option, convert any borrowings under the loan agreement to a
term loan payable in monthly principal and interest payments over five years. 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 February 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. As of March 2004,
we have subleased approximately 20,000 square feet of this building to three
unrelated parties with terms coinciding with the expiration of our lease. We
are actively trying to sublease the remaining vacant space of approximately
10,000 square feet. F-13




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AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Aetrium also leases its Dallas facility and certain equipment under
various operating leases. Rent expense under all operating leases was as
follows (in thousands): Year ended Dec. 31,
    
    2003
    
    2002
    
    2001Leased from shareholders
    
    $
    438
    
    
    $
    438
    
    
    $
    438Leased from others
    
    
    344
    
    
    
    473
    
    
    
    561Sublease/assigned lease income
    
    
    (341
    )
    
    
    (351
    )
    
    
    (164
    )Total net rent expense
    
    $
    441
    
    
    $
    560
    
    
    $
    835
 As of December 31, 2003, future minimum annual lease payments under operating
leases were as follows (in thousands): 2004
    
    $
    5742005
    
    
    5812006
    
    
    103Total minimum lease payments
    
    $
    1,258
 The above minimum lease payments have not been reduced by minimum sublease
rentals of $0.3 million due in the future under noncancellable subleases. In 2000, we vacated a leased 45,000 square-foot facility in Poway, California.
The lease was assigned to an unrelated company in 2000 and Aetrium continued to
be contingently liable under the lease if the assignee were to default. In
January 2004, we were notified by the lease assignee that it would be
discontinuing operations. We negotiated a termination of the lease assignment
for a lump sum payment and credit of $452,000 and the lease was re-assigned to
Aetrium. Approximately one-half of the facility is subleased to two unrelated
parties through March 2005. We are actively seeking a new tenant for the
vacant portion of the facility. This lease obligation and the future minimum
sublease rentals of approximately $0.3 million are not included in the above
table of future minimum lease payments.The Poway facility lease expires in
January 2010 and future minimum lease payments are as follows (in thousands):
2004  $481; 2005  $497; 2006  $515; 2007 
$533; 2008  $551; thereafter -
$619. 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 in each of the years ended December 31, 2003, 2002 and
2001. 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 OPTION PLANS Aetriums 1993 Stock Incentive Plan (the 1993 Plan) terminated on June 8, 2003.
Stock options granted under the 1993 Plan that were outstanding at the time
the plan terminated may continue to be exercised according to their individual
terms. On May 21, 2003, Aetriums shareholders approved the adoption of the
2003 Stock Incentive Plan (the 2003 Plan) to replace the 1993 Plan. Employees,
officers, directors, consultants and independent contractors providing services
to us are eligible to receive awards under the 2003 Plan. The number of shares
available for issuance under the 2003 Plan is equal to 20.0% 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 outstanding stock
options, warrants or other stock F-14




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements rights. Our 2003 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 the 2003 Plan may be incentive stock
options or nonqualified stock options. The 2003 Plan will terminate on February
28, 2013. Our stock incentive plans provide 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. The following table summarizes activity under our stock incentive plans: Outstanding OptionsNumber
    
    Range of
    
    Weighted Averageof Shares
    
    Exercise Prices
    
    Exercise PriceBalance, December 31, 2000
    
    
    1,529,417
    
    
    $
    5.63 to  18.81
    
    
    $
    7.70Options granted
    
    
    332,000
    
    
    
    1.69
    
    
    
    1.69Options forfeited
    
    
    (737,417
    )
    
    
    1.69 to 18.81
    
    
    
    9.25Balance, December 31, 2001
    
    
    1,124,000
    
    
    
    1.69 to 7.08
    
    
    
    4.91Options granted
    
    
    545,300
    
    
    
    1.03 to   2.06
    
    
    
    2.02Options exercised
    
    
    (2,478
    )
    
    
    1.69
    
    
    
    1.69Options forfeited
    
    
    (168,076
    )
    
    
    1.69 to 7.08
    
    
    
    5.47Balance, December 31, 2002
    
    
    1,498,746
    
    
    
    1.03 to 7.08
    
    
    
    3.80Options granted
    
    
    701,950
    
    
    
    0.87 to   2.76
    
    
    
    2.70Options exercised
    
    
    (866
    )
    
    
    2.06
    
    
    
    2.06Options forfeited
    
    
    (304,531
    )
    
    
    1.03 to 7.08
    
    
    
    5.70Balance, December 31, 2003
    
    
    1,895,299
    
    
    $
    0.87 to 7.08
    
    
    $
    3.09Options exercisable as of
December 31, 2003
    
    
    907,179
    
    
    $
    0.87 to 7.08
    
    
    $
    3.56
 The following table summarizes information related to stock options outstanding
at December 31, 2003, all of which are nonqualified options and expire five
years after the grant date and of which 377,195 options were fully exercisable
when granted and 1,518,104 options become exercisable over a four to five-year
period: Options Outstanding
    
    Options ExercisableWeightedRange of
    
    Number
    
    Average
    
    Weighted
    
    Number
    
    WeightedExercise
    
    Outstanding
    
    Remaining
    
    Average
    

    Exercisable
    
    AveragePrices
    
    at 12/31/03
    
    Contractual Life
    
    Exercise Price
    
    at 12/31/03
    
    Exercise Price$    0.87
to 1.03
    
    
    32,500
    
    
    3.9 years
    
    $
    0.93
    
    
    
    8,490
    
    
    $
    0.941.69 to 2.06
    
    
    778,016
    
    
    3.0 years
    
    
    1.91
    
    
    
    538,721
    
    
    
    1.872.76
    
    
    681,950
    
    
    5.0 years
    
    
    2.76
    
    
    
    
    
    
    
    5.69 to 7.08
    
    
    402,833
    
    
    1.2 years
    
    
    6.09
    
    
    
    359,968
    
    
    
    6.13$    0.87
to 7.08
    
    
    1,895,299
    
    
    3.3 years
    
    $
    3.09
    
    
    
    907,179
    
    
    $
    3.56
 NOTE 13: EMPLOYEE SAVINGS 401(k) AND STOCK PURCHASE PLANS Aetrium has 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 in 2001. We made no
contributions to the plan in 2002 or 2003. F-15




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Prior to and during 2003, Aetrium had a
nonqualified employee stock purchase plan until the plan was terminated in December 2003.  Employees could acquire shares of our
common stock by contributing to the plan through payroll deductions. Such contributions were limited to 10% of
each employees base compensation. The plan purchased common shares on the
open market on a monthly basis. Aetrium matched a portion of employee
contributions at managements discretion. Such matching contributions amounted
to $433, $1,361, and $4,984 in 2003, 2002 and 2001, respectively. NOTE 14: INCOME TAXES The income tax benefit reported in our consolidated statement of operations is
made up of the following components (in thousands): Year ended December 31,
    
    2003
    
    2002
    
    2001Current tax benefit:Federal
    
    $
    
    
    
    $
    (440
    )
    
    $
    (226
    )State
    
    
    
    
    
    
    
    
    
    
    Total current benefit
    
    
    
    
    
    
    (440
    )
    
    
    (226
    )Deferred tax benefit:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    Total deferred benefit
    
    
    
    
    
    
    
    
    
    
    Total income tax benefit
    
    $
    
    
    
    $
    (440
    )
    
    $
    (226
    )
 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,
    
    2003
    
    2002
    
    2001Tax benefit computed at federal
statutory rate
    
    $
    (530

    )
    
    $
    (3,309
    )
    
    $
    (3,704
    )State taxes, net of federal benefit
    
    
    (31
    )
    
    
    (217
    )
    
    
    (273
    )Increase (decrease) in tax from:Business meals and entertainment
    
    
    17
    
    
    
    15
    
    
    
    23Tax credits
    
    
    
    
    
    
    
    
    
    
    (284
    )Valuation allowance change
    
    
    561
    
    
    
    3,066
    
    
    
    4,113Other, net
    
    
    (17
    )
    
    
    5
    
    
    
    (101
    )Reported income tax benefit
    
    $
    
    
    
    $
    (440
    )
    
    $
    (226
    )
 F-16




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Deferred tax assets (liabilities) are comprised of the following (in
thousands): December 31,
    
    2003
    
    2002
    
    2001Accounts receivable, principally due to
allowances for doubtful accounts
    
    $
    81
    
    
    $
    95
    
    
    $
    134Inventories, principally due to
reserves
for excess and obsolete inventories
and additional costs inventoried for
tax purposes pursuant to the Tax
Reform Act of 1986
    
    
    1,193
    
    
    
    1,416
    
    
    
    1,483Employee compensation and benefits
accrued for financial reporting
purposes
    
    
    54
    
    
    
    57
    
    
    
    75Amortization of intangibles
    
    
    7,379
    
    
    
    7,970
    
    
    
    6,110NOL and tax credit carryforwards
    
    
    16,721
    
    
    
    15,198
    
    
    
    13,707Restructuring accruals
    
    
    76
    
    
    
    127
    
    
    
    304Other, net
    
    
    124
    
    
    
    204
    
    
    
    188Deferred tax asset
    
    $
    25,628
    
    
    $
    25,067
    
    
    $
    22,001Less, valuation allowance
    
    
    (25,628
    )
    
    
    (25,067
    )
    
    
    (22,001
    )Net deferred tax asset
    
    $
    
    
    
    $
    
    
    
    $
    
 Since 2000, Aetrium has maintained a valuation allowance to fully reserve our
deferred tax assets due to the uncertainty of realizing these assets. 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 2002 and $0.2 million in 2001 related to refunds of
income taxes paid and expensed prior to 2001. The tax refund received in 2002
resulted from tax legislation enacted in 2002. Aetrium has federal net operating loss carryforwards of approximately $44
million that will begin to expire in 2020 if not utilized. We also have state
net operating loss carryforwards of approximately $15 million that will expire
at various times, beginning in 2005, if not utilized. We also have federal and
state research tax credit carryforwards of approximately $1 million that will
expire at various times, beginning in 2013, if not utilized. 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,
    
    2003
    
    2002
    
    2001Test handlers
    
    
    52
    %
    
    
    51
    %
    
    
    53
    %Semiconductor automation products
    
    
    11
    
    
    
    8
    
    
    
    16Reliability test equipment products
    
    
    20
    
    
    
    18
    
    
    
    18Change kits and spare parts
    
    
    17
    
    
    
    23
    
    
    
    13Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 F-17




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##### Table of Contents



AETRIUM INCORPORATED
Notes to Consolidated Financial Statements Sales by geographic region based on product shipment destination were as
follows (in thousands): Year ended December 31,
    
    2003
    
    2002
    
    2001United States
    
    $
    6,531
    
    
    $
    5,186
    
    
    $
    12,700Asia
    
    
    5,357
    
    
    
    6,688
    
    
    
    5,485Europe
    
    
    2,120
    
    
    
    756
    
    
    
    1,399Other
    
    
    81
    
    
    
    58
    
    
    
    430Total
    
    $
    14,089
    
    
    $
    12,688
    
    
    $
    20,014
 Sales to customers comprising more than 10% of our total net sales were as
follows: Year ended December 31,
    
    2003
    
    2002
    
    2001Customer A
    
    
    37
    %
    
    
    31
    %
    
    
    23
    %Customer B
    
    
    11
    %
    
    
    *
    
    
    
    *
 * Sales to customer were less than 10% of total net sales Accounts receivable from customers comprising more than 10% of our total
accounts receivable were as follows: December 31,
    
    2003
    
    2002Customer A
    
    
    34
    %
    
    
    39
    %Customer C
    
    
    12
    %
    
    
    *Customer D
    
    
    *
    
    
    
    15
    %
 * Accounts receivable from customer were less than 10% of 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-18




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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 INCORPORATEDDate: March 30, 2004
    
    By:
    
    /s/ Joseph C. LevesqueJoseph C. LevesqueChief Executive Officer and President(principal executive officer)By:
    
    /s/ Paul H. AskegaardPaul H. AskegaardTreasurer(principal financial and accounting officer)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2004 by the following persons on
behalf of the registrant and in the capacities indicated. Signature
    
    Title/s/ Joseph C. Levesque
Joseph C. Levesque
    
    Chairman of the Board/s/ Darnell L. Boehm
Darnell L. Boehm
    
    Director/s/ Terrence W. Glarner
Terrence W. Glarner
    
    Director/s/ Andrew J. Greenshields
Andrew J. Greenshields
    
    Director/s/ Douglas L. Hemer
Douglas L. Hemer
    
    Director




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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, 2003
 ItemNo.
    
    Item
    
    Method of Filing3.1
    
    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).
 E-1




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##### Table of Contents



ItemNo.
    
    Item
    
    Method of Filing10.8
    
    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.
    
    Incorporated by reference to
Exhibit 10.17 to our Annual
Report on Form 10-K for the
year ended December 31, 2002
(File No. 0-22166).
 E-2




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##### Table of Contents



ItemNo.
    
    Item
    
    Method of Filing10.18
    
    2003 Stock Incentive Plan.
    
    Incorporated by reference to
Exhibit 10.17 to our Annual
Report on Form 10-K for the
year ended December 31, 2002
(File No. 0-22166).10.19
    
    Form of Change of Control Agreement
    
    Filed herewith electronically.10.20
    
    Assignment Agreement, dated January 20,
2004, by and between us and Littlefeet,
Inc.
    
    Filed herewith electronically.10.21
    
    Sales Incentive Program
    
    Filed herewith electronically.14.1
    
    Code of Business Conduct and Ethics
    
    Filed herewith electronically.21.1
    
    Subsidiaries of the Registrant.
    
    Filed herewith electronically.23.1
    
    Independent Accountants Consent.
    
    Filed herewith electronically.31.1
    
    Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
    
    Filed herewith electronically.31.2
    
    Certification of Chief Administrative
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
    
    Filed herewith electronically.31.3
    
    Certification of Treasurer pursuant to
Section 302 of the Sarbanes-Oxley Act of
2002.
    
    Filed herewith electronically.32.1
    
    Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
    
    Filed herewith electronically.
 E-3




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##### Table of Contents



SCHEDULE II Valuation and Qualifying Accounts Balance at
    
    
    
    
    
    
    
    
    
    Balance atbeginning of
    
    
    
    
    
    
    
    
    
    end ofDescription
    
    year
    
    Additions
    
    Deductions
    
    yearAllowance for doubtful accounts:2001
    
    $
    514
    
    
    $
    0
    
    
    $
    (119
    )
    
    $
    3952002
    
    
    395
    
    
    
    0
    
    
    
    (115
    )
    
    
    2802003
    
    
    280
    
    
    
    0
    
    
    
    (43
    )
    
    
    237Inventory excess and
obsolescence reserve1:2001
    
    $
    2,258
    
    
    $
    3,657
    
    
    $
    (1,744
    )
    
    $
    4,1712002
    
    
    4,171
    
    
    
    100
    
    
    
    (270
    )
    
    
    4,0012003
    
    
    4,001
    
    
    
    80
    
    
    
    (721
    )
    
    
    3,360
   (1)
    
    Deductions represent sales or disposals of reserved inventory. S-1