**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **FORM
        10-K**
 **ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(** **d** **)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the fiscal year ended December 31, 2006**
 **Commission
        file number 000-22166**
 
 **AETRIUM
        INCORPORATED**
 (Exact
        name of registrant as specified in its charter)
 
 **MINNESOTA**
                (State
                  of incorporation)
              
              **41-1439182**
                (I.R.S.
                  employer identification no.)**2350
                  Helen Street**
                **North
                  St. Paul, Minnesota**
                (Address
                  of principal executive offices)
              **55109**
                (Zip
                  code)
              **(651)****770-2000**
                (Registrant’s
                  telephone number)
  **Securities
        registered pursuant to Section 12(b) of the Act:**
 **COMMON
        STOCK, PAR VALUE $.001 PER SHARE**
 **Securities
        registered pursuant to Section 12(g) of the Act:**
 **NONE**
 
 Indicate
        by check mark if the Registrant is a well-known seasoned issuer, (as defined
        in
        Rule 405 of the Securities Act). Yes £ No T
  Indicate
        by check mark if the Registrant is not required to file reports pursuant
        to
        Section 13 or 15(d) of the Exchange Act. Yes £ No T
  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 T 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 a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large
        accelerated filer £ Accelerated filer £ Non-accelerated filer T
  Indicate
        by check mark whether the Registrant is a shell company (as defined in Exchange
        Act Rule 12b-2). Yes £ No T
  As
        of
        June 30, 2006 (the last business day of the Registrant’s most recently completed
        second fiscal quarter), the aggregate market value of the Common Stock of
        the
        Registrant (based upon the closing price of the Common Stock at that date
        as
        reported by the The Nasdaq Stock Market), excluding outstanding shares
        beneficially owned by directors and executive officers, was
        $43,158,000.
  As
        of
        March 16, 2007, 10,281,274 shares of Common Stock of the Registrant were
        outstanding.
  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 2007 Annual Meeting of Stockholders to
        be
        held May 23, 2007 (the “2007 Proxy Statement”).
 
  
   
    **Form
        10-K**
   **For
        the fiscal year ended** **December
        31, 2006**
   **TABLE
        OF CONTENTS**
   **PART
        I**
  **ITEM
        1.**  **BUSINESS.....................................................................................................................................................
        1**
 **ITEM
        1A.**  **RISK
        FACTORS.......................................................................................................................................
        8**
 **ITEM
        1B.**  **UNRESOLVED
        STAFF
        COMMENTS...................................................................................................
        9**
 **ITEM
        2.**  **PROPERTIES...............................................................................................................................................
        9**
 **ITEM
        3.**  **LEGAL
        PROCEEDINGS..........................................................................................................................
        10**
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................
        10**
 **ITEM
        4A.**  **EXECUTIVE
        OFFICERS OF THE
        REGISTRANT............................................................................
        10**
  **PART
        II**
  **ITEM
        5.**  **MARKET
        FOR REGISTRANT’S COMMON EQUITY, RELATED**
 **STOCKHOLDER
        MATTERS AND ISSUER'S PURCHASES OF EQUITY**
 **SECURITIES.....................................................................................................................................
        12**
 **ITEM
        6.**  **SELECTED
        FINANCIAL
        DATA............................................................................................................
        14**
 **ITEM
        7.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL**
 **CONDITION
        AND RESULTS OF
        OPERATIONS....................................................................
        15**
 **ITEM
        7A.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT**
 **MARKET
        RISK................................................................................................................................
        23**
 **ITEM
        8.**  **FINANCIAL
        STATEMENTS AND SUPPLEMENTARY
        DATA......................................................
        23**
 **ITEM
        9.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON**
 **ACCOUNTING
        AND FINANCIAL
        DISCLOSURE...................................................................
        23**
 **ITEM
        9A.**  **CONTROLS
        AND
        PROCEDURES...................................................................................................
        23**
 **ITEM
        9B.**  **OTHER
        INFORMATION....................................................................................................................
        23**
  **PART
        III**
  **ITEM
        10.**  **DIRECTORS,
        EXECUTIVE OFFICERS AND CORPORATE**
 **GOVERNANCE...............................................................................................................................
        24**
 **ITEM
        11.**  **EXECUTIVE
        COMPENSATION........................................................................................................
        24**
 **ITEM
        12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS**
 **AND
        MANAGEMENT AND RELATED STOCKHOLDER MATTERS................................
        24**
 **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS, AND**
 **DIRECTOR
        INDEPENDENCE......................................................................................................
        24**
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND
        SERVICES...................................................................
        25**
  **PART
        IV**
  **ITEM
        15.**  **EXHIBITS,
        FINANCIAL STATEMENT
        SCHEDULES..................................................................
        26**
 
 
  
    **PART
        I**
  This
        Annual Report on 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 Annual Report on 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 Item 1A 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 Annual Report on 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 integrated circuits, or ICs, which constitute
        the
        highest revenue component of the semiconductor industry. Our primary focus
        is on
        high volume ICs and on the latest IC 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. Our products automate critical
        functions to improve manufacturing yield, raise quality levels, increase
        product
        reliability and reduce manufacturing costs.
  We
        have
        two principal equipment 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 during production
        test cycles. We also offer change kits to adapt our test handlers to different
        IC package configurations or to upgrade installed equipment for enhanced
        performance. Change kits represent a significant part of our
        revenue.
  ·  ***Reliability
        Test Equipment*** .
        The
        primary focus of our reliability test equipment is to provide semiconductor
        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 67%, 44% and 57% of our net sales in 2006,
        2005
        and 2004, respectively. Reliability test equipment accounted for 15%, 26%
        and
        23% of our net sales in 2006, 2005 and 2004, respectively. Change kits and
        spare
        parts accounted for 18%, 30% and 20% of our net sales in 2006, 2005 and 2004,
        respectively.
  Industry
        conditions for the semiconductor equipment industry were strong in the first
        half of 2004 but weakened during the second half of 2004, and these weakened
        industry conditions continued into 2005. By mid 2005 the semiconductor industry
        had worked out of the excess inventory position that became apparent by the
        second half of 2004, and production capacity utilization rates had risen
        to a
        high level. These factors and continuing growth in demand for ICs began fueling
        a recovery for the
   
  semiconductor
        equipment industry, and particularly the TAP segment, that gained momentum
        during the remainder of 2005 and through the first half of 2006. However,
        by the
        third quarter of 2006, bookings in the TAP segment of the semiconductor
        equipment industry began a significant decline in the face of increasing
        inventories in the semiconductor industry, and the bookings decline continued
        through the fourth quarter of 2006, exacerbated by a decline in IC unit sales.
  Our
        results were similar in pattern. In the first half of 2006, our revenues
        continued an upward trend that began in the fourth quarter of 2005. Our revenues
        continued to be strong in the third quarter of 2006, but our bookings declined
        significantly. Our bookings continued to decline in the fourth quarter of
        2006
        and our revenues followed.
  Analysts
        of the semiconductor industry are generally forecasting continued growth
        in that
        industry in 2007. Forecasts for the semiconductor equipment industry, and
        for
        the TAP segment within it, however, are mixed. Nevertheless, regardless of
        industry conditions, we believe that our line of product offerings, including
        our newest product introductions, coupled with our lean cost structure and
        our
        strong working capital base, position us to outperform our industry
        segment.
  Our
        strategy has focused on revenue growth through product line expansion, by
        both
        internally developing and acquiring complementary technologies, businesses
        or
        product lines. Technologies, businesses and product lines that we have acquired
        in the past pursuant to this strategy have since been assimilated and
        consolidated into our current operations.
  On
        December 31, 2006, we completed the sale of the product lines being manufactured
        at our Dallas, Texas facility to WEB Technology, Inc., a privately held company
        that is owned in part by senior management of our Dallas operation. The divested
        product lines, which included our burn-in board loaders and turret-based
        test
        handlers, were some of our lowest revenue and less strategic product lines
        and
        had been unprofitable for several quarters. It had become clear as 2006
        progressed that the divested product lines were no longer a good long term
        strategic fit. The divestiture allows us to concentrate all of our product
        development and customer support efforts on our higher revenue, more strategic
        and more successful gravity feed test handlers and reliability test equipment.
  As
        part
        of the sale, we transferred all intellectual property, inventory, equipment
        and
        other assets associated with the divested product lines to the buyer. The
        buyer
        assumed responsibility for all liabilities and obligations related to the
        installed base of the divested product lines, including all product warranty
        obligations, and agreed to provide ongoing customer support, including field
        service, spare parts and device kits. We recorded special charges related
        to the
        divestiture in the fourth quarter of 2006 in the amount of approximately
        $4.0
        million, most of which was non-cash related. See Note 3 to the Consolidated
        Financial Statements included in this Annual Report on Form 10-K for more
        information regarding these discontinued 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 website 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.
   2
   **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
        automatically during the final test stage of the manufacturing process. ICs
        are
        loaded into the test handler from bowls, tubes or trays and then, if required,
        transported to a temperature chamber within the test handler where they are
        thermally conditioned to the required testing temperature. The ICs are then
        placed into a contactor, which provides an electrical connection between
        the IC
        and the tester. After testing, the test handler sorts the ICs 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 IC packages, and automatic placement of the ICs 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
        IC
        during the test handling cycle.
  ICs
        are
        multi-function semiconductor devices that may contain 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.
  In
        the
        testing of ICs, 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 MLF TM s,
        SONs
        or QFNs), have electrical contact pads flush with the sides and bottoms of
        the
        ICs. MLPs are typically tested with gravity feed or turret based test handlers,
        particularly for analog and linear applications. MLPs constitute one of the
        fastest growing new IC package types.
  More
        complex ICs are sometimes packaged in IC package families with leads more
        easily
        damaged in handling. These package families are typically tested with
        pick-and-place test handlers.
  Our
        primary focus continues to be on the newest device and package types, and
        the
        largest volume and fastest growing markets, in the IC side of the semiconductor
        industry. Our test handler products are complementary with minimal overlap
        of
        application, and we distribute and service them through a common organization
        for efficiency. Our primary test handler product line is our gravity feed
        test
        handlers.
  ***Gravity
        Feed Test Handlers***
  Traditionally,
        test handlers have used gravity to move ICs from tubes or trays through the
        handler system and back into tubes or trays. Typically, in gravity feed systems
        ICs are halted at necessary points in the handling process by stopping against
        other ICs or singulation mechanisms, which can result in lead damage to IC
        packages with more fragile leads. Accordingly, gravity feed handlers are
        best
        suited for leadless packages and IC packages with more rugged leads, 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
   3
  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 test temperatures ranging
        from
        -55 degrees Celcius to +155 degrees Celcius. They use mechanical refrigeration
        to cool ICs, which is more economical and less dangerous than liquid nitrogen,
        commonly used as a refrigerant in competing handlers.
  Our
        55V
        Series is our principal and newest line of gravity feed test handlers. The
        55V
        Series focuses on analog and logic IC applications and addresses a wide range
        of
        IC packages, including SOPs and MLFs. The 55V Series offers a small footprint,
        a
        vertical backplane that can accommodate any size of test head, and our high
        speed test site actuator that we believe offers significant throughput
        advantages over our competition, depending upon device test times and thermal
        conditioning requirements. We offer the 55V Series in single, dual, quad
        and
        eight test site configurations. Each of our 55V Series multi-site test handlers
        can simultaneously test devices in each of their sites to increase productivity
        and reduce testing costs in certain applications.
  We
        first
        introduced our 55V6 single and dual site test handler in 2002 and our 55V8
        quad
        site test handler in 2004, and these handlers constituted the majority of
        our
        test handler sales in 2006. In the last half of 2006, we successfully completed
        an extensive evaluation of our 55V16 eight site test handler at a large U.S.
        headquartered integrated device manufacturer with production facilities in
        southeast Asia, and received our first purchase order for the 55V16 from
        that
        customer.
  ***Change
        Kits, Upgrades and Spare Part*** *s*
  We
        have
        an ongoing demand for IC 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 IC 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
        equipment orders as kits or separately as piece parts or in kit form as
        required.
  **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 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.
  In
        1998,
        we introduced our 1164 Series of reliability test equipment, including a
        suite
        of applications for customers to perform a variety of tests. We have since
        added
        many new features, including the full reliability test functionality necessary
        for testing an IC manufacturer’s entire copper process. **** 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. Sixteen of the top 20
        semiconductor manufacturers in the world are using our 1164 Series of
        reliability test equipment for copper and related advanced process technologies.
   4
  **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
        test handler product lines, with no one company dominating the overall test
        handler market. The companies with which we compete most directly in the
        test
        handler market include Multitest Electronic Systems GmbH, Rasco AG and Yokogawa
        Electric Corporation.
  We
        compete for test handler sales primarily on the basis of effective handler
        throughput, cost of ownership, temperature accuracy 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 our reliability test equipment is also highly competitive and
        our
        competitors include QualiTau, Ltd., Chiron Technology Pte. Ltd., ESPEC Corp.
        and
        Reedholm Instruments Co. 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**
  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 IC 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 2006, Maxim Integrated Products, Inc. accounted for 51% of our net sales
        and
        UST Technology Pte. Ltd., one of our international distributors, accounted
        for
        20% of our net sales. Maxim Integrated Products, Inc. also accounted for
        more
        than 10% of our net sales in 2005 and 2004. UST Technology Pte. Ltd.
        also
   5
  accounted
        for more than 10% of our net sales in 2005. Samsung America, Inc. also accounted
        for more than 10% of our net sales in 2004. 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 four 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.
  We
        maintain sales and service locations in North St. Paul, Minnesota and Santa
        Clara and San Diego, California. As of December 31, 2006, 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 64%, 65% and 52% of our net sales in 2006, 2005 and
        2004, 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. 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 may also 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.
        We
        focus our new product development efforts on what we believe to be the most
        compelling requirements in the largest and fastest growing segments of the
        IC
        side of the semiconductor industry, with emphasis on near term revenue
        potential. In 2006, we concentrated our new product development efforts
        on:
  ·
              completing
                  development of and beta testing the Model 55V16 eight site gravity
                  feed
                  test handlers; 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.
   6
   Product
        development expenses include new product development and continuation
        engineering. Our continuation engineering efforts include the development
        of
        additional change kits to meet the expanding families of IC package types,
        further advancement of contactor technologies, and the addition of features
        and
        performance options for existing equipment.
  We
        expense all research and development costs, including costs for software
        development, as incurred. In 2006, 2005 and 2004, our expenses relating to
        research and development were approximately $3.4 million, $2.2 million and
        $2.6
        million, respectively. In 2006 our research and development expense totaled
        about 12% of our revenue. Over time, our objective is to invest approximately
        12% to 15% of our net sales in research and development. However, the percentage
        may be higher in periods of reduced sales. We employed 20 engineering personnel
        as of December 31, 2006.
  **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 ranging in remaining terms from one to 10 years
        covering certain features of our handling systems and reliability test systems,
        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 our 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, which
        in
        turn compels us to continually enhance and extend our product lines. We believe
        that patent, trade secret and copyright protection is less significant to
        our
        competitive position than factors such as the knowledge, ability and experience
        of our personnel, new product development, frequent product enhancements,
        name
        recognition and ongoing, reliable product maintenance and support.
  **Backlog**
  Our
        backlog was $2.0 million at the end of 2006 and $8.0 million at the end of
        2005.
        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 2007 all of our backlog
        as
        of the end of 2006.
  **Employees**
  As
        of
        December 31, 2006, we had 74 employees, consisting of 31 in manufacturing,
        20 in
        engineering and product development, 15 in sales, marketing and customer
        service, and 8 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 we believe that
        our
        employee relations are satisfactory.
  **Financial
        Information About Geographic Areas**
  See
        Note
        17 to the Consolidated Financial Statements included in this Annual Report
        on
        Form 10-K for information about geographic areas.
   7
  ITEM
        1A.RISK
        FACTORS.
  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. 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. Bookings trended down in the TAP segment of the
        semiconductor equipment industry in the last half of 2006. A continuation
        of
        this trend could have a material and adverse impact on our
        operations.
  ***Successful
        Development and Introduction of New Products and Product
        Improvements***
  We
        operate in an industry that is highly competitive with respect to timely
        product
        innovations. The market for our products is characterized by rapid technological
        change and evolving industry standards. The development of more complex ICs
        has
        driven the need for new equipment and processes to produce such devices at
        an
        acceptable cost. We believe that our future success will depend in part upon
        our
        ability to anticipate and respond rapidly to changes in technologies, IC
        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.
  ***Impact
        of Competitive Markets***
  The
        markets for our main product lines are highly competitive. Some of our
        competitors have substantially greater financial, manufacturing, marketing
        and
        product development resources than we have. For most of our customers, we
        are
        not the sole supplier of our type of equipment. In addition, it is common
        for
        customers to evaluate more than one supplier’s equipment for their emerging
        requirements. Accordingly, we are at significant risk to lose orders to
        competing suppliers, and even to being displaced as a supplier to potentially
        significant customers, which 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. 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
   8
  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.
  ***Impact
        of Cost Reduction Actions***
  In
        the
        event of a sustained downturn and continuing decline in our revenues, we
        may
        implement cost reduction actions, such as workforce reductions, consolidation
        of
        operations, pay freezes and reductions, and reductions in other expenditures.
        In
        doing so, we would attempt to maintain the necessary infrastructures to allow
        us
        to take full advantage of subsequent improvements in conditions. However,
        there
        can be no assurance that reductions we may have made in personnel and
        expenditure levels and the loss of the capabilities of personnel we may have
        terminated would 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.
  ***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 us, could negatively affect our operating
        results.
  ***Risks
        Inherent 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 mature
        could negatively impact our operating results.
  ***Supply
        of Significant Components for our Products***
  Certain
        significant components used in our products, including certain contactor
        components, printed circuit boards and refrigeration systems, are currently
        available only from sole or limited sources. We do not maintain long-term
        supply
        agreements with most of our suppliers, and we purchase most of our components
        through individual purchase orders. Our inability to obtain components in
        required quantities or of acceptable quality could result in delays or
        reductions in our product introductions or shipments, which could damage
        our
        relationships with our customers and cause our operating results to suffer.
  **ITEM
        1B.**  **UNRESOLVED
        STAFF COMMENTS.**
  None.
  **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 2011. We consider our present facilities to
        be
        sufficient for our current operations.
   9
  In
        addition, as of December 31, 2006, we had the following lease
        obligations:
  ·
              We
                  vacated a 45,000 square foot facility in Poway, California in 2000.
                  This
                  lease expires in January 2010. This space is currently subleased
                  to third
                  parties. We remain liable under the lease on a contingent basis
                  in the
                  event a sublessee is in default.
  ·
              We
                  vacated a 28,000 square foot facility in Dallas, Texas upon the
                  sale of
                  our operations there on December 31, 2006. We assigned the lease
                  of that
                  facility, which expires in April 2008, to the buyer. We remain
                  liable
                  under the lease on a contingent basis in the event the assignee
                  is in
                  default.
  **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 2006.
  ITEM
        4A.EXECUTIVE
        OFFICERS OF THE REGISTRANT.
  Our
        executive officers, their ages and the offices they held as of March 1, 2007
        are
        as follows:
  **Name******
              **Age******
              **Position******Joseph
                  C. Levesque
              62
              Chairman
                  of the Board, President and Chief Executive OfficerDouglas
                  L. Hemer
              60
              Chief
                  Administrative Officer, Secretary and DirectorDaniel
                  M. Koch
              53
              Vice
                  President — Worldwide SalesJohn
                  J. Pollock
              47
              Vice
                  President — General ManagerPaul
                  H. Askegaard
              55
              TreasurerTimothy
                  G. Foley
              47
              Vice
                  President — ManufacturingDean
                  K. Hedstrom
              57
              Vice
                  President — Engineering
 
 ***Mr.
        Levesque*** has
        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.
        Hemer*** has
        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 in May 1996. Mr. Hemer is also a director of
        Versa
        Companies, a privately held company.
  10
 ***Mr.
        Koch*** has
        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.
        Pollock*** has
        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 a test handler product line we had recently acquired.
        From September 1996 to August 1997, Mr. Pollock served as a Business Unit
        Manager.
  ***Mr.
        Askegaard*** has
        served as our Treasurer since February 1992. From October 1986 to February
        1992,
        Mr. Askegaard served as our Corporate Controller.
  ***Mr.
        Foley*** has
        served as the Vice President - Manufacturing of our North St. Paul operations
        since December 2001. Prior to that, he served at our North St. Paul Operations
        as Vice President - Operations from August 1998 to December 2001, Vice President
        - Manufacturing from October 1996 to August 1998, and in various other positions
        since joining us in 1988.
  ***Mr.
        Hedstrom*** has
        served as the Vice President - Engineering of our North St. Paul operations
        since September 2004. From 1993 to 1998 Mr. Hedstrom was a co-founder, director,
        and later President of CariTech, Inc., a manufacturer of carrier tape materials
        for the IC industry. Following the acquisition of CariTech by Illinois Tool
        Works in August 1998, he served as Engineering Manager - World Wide Operations
        for Illinois Tool Works until May 2001. Prior to founding CariTech and
        subsequent to his retirement from Illinois Tool Works, Mr. Hedstrom served
        as
        President and a Principal of Hedstrom Engineering Co., a consulting firm
        specializing in industrial automation and controls.
   11
  **PART
        II**
  **ITEM
        5.**   **MARKET
        FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S
        PURCHASES OF EQUITY SECURITIES.**
  **Market
        Information**
  Our
        common stock is quoted on The Nasdaq Global 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 Global
        Market.
        These prices do not include adjustments for retail mark-ups, markdowns or
        commissions.
  **First
                  Quarter**
              
              **Second
                  Quarter**
              
              **Third
                  Quarter**
              
              **Fourth
                  Quarter**Fiscal
                  2006
              
              
              High
              
              $
              6.20
              
              $
              5.79
              
              $
              5.69
              
              $
              6.23Low
              
              $
              4.05
              
              $
              4.16
              
              $
              3.70
              
              $
              2.87Fiscal
                  2005
              
              
              High
              
              $
              4.05
              
              $
              3.19
              
              $
              4.10
              
              $
              5.15Low
              
              $
              2.79
              
              $
              2.02
              
              $
              2.57
              
              $
              2.44
 **Holders**
  As
        of
        March 16, 2007, there were 140 shareholders of record. We estimate that an
        additional 3,500 shareholders beneficially own stock held for their accounts
        at
        brokerage firms and financial institutions.
  **Dividends**
  We
        have
        never paid cash dividends on our common stock. We currently intend to retain
        any
        earnings for use in our operations and do not anticipate paying cash dividends
        in the foreseeable future.
  **Recent
        Sale of Unregistered Securities**
  We
        did
        not have any unregistered sales of equity securities during fiscal year
        2006.
  **Issuer’s
        Purchases of Equity Securities**
  We
        did
        not make any purchases of our common stock during the fourth quarter of fiscal
        2006.
   12
  **Performance
        Graph**
  In
        accordance with the rules of the SEC, the following performance graph compares
        for the five-year period ending on December 31, 2006, the yearly cumulative
        total shareholder return on our common stock on the Nasdaq Global Market
        with
        the yearly cumulative total return over the same period with the Nasdaq Stock
        Market (U.S. Companies) Index and a Hemscott Group Index for semiconductor
        equipment and material. Hemscott, Inc. prepared the data points and the
        performance graph. The comparison assumes a $100 investment in our common
        stock,
        the Nasdaq Stock Market (U.S. Companies) Index and the Hemscott Group Index
        on
        December 31, 2001, with reinvestment of all dividends.
  
  **12/31/01**
              **12/31/02**
              **12/31/03**
              **12/31/04**
              **12/31/05**
              **12/31/06****Aetrium
                  Incorporated**
              $100.00
              $53.10
              $218.62
              $270.34
              $311.72
              $245.52**Hemscott
                  Group Index**
              100.00
              59.82
              108.54
              85.18
              59.57
              100.85**Nasdaq
                  U.S. Market Index**
              100.00
              69.97
              106.36
              115.98
              120.15
              134.80
 
  13
  The
        foregoing Stock Performance Graph will not be deemed to be "filed" with the
        Securities and Exchange Commission or subject to the liabilities of Section
        18
        of the Securities Exchange Act of 1934, as amended. Notwithstanding anything
        to
        the contrary set forth in any of our previous filings under the Securities
        Act
        of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
        that
        might incorporate future filings, including this annual report on Form 10-K,
        in
        whole or in part, the foregoing Stock Performance Graph will not be incorporated
        by reference into any such filings.
  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. On
        December 31, 2006, as discussed in Note 3 to our Consolidated Financial
        Statements, we sold our
        product lines and operations located in Dallas, Texas. Operating results
        related
        to those operations have been reclassified and presented as discontinued
        operations for all periods presented.
  **Five
        Year Summary**
 **(in
        thousands, except per share data)**
 
 
 Year
                  ended December 31,****
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002**Statement
                  of operations data:**Net
                  sales from continuing operations
              
              $
              28,184
              
              $
              12,984
              
              $
              22,759
              
              $
              10,068
              
              $
              8,400Income
                  (loss) from continuing operations
              
              
              4,939
              
              
              (244
              )
              
              4,750
              
              
              (391
              )
              
              (1,327
              )Income
                  (loss) from continuing operations per common share:
                Basic
                Diluted
              
              $
                $
              0.49
                0.47
              
              $
                $
              (0.03
                (0.03
              )
                )
              $
                $
              0.50
                0.47
              
              $
                $
              (0.04
                (0.04
              )
                )
              $
                $
              (0.14
                (0.14
              )
                )Weighted
                  average common shares
                outstanding:
                Basic
                Diluted
              
              
              10,028
                10,586
              
              
              9,634
                9,634
              
              
              9,589
                10,113
              
              
              9,477
                9,477
              
              
              9,476
                9,476December
                  31,
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003
              
              
              2002**Balance
                  sheet data:**Total
                  assets
              
              $
              18,867
              
              $
              18,445
              
              $
              20,835
              
              $
              16,469
              
              $
              18,081Long-term
                  debt, less current portion****
              
              
              57
              
              
              98
              
              
              132
              
              
              —
              
              
              —
 
 
  14
  **ITEM
        7.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
  On
        December 31, 2006, as discussed in Note 3 to our Consolidated Financial
        Statements, we sold our
        product lines and operations located in Dallas, Texas. Operating results
        related
        to those operations have been reclassified and presented as discontinued
        operations for all periods presented and, unless otherwise indicated, the
        following management discussion and analysis refers to continuing operations
        only.
  **Overview:**
  Aetrium
        designs, manufactures and markets a variety of electromechanical equipment
        used
        by the semiconductor industry to handle and test integrated circuits, or
        ICs.
        Our primary emphasis is on the IC segment of semiconductor manufacturing.
        Our
        equipment is used primarily in what is referred to as the “back-end” or test,
        assembly and packaging (TAP) segment of the semiconductor equipment industry.
  The
        semiconductor 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 devices, changes in semiconductor manufacturing
        capacity, advancements in industry technologies and competitive factors.
        For
        these and other reasons, our operating results for 2006, 2005 and 2004 may
        not
        be indicative of future operating results.
  Following
        a deep and prolonged downturn during the three-year period ended December
        31,
        2003, semiconductor equipment industry business conditions improved
        significantly in early 2004 as many semiconductor manufacturers increased
        capital spending in response to increased demand for their products. Aetrium’s
        revenues increased dramatically and our revenues in the first half of 2004
        were
        more than double our revenues for the first half of 2003. However, semiconductor
        industry conditions weakened again in the second half of 2004 and manufacturers
        responded by quickly reducing their levels of capital spending. As a result,
        Aetrium’s orders and revenues decreased sequentially in the third and fourth
        quarters of 2004. Overall, 2004 was a very strong year for Aetrium, with
        revenues of $22.8 million compared with $10.1 million in the previous
        year.
  Semiconductor
        equipment industry conditions remained generally weak in the first half of
        2005
        and Aetrium’s revenues continued to decline in the first and second quarters.
        However, semiconductor industry conditions steadily improved in the second
        half
        of 2005 as many manufacturers experienced improving demand for semiconductors,
        decreasing inventory levels and improving capacity utilization rates, leading
        to
        improved business conditions for equipment suppliers as well. Worldwide bookings
        for the TAP segment of the semiconductor equipment industry improved
        substantially in the second half of 2005. Aetrium’s results followed this
        improving trend and our revenues increased sequentially by 29% and 71% in
        the
        third and fourth quarters of 2005, respectively. Our 2005 revenues were $13.0
        million, down 43% from the previous year.
  Industry
        conditions continued to be favorable in the first half of 2006. Aetrium’s order
        activity and revenues were strong during this period and our net sales increased
        to $6.9 million and $8.0 million in the first two quarters of 2006,
        respectively. Our revenues further increased to $8.2 million in the third
        quarter of 2006. Although our revenues increased sequentially in the third
        quarter of 2006, our new order activity decreased significantly from second
        quarter levels, which was consistent with generally weakening demand for
        equipment in the TAP segment of the semiconductor equipment industry. Order
        activity remained weak in the fourth quarter of 2006, and our revenues decreased
        to $5.1 million, or 38%
   15
  below
        third quarter levels. Despite the slowdown late in the year, our 2006 revenues
        were $28.2 million, an increase of 117% over the prior year.
  Business
        conditions continue to be relatively weak in early 2007, and it is uncertain
        whether the current business slowdown will be brief or of a longer duration.
        In
        addition, changes in semiconductor industry conditions, general domestic
        and
        global economic conditions, and/or other factors may adversely impact Aetrium’s
        future operating results.
  **Off-Balance
        Sheet Arrangements**
  We
        did
        not have any off-balance sheet arrangements as of December 31, 2006 or
        2005.
  **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 share-based
        compensation, revenue recognition, accounts receivable, inventories,
        identifiable intangible assets, warranty obligations and income tax
        accounting.
  ***Share-Based
        Compensation***
  On
        January 1, 2006, we adopted the provisions of Statement of Financial
        Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS
        123R), which requires the measurement and recognition of all share-based
        compensation under the fair value method. In accordance with SFAS 123R, we
        began
        recognizing compensation expense in 2006 for all share-based awards granted
        in
        2006 plus the unvested portion of awards granted prior to 2006. We implemented
        SFAS 123R using the modified prospective transition method. Under this
        transition method, our financial statements and related information presented,
        pertaining to periods prior to our adoption of SFAS 123R, have not been restated
        to reflect the impact of SFAS 123R.
  We
        determine the fair value of share-based awards on the grant date by using
        the
        Black-Scholes option valuation model. We also use the Black-Scholes model
        to
        determine the fair value of modifications to awards by determining and comparing
        the fair value of the modified award with the fair value of the award
        immediately before the modification. Option valuation models, including
        Black-Scholes, require the input of subjective assumptions, and changes in
        the
        assumptions used can materially affect the calculation of the fair value
        of an
        award. These assumptions include expected stock price volatility, risk-free
        interest rate, expected dividend yield, and the expected life of the award.
        We
        estimate future stock price volatility based primarily on historical daily
        stock
        price observations of our common stock. Risk-free interest rate is estimated
        based on U.S. Treasury bill rates consistent with the expected term of an
        award.
        We assume an expected dividend yield of zero based on our intention to retain
        any future earnings for use in our operations. Expected life of an award
        is
        estimated primarily based on vesting provisions, the contractual term of
        the
        award, and historical experience of previous awards with similar terms or,
        if
        appropriate in the circumstances, we use the simplified method for estimating
        the expected life of an award, as permitted by Staff Accounting Bulletin
        No.
        107. SFAS
        123R also
        requires
   16
  that
        estimated forfeitures be considered in the calculation of future compensation
        expense at the date of grant. We use historical data, as adjusted if deemed
        appropriate, to estimate future option forfeiture rates for purposes of
        recognizing share-based compensation expense. Prior to our adoption of
        SFAS 123R, we reduced pro-forma share-based compensation expense, presented
        in the notes to our financial statements, for actual forfeitures as they
        occurred
  ***Revenue
        Recognition***
  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 significant post-shipment
        obligations to be performed by Aetrium, revenue for the entire transaction
        is
        deferred until such obligations have been completed or, if applicable, the
        transaction is accounted for as a multiple-element arrangement. For arrangements
        containing multiple elements, the amounts allocated to delivered and undelivered
        elements are based on their fair value and revenue is recognized upon delivery
        of each element. In instances where contractual terms can only be satisfied
        after shipment, such as meeting customer-specified acceptance requirements
        at
        the customer’s site, revenue is not recognized until there is objective evidence
        that the applicable contract terms have been met. Due to the high selling
        prices
        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.
  ***Accounts
        Receivable***
  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.
  ***Inventories***
  We
        adjust
        our inventories for estimated excess and obsolete inventory equal to the
        difference between the cost of inventory and its estimated realizable 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 adjustments may be
        required.
  ***Identifiable
        Intangible Assets***
  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.
   17
  ***Warranty
        Obligations and Equipment Improvement Costs***
  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. On occasion, we may provide no-charge equipment improvements
        for
        customers at our discretion. Such costs are accrued when identified, quantified
        and approved by management.
  ***Income
        Tax Accounting***
  We
        record
        the benefit we will derive in future accounting periods from tax losses and
        credits and deductible temporary differences as “deferred tax assets” on our
        balance sheet. These 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. We carry a valuation allowance
        to
        fully reserve these assets. We assess the realizability of our deferred tax
        assets and the need for this valuation allowance in accordance with Statement
        of
        Financial Accounting Standards No. 109, “Accounting for Income Taxes.” We expect
        to continue to maintain a full valuation allowance until we determine that
        we
        can sustain a level of profitability that demonstrates our ability to use
        these
        assets. To the extent we determine that the realization of some or all of
        these
        benefits is more likely than not based upon expected future taxable income,
        a
        portion or all of the valuation allowance will be reversed.  Such a
        reversal would be recorded as an income tax benefit and, for the portion
        related
        to deductions for stock option exercises, an increase in shareholders'
        equity.
  **Results
        of Operations** :
  Selected
        statement of operations data from continuing operations as a percentage of
        our
        net sales for 2006, 2005 and 2004 were as follows:
  ****
              
              **2006**
              
              2005
              
              2004Net
                  sales
              
              
              **100.0**
              **%**
              
              100.0
              %
              
              100.0
              %Cost
                  of goods sold
              
              
              **48.7**
              
              
              49.6
              
              
              41.1Gross
                  profit
              
              
              **51.3**
              
              
              50.4
              
              
              58.9Operating
                  expenses:Selling,
                  general and administrative
              
              
              **22.7**
              
              
              36.5
              
              
              26.4Research
                  and development
              
              
              **11.9**
              
              
              17.1
              
              
              11.3Total
                  operating expenses
              
              
              **34.6**
              
              
              53.6
              
              
              37.7Income
                  (loss) from continuing operations
              
              
              **16.7**
              **%**
              
              (3.2
              )%
              
              21.2
              %
  **Net
        Sales:**
  Our
        net
        sales by product line as a percentage of total sales for 2006, 2005 and 2004
        were as follows:
  **2006**
              
              2005
              
              2004Test
                  handler products
              
              
              **67**
              **%**
              
              44
              %
              
              57
              %Reliability
                  test equipment products
              
              
              **15**
              
              
              26
              
              
              23Change
                  kits and spare parts
              
              
              **18**
              
              
              30
              
              
              20Total
              
              
              **100**
              **%**
              
              100
              %
              
              100
              %
  Net
        sales
        were $28.2 million in 2006 compared with $13.0 million in 2005, a 117% increase.
        Although industry conditions weakened late in 2006, our net sales for the
        year
        increased across all our
   18
   product
        lines compared to 2005. Net sales of test handlers, representing 67% of total
        net sales, were $19.0 million in 2006, an increase of 229% compared to 2005.
        The
        significant increase in test handler sales was attributable to the improving
        business conditions in the semiconductor industry that began in the second
        half
        of 2005 and continued into 2006. Also, test handler sales in 2006 reflect
        the
        increased market acceptance of our relatively new Model 55V8 test handlers
        in
        the marketplace. Net sales of reliability test equipment, representing 15%
        of
        total net sales, were $4.3 million in 2006, an increase of 28% over 2005.
        Net
        sales of change kits and spare parts, representing 18% of total net sales,
        were
        $4.9 million in 2006, an increase of 27% over 2005.
  Net
        sales
        were $13.0 million in 2005 compared with $22.8 million in 2004, a decrease
        of
        43%. The decrease in sales was across all of our product lines and was
        attributable to the slowdown in the semiconductor industry that began in
        the
        second half of 2004 and continued into 2005. We experienced weak business
        conditions through the first half of 2005, but order activity increased in
        the
        third quarter and improved substantially in the fourth quarter. Net sales
        of
        test handlers, representing 44% of total net sales, were $5.8 million in
        2005, a
        decrease of 56% compared to 2004. Net sales of reliability test equipment,
        representing 26% of total net sales, were $3.4 million in 2005, a decrease
        of
        35% compared to 2004. Net sales of change kits and spare parts, representing
        30%
        of total net sales, were $3.9 million in 2005, a decrease of 14% compared
        to
        2004. Sales of test handlers were most affected by the industry slowdown
        as
        excess inventories at our customers and customer efforts to increase
        productivity of their existing manufacturing capacity both delayed production
        equipment acquisitions.
  **Gross
        Profit:**
  Gross
        profit was 51.3% of net sales in 2006 compared with 50.4% of net sales in
        2005
        and 58.9% of net sales in 2004. Gross margins increased in 2006 primarily
        due to
        efficiencies associated with significantly higher production and revenue
        levels
        compared with the prior year, partially offset by a change in product mix
        and
        relatively high initial costs related to our Model 55V8 test handlers. Sales
        of
        test handlers, which typically generate lower margins than our reliability
        test
        equipment product line and change kits and spare parts, represented 67% of
        total
        net sales in 2006 compared with 44% in 2005. Gross margins decreased in 2005
        compared with 2004 due to inefficiencies associated with reduced production
        and
        revenue levels, a higher mix of discounted distributor sales compared with
        the
        prior year, and relatively high material and distribution costs of early,
        limited volume production runs of our Model 55V8 test handlers.
  **Selling,
        General and Administrative Expenses:**
  Selling,
        general and administrative, or SG&A, expenses were $6.4 million in 2006
        compared with $4.7 million in 2005 and $6.0 million in 2004 .
        C ommission
        and warranty/equipment improvement expenses increased $0.2 million and $0.7
        million, respectively, in 2006 compared with 2005 due primarily to higher
        net
        sales volume and increased product improvement costs related primarily to
        our
        Model 55V8 gravity feed test handler. Incentive compensation expense increased
        $0.4 million in 2006 compared with 2005 due to higher order levels and profit
        levels achieved in 2006. We also recorded charges of $0.2 million in 2006
        related to a facility we vacated in 2000. In addition, we recorded $0.1 million
        in share-based compensation expense as a result of our adoption of SFAS No.
        123R.  SG&A
        expenses decreased by $1.3 million in 2005 compared with 2004. C ommission
        expense decreased $0.9 million due primarily to the significantly reduced
        net
        sales volume. Incentive compensation expense decreased $0.4 million due
        primarily to the operating losses incurred in 2005.
  **Research
        and Development Expenses:**
  Research
        and development expenses were $3.4 million in 2006 compared with $2.2 million
        in
        2005 and $2.6 million in 2004.  The
        increase in 2006 primarily reflects increased wages, materials and
   19
  contract
        service costs, with much of the increase attributed to design improvements
        of
        our Model 55V8 gravity feed test handlers and development costs associated
        with
        our new Model 55V16 gravity feed test handlers. The number of research and
        development personnel increased from 14 at December 31, 2005 to 20 at December
        31, 2006. Research and development expenses decreased by $0.3 million in
        2005
        compared with 2004, primarily due to a reduction in materials and third-party
        contractor service costs. As a percentage of net sales, research and development
        expenses were 11.9%, 17.1% and 11.3% in 2006, 2005 and 2004, respectively.
        New
        product development is an essential part of our strategy to gain market share.
        Over time, we expect to invest approximately 12% to 15% of our revenues in
        research and development although we may exceed this range during periods
        of
        reduced revenues, as was the case in 2005.
  **Interest
        Income, Net:**
  Interest
        income, net, amounted to $244,000, $140,000 and $61,000 in 2006, 2005 and
        2004,
        respectively. These amounts consisted primarily of interest income from the
        investment of excess funds. Interest income increased in 2006 primarily due
        to
        our higher average cash balances and generally higher interest rates. Interest
        income increased in 2005 compared with 2004 primarily due to higher interest
        rates.
  **Other
        (Expense), Net:**
  In
        the
        second quarter of 2004, we settled a claim against a customer for past-due
        invoices for products we had delivered plus charges related to a purchase
        order
        cancelled by the customer in 2001. We accepted shares of the customer’s common
        stock with a market value of approximately $233,000 in settlement of these
        claims. Of this amount, approximately $106,000 was applied to the customer’s
        past-due accounts receivable amounts owed to us. The remaining $127,000,
        related
        to purchase order cancellation charges, was recorded as a gain in the second
        quarter of 2004. Prior to December 31, 2004, we sold the shares for
        approximately $31,000 and realized a loss of approximately $202,000 in the
        fourth quarter of 2004. The net effect of these transactions was a net loss
        of
        $74,000, which is presented as “Other (expense), net” in our Consolidated
        Statement of Operations.
  **Income
        Tax Expense (Benefit):**
  We
        recorded income tax expense of $5,000 in 2006 for minimum state taxes. We
        recorded an income tax benefit of $30,000 in 2005 related primarily to a
        refund
        received on prior year taxes. In 2004, we recorded income tax expense of
        $52,000
        on income from continuing operations of $4.8 million, consisting primarily
        of
        the federal alternative minimum tax and certain state minimum fees.  Since
        2000, we have maintained a valuation allowance to fully reserve our deferred
        tax
        assets. We recorded the valuation allowance in 2000 because the cumulative
        losses we had incurred over the previous three years made it questionable
        whether we would realize value from the deferred tax assets. We continue
        to
        monitor the realizability of the benefits related to our net deferred tax
        assets.  To the extent we determine that the realization of some or all of
        these benefits is more likely than not based upon expected future taxable
        income, a portion or all of the valuation allowance will be reversed.  Such
        a reversal would be recorded as an income tax benefit and, for some portion
        related to deductions for stock option exercises, an increase in shareholders'
        equity.
  **Discontinued
        Operations:**
  On
        December 31, 2006, as discussed in Note 3 to
        our
        Consolidated Financial Statements ,
        we sold
        our product lines and operations located in Dallas, Texas. We recorded a
        loss of
        $4.0 million on the sale. In accordance with SFAS No. 144, “Accounting for
        the Impairment or Disposal of Long-Lived Assets,”
   20
  the
        results related to those operations have been reclassified and presented
        as
        discontinued operations for all periods reported. Condensed results of
        discontinued operations are summarized below (in thousands):
  ****Year
                  ended December 31,
              
              **2006**
              
              2005
              
              2004Net
                  sales
              
              **$**
              **3,260**
              
              $
              3,423
              
              $
              5,030Cost
                  of goods sold
              
              
              **2,063**
              
              
              1,874
              
              
              2,653Gross
                  profit
              
              
              **1,197**
              
              
              1,549
              
              
              2,377Operating
                  expenses
              
              
              **2,682**
              
              
              3,227
              
              
              3,724Loss
                  from discontinued operations
              
              **$**
              **(1,485**
              **)**
              $
              (1,678
              )
              $
              (1,347
              )
 
  **Financial
        Condition, Liquidity and Capital Resources:**
  Cash
        and
        cash equivalents increased by $4.3 million in 2006. We
        generated $3.2 million from operating activities during the year. The major
        components of cash flows generated by operating activities were $3.5 million
        income before a non-cash loss on the sale of discontinued operations, $0.5
        million in non-cash depreciation, amortization and share-based compensation
        expense, a $1.9 million decrease in accounts receivable and a $0.2 million
        increase in other accrued liabilities, partially offset by a $1.9 million
        increase in inventories and a $1.1 million decrease in accounts payable.
        Accounts receivable decreased due to the favorable timing of cash collections
        just prior to December 31, 2006 and lower shipment levels in the fourth quarter
        of 2006 compared with 2005. The increase in other accrued liabilities included
        a
        $0.2 million increase in accrued warranty and no-charge equipment improvement
        costs. Although inventory purchases and levels decreased in the fourth quarter
        of 2006 as business slowed, inventory levels increased from the prior year
        due
        to purchases to support new product introductions and our decision to carry
        higher inventories of some models to meet customer delivery requirements.
        Accounts payable decreased primarily due to a reduction in inventory purchases
        in the fourth quarter of 2006 compared with the fourth quarter of 2005. Net
        cash
        used in investing activities in 2006 amounted to $0.1 million for capital
        expenditures. During 2006, we received $1.2 million in proceeds from employee
        stock option exercises.
  Cash
        and
        cash equivalents decreased by approximately $3.1 million in 2005. We used
        $3.1 million to fund operating activities during the year. The major components
        of cash flows used in operating activities were a net loss of $1.9 million,
        a
        $1.2 million increase in accounts receivable, a $0.4 million increase in
        inventories, and a $0.6 million decrease in other accrued liabilities, partially
        offset by $0.8 million in non-cash depreciation and amortization expense.
        Accounts receivable increased primarily because the timing of fourth quarter
        shipments in 2005 was more concentrated in the latter part of the quarter
        as
        compared to 2004. Inventories increased primarily due to an increase in
        purchases in response to significantly increased order activity in the fourth
        quarter of 2005. The decrease in other accrued liabilities reflects primarily
        a
        reduction in the balance of outstanding customer advance payments since December
        31, 2004. Net cash used in investing activities in 2005 amounted to $0.1
        million
        for capital expenditures. During 2005, we received $0.1 million in proceeds
        from
        employee stock option exercises.
  Cash
        and
        cash equivalents increased by approximately $3.2 million in 2004. We generated
        $2.9 million of cash from operating activities during the year. The major
        components of cash flows generated from operating activities were net income
        of
        $3.4 million, $1.1 million in non-cash depreciation and amortization expense,
        and an increase of $0.5 million in deferred revenue and customer deposits.
        These
        sources of cash were partially offset by increases in accounts receivable
        of
        $0.4 million and inventories of $1.9 million. Deferred revenue increased
        due to
        the receipt of $0.3 million in progress payments related to shipped equipment
        that had not met revenue recognition criteria at December 31, 2004 and customer
        deposits increased due to the receipt of a $0.1 million deposit with a special
        equipment order from a new customer. Inventories increased in 2004 due to
        increased production levels resulting from higher business volumes. Accounts
        receivable increased because revenues in the fourth quarter of 2004
        were
   21
  substantially
        higher than in the fourth quarter of 2003. Net cash used in investing activities
        in 2004 amounted to $0.2 million for capital expenditures. During 2004, we
        received approximately $0.4 million in cash from the exercise of employee
        stock
        options and $0.2 million in long-term bank financing related to certain data
        processing equipment purchases.
  Historically
        we have supported our capital expenditure and working capital needs with
        cash
        generated from operations and our existing cash and cash equivalents. We
        believe
        our cash and cash equivalents of $8.4 million at December 31, 2006 will be
        sufficient to meet capital expenditure and working capital needs at least
        through 2007. In addition, we have a revolving credit line agreement with
        a bank
        that provides for borrowings up to the lesser of $2.0 million or 90% of eligible
        accounts receivable plus 75% of eligible inventories. The credit agreement
        expires in October 2007. We believe we will be able to extend the agreement
        at
        that time or obtain similar financing, if needed. However, there can be no
        assurance that such financing will be available with terms favorable to us
        or at
        all. In addition, a prolonged continuation of the current industry slowdown or
        future industry downturns could negatively impact the demand for and prices
        of
        our products and adversely affect future cash flows. Also, we may acquire
        other
        companies, product lines or technologies that are complementary to our business,
        and our working capital needs may change as a result of such
        acquisitions.
  Our
        significant contractual obligations as of December 31, 2006 and the effect
        such
        obligations are expected to have on our cash flows in future periods are
        summarized below (in thousands):
  Payments
                  Due By PeriodContractual
                  Obligations
              
              Total
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011Non-cancellable
                  operating leases
              
              $
              2,797
              
              $
              782
              
              $
              800
              
              $
              818
              
              $
              347
              
              $
              50Bank
                  loan payments (assuming an interest rate of 7.5%)
              
              
              107
              
              
              48
              
              
              48
              
              
              11
              
              
              —
              
              
              —Purchase
                  order commitments
              
              
              392
              
              
              392
              
              
              —
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              3,296
              
              $
              1,222
              
              $
              848
              
              $
              829
              
              $
              347
              
              $
              50
 
 The
        lease
        obligations above have not been reduced by minimum sublease rentals of $1.7
        million due in the future under noncancellable subleases related to a facility
        in Poway, California. Also, the lease obligations above do not include payments
        due under a lease related to a facility in Dallas, Texas which is assigned
        to
        WEB Technology, Inc. (WEB). The remaining minimum payments under the lease,
        for
        which we are contingently liable if WEB defaults, amounted to $0.2 million
        at
        December 31, 2006.
  **Recent
        Accounting Pronouncements**
  In
        September 2006, the Financial
        Accounting Standards Board (FASB) issued
        Statement of Financial Accounting Standards No. 157, “Fair Value”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
        measuring fair value in accordance with generally accepted accounting
        principles, and expands disclosures about fair value measurements. SFAS 157
        becomes effective for fiscal years beginning after November 15, 2007. We
        do not
        expect the implementation of SFAS 157 to have a material impact on our
        financial position or results of operations.
   22
  In
        June 2006, the Financial Accounting Standards Board (FASB) issued FASB
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
        Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the
        accounting for uncertainty in income taxes by defining a threshold for
        recognizing the
        benefits of tax return positions and
        providing guidance on the measurement and
        classification of income tax uncertainties  in
        financial statements.  FIN 48
        also increases disclosure requirements associated with any recorded income
        tax
        uncertainties. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006. Therefore, we
        will adopt this pronouncement in fiscal year 2007. We
        do not
        expect the implementation of FIN 48 to have a material impact on our financial
        position or results of operations.
  **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, 2006, consisted primarily of money
        market
        funds and bank certificates of deposit 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.**
  The
        information required by this Item is included in our Consolidated Financial
        Statements and the reports of our independent registered public accounting
        firms, which 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, 2006. Based
        on
        their evaluation, they concluded that our disclosure controls and procedures
        were effective. 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.
  **ITEM
        9B.**  **OTHER
        INFORMATION.**
  None.
   23
  **PART
        III**
  **ITEM
        10.**  **DIRECTORS,
        EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.**
  **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 2007 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 10-K 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 2007 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 “Audit Committee Report - Membership and Role of
        the Audit Committee” in our 2007 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 2007 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,” “Executive Compensation and Other Benefits,” “Executive Compensation
        and Other Benefits—Compensation Committee—Compensation Committee Interlocks and
        Insider Participation” and “Executive Compensation and Other
        Benefits—Compensation Committee—Compensation Committee Report” in our 2007 Proxy
        Statement is incorporated in this Annual Report on Form 10-K by
        reference.
  **ITEM
        12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
        MATTERS.**
 
 The
        information under the caption “Security Ownership of Certain Beneficial Owners
        and Management” in our 2007 Proxy Statement is incorporated in this Annual
        Report on Form 10-K by reference.
  **ITEM
        13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE.**
 
 The
        information under the captions “Election of Directors—Additional Information
        About the Board and Its Committees” and “Certain Relationships and Related
        Transactions” in our 2007 Proxy Statement is incorporated in this Annual Report
        on Form 10-K by reference.
   24
  ITEM
        14.  **PRINCIPAL
        ACCOUNTANT 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
        Registered Public Accounting Firms—Audit and Non-Audit Fees” and “Independent
        Registered Public Accounting Firms—Pre-approval Policies and Procedures” in our
        2007 Proxy Statement is incorporated in this Annual Report on Form 10-K by
        reference.
   25
  **PART
        IV**
  **ITEM
        15.**  **EXHIBITS,
        FINANCIAL STATEMENT SCHEDULES.**
 
 **(a)
        1.**  **Financial Statements of Registrant.**
  The
        following Consolidated Financial Statements of Aetrium Incorporated and the
        Independent Registered Public Accounting Firms’ Reports thereon are included
        herein:
  Description
              Page(s)Reports
                  of Independent Registered Public Accounting Firms
              F-1
                  - F-2Consolidated
                  Financial Statements:Consolidated
                  Statements of Operations
              F-3Consolidated
                  Balance Sheets
              F-4Consolidated
                  Statements of Changes in Shareholders’ Equity
              F-5ConsolidatedStatements of Cash Flows
              F-6Notes
                  to Consolidated Financial Statements
              F-7
                  - F-24
  **(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 30, 2007 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(b):
  1.
              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).2.
              Form
                  of Non-Statutory Stock 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).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).
   26
  4.
              Salary
                  Savings Plan (incorporated by reference to Exhibit 10.3 to our
                  Registration Statement on Form SB-2) (File No.
                  33-64962C).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).6.
              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).7.
              Form
                  of Change of Control Agreement (incorporated by reference to Exhibit
                  10.19
                  to our Annual Report on Form 10-K for the year ended December 31,
                  2003)
                  (File No. 0-22166).8.
              Sales
                  Incentive Program (incorporated by reference to Exhibit 10.21 to
                  our
                  Annual Report on Form 10-K for the year ended December 31, 2003)
                  (File No.
                  0-22166).9.
              Executive
                  Officer Profit Sharing Program (incorporated by reference to Exhibit
                  10.1
                  to our Current Report on Form 8-K dated January 23, 2007) (File
                  No.
                  0-22166).
 
  
  
  27
   
 **FINANCIAL
        STATEMENTS OF REGISTRANT**
  **Report
        of Independent Registered Public Accounting Firm**
  
 Board
        of
        Directors and Shareholders
 Aetrium
        Incorporated
 
 We
        have
        audited the accompanying consolidated balance sheet of Aetrium Incorporated
        (the
“Company”) as of December 31, 2006, and the related consolidated statements
        of operations, changes in shareholders’ equity and cash flows for the year then
        ended. These finan-cial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audit.
  We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform an audit of its internal control over
        financial reporting. Our audit included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Aetrium
        Incorporated as of December 31, 2006, and the results of its operations and
        its
        cash flows for the year then ended, in conformity with accounting principles
        generally accepted in the United States of America.
 
 As
        discussed in Note 2 to the consolidated financial statements, effective
        January 1, 2006, the Company changed its method of accounting for
        share-based payments to adopt Statement of Financial Accounting Standards
        No.
        123(R), *Share-Based
        Payment.*
 
 Our
        audit
        was conducted for the purpose of forming an opinion on the basic consolidated
        financial statements taken as a whole. Schedule II is presented for purposes
        of
        additional analysis and is not a required part of the basic consolidated
        financial statements. This schedule has been subjected to the auditing
        procedures applied in the audit of the basic consolidated financial statements
        and, in our opinion, is fairly stated in all material respects in relation
        to
        the basic consolidated financial statements taken as a whole.
  
  /s/
        Grant
        Thornton LLP
 Minneapolis,
        Minnesota
 March
        8,
        2007
  F-1
  
  **Report
        of Independent Registered Public Accounting Firm**
   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, 2005, and the results of their operations and their cash flows
        for each of the two years in the period ended December 31, 2005 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 the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements, assessing the accounting principles used and significant estimates
        made by management, and evaluating the overall financial statement presentation.
        We believe that our audits provide a reasonable basis for our opinion.
  
 
 
 
 /s/
        PricewaterhouseCoopers LLP
 Minneapolis,
        Minnesota
 March
        24,
        2006, except for the effect of reporting
 the
        discontinued operations described in Note 3,
 as
        to
        which the date is March 21, 2007
  
   
  
  F-2
   **AETRIUM
        INCORPORATED**
 **Consolidated
        Statements of Operations**
  
  Year
                  Ended December 31,****
              
              **2006**
              
              2005
              
              2004Net
                  sales
              
              **$**
              **28,183,661**
              
              $
              12,983,933
              
              $
              22,758,930Cost
                  of goods sold
              
              
              **13,713,846**
              
              
              6,441,934
              
              
              9,346,555Gross
                  profit
              
              
              **14,469,815**
              
              
              6,541,999
              
              
              13,412,375Operating
                  expenses:Selling,
                  general and administrative
              
              
              **6,405,651**
              
              
              4,733,079
              
              
              6,032,912Research
                  and development
              
              
              **3,364,295**
              
              
              2,223,347
              
              
              2,564,204Total
                  operating expenses
              
              
              **9,769,946**
              
              
              6,956,426
              
              
              8,597,116Income
                  (loss) from operations
              
              
              **4,699,869**
              
              
              (414,427
              )
              
              4,815,259Interest
                  income, net
              
              
              **244,295**
              
              
              140,497
              
              
              61,396Other
                  (expense), net
              
              
              **—**
              
              
              —
              
              
              (74,196
              )Income
                  (loss) from continuing operations before income taxes
              
              
              **4,944,164**
              
              
              (273,930
              )
              
              4,802,459Income
                  tax expense (benefit)
              
              
              **5,000**
              
              
              (30,000
              )
              
              52,000Income
                  (loss) from continuing operations
              
              
              **4,939,164**
              
              
              (243,930
              )
              
              4,750,459Discontinued
                  operations (see Note 3):Loss
                  from discontinued operations
              
              
              **(1,485,416**
              **)**
              
              (1,677,739
              )
              
              (1,347,042
              )Loss
                  on sale of discontinued operations
              
              
              **(4,004,798**
              **)**
              
              —
              
              
              —Net
                  income (loss)
              
              **$**
              **(551,050**
              **)**
              $
              (1,921,669
              )
              $
              3,403,417Basic
                  income (loss) per share:Continuing
                  operations
              
              **$**
              **0.49**
              
              $
              (0.03
              )
              $
              0.50Discontinued
                  operations
              
              
              **(0.55**
              **)**
              
              (0.17
              )
              
              (0.14
              )Net
                  income (loss)
              
              **$**
              **(0.05**
              **)**
              $
              (0.20
              )
              $
              0.35Diluted
                  income (loss) per share:Continuing
                  operations
              
              **$**
              **0.47**
              
              $
              (0.03
              )
              $
              0.47Discontinued
                  operations
              
              
              **(0.52**
              **)**
              
              (0.17
              )
              
              (0.13
              )Net
                  income (loss)
              
              **$**
              **(0.05**
              **)**
              $
              (0.20
              )
              $
              0.34Weighted
                  average common shares outstanding:Basic
              
              
              **10,028,000**
              
              
              9,634,000
              
              
              9,589,000Diluted
              
              
              **10,586,000**
              
              
              9,634,000
              
              
              10,113,000
  
   
   
   *The
              accompanying notes are an integral part of the consolidated financial
              statements.*
 F-3
    **AETRIUM
        INCORPORATED**
 **Consolidated
        Balance Sheets**
  
  December
                  31,****
              
              **2006**
              
              2005ASSETSCurrent
                  assets:Cash
                  and cash equivalents
              
              **$**
              **8,394,440**
              
              $
              4,133,531Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $46,000 in 2006 and 2005
              
              
              **2,164,376**
              
              
              4,383,355Inventories
              
              
              **7,363,089**
              
              
              5,620,847Other
                  current assets
              
              
              **336,229**
              
              
              80,126Current
                  assets - discontinued operations
              
              
              **—**
              
              
              3,529,881Total
                  current assets
              
              
              **18,258,134**
              
              
              17,747,740Property
                  and equipment:Furniture
                  and fixtures
              
              
              **535,928**
              
              
              535,928Equipment
              
              
              **1,268,101**
              
              
              1,329,334Less
                  accumulated depreciation and amortization
              
              
              **(1,610,316**
              **)**
              
              (1,641,145
              )Property
                  and equipment, net
              
              
              **193,713**
              
              
              224,117Property
                  and equipment, net - discontinued operations
              
              
              **—**
              
              
              52,328Other
                  assets
              
              
              **415,340**
              
              
              92,292Identifiable
                  intangible assets, net - discontinued operations
              
              
              **—**
              
              
              328,750Total
                  assets
              
              **$**
              **18,867,187**
              
              $
              18,445,227LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCurrent
                  liabilities:Current
                  portion of long-term debt
              
              **$**
              **41,561**
              
              $
              34,738Trade
                  accounts payable
              
              
              **490,264**
              
              
              1,463,479Accrued
                  compensation
              
              
              **378,747**
              
              
              306,304Other
                  accrued liabilities
              
              
              **1,445,996**
              
              
              592,262Current
                  liabilities - discontinued operations
              
              
              **—**
              
              
              377,113Total
                  current liabilities
              
              
              **2,356,568**
              
              
              2,773,896Long-term
                  debt, less current portion
              
              
              **56,572**
              
              
              98,419Commitments
                  and contingencies (See Note 12)Shareholders’
                  equity:Common
                  stock, $.001 par value; 30,000,000 sharesauthorized
                  10,266,252 and 9,649,425 shares issuedand
                  outstanding, respectively
              
              
              **10,266**
              
              
              9,649Additional
                  paid-in capital
              
              
              **62,103,952**
              
              
              60,672,384Accumulated
                  deficit
              
              
              **(45,660,171**
              **)**
              
              (45,109,121
              )Total
                  shareholders’ equity
              
              
              **16,454,047**
              
              
              15,572,912Total
                  liabilities and shareholders’ equity
              
              **$**
              **18,867,187**
              
              $
              18,445,227
 
 
  
   *The
              accompanying notes are an integral part of the consolidated financial
              statements.*
 F-4
    **AETRIUM
        INCORPORATED**
 **Consolidated
        Statements of Changes in Shareholders’ Equity**
   
  Common
                  StockShares
              
              Amount
              
              Additional
                Paid-in
                  Capital
              
              Accumulated
                Deficit
              
              Total
                Shareholders’
                  Equity**Balance,
                  December 31, 2003**
              
              
              9,477,910
              
              $
              9,478
              
              $
              60,251,952
              
              $
              (46,590,869
              )
              $
              13,670,561Exercise
                  of stockoptions
              
              
              149,526
              
              
              149
              
              
              365,907
              
              
              —
              
              
              366,056Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              3,403,417
              
              
              3,403,417**Balance,
                  December 31, 2004**
              
              
              9,627,436
              
              
              9,627
              
              
              60,617,859
              
              
              (43,187,452
              )
              
              17,440,034Exercise
                  of stock options
              
              
              21,989
              
              
              22
              
              
              54,525
              
              
              —
              
              
              54,547Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,921,669
              )
              
              (1,921,669
              )**Balance,
                  December 31, 2005**
              
              
              9,649,425
              
              
              9,649
              
              
              60,672,384
              
              
              (45,109,121
              )
              
              15,572,912Exercise
                  of stock options
              
              
              616,827
              
              
              617
              
              
              1,241,839
              
              
              —
              
              
              1,242,456Share-based
                  compensation expense
              
              
              —
              
              
              —
              
              
              189,729
              
              
              —
              
              
              189,729Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              (551,050
              )
              
              (551,050
              )**Balance,
                  December 31, 2006**
              
              
              10,266,252
              
              $
              10,266
              
              $
              62,103,952
              
              $
              (45,660,171
              )
              $
              16,454,047
 
 
 
 
 
  The
              accompanying notes are an integral part of the
              consolidated financial statements.
 F-5
    **AETRIUM
        INCORPORATED**
 **Consolidated
        Statements of Cash Flows**
  
  Year
                  Ended December 31,****
              
              **2006**
              
              2005
              
              2004**Cash
                  flows from operating activities:**Net
                  income (loss)
              
              **$**
              **(551,050**
              **)**
              $
              (1,921,669
              )
              $
              3,403,417Loss
                  on sale of discontinued operations
              
              
              **4,004,798**
              
              
              —
              
              
              —Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Depreciation
                  and amortization
              
              
              **353,445**
              
              
              765,714
              
              
              1,098,371Share-based
                  compensation expense
              
              
              **159,946**
              
              
              —
              
              
              —Provision
                  for bad debts
              
              
              —
              
              
              —
              
              
              60,000Provision
                  for excess and obsolete inventories
              
              
              **90,000**
              
              
              90,000
              
              
              120,000Loss
                  on disposal of equipment
              
              
              —
              
              
              2,731
              
              
              —Gain
                  on claim settlement
              
              
              —
              
              
              —
              
              
              (127,444
              )Loss
                  on sale of marketable securities
              
              
              —
              
              
              —
              
              
              201,640Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              **1,943,950**
              
              
              (1,203,855
              )
              
              (383,320
              )Inventories
              
              
              **(1,912,938**
              **)**
              
              (388,291
              )
              
              (1,925,200
              )Other
                  current assets
              
              
              **(67,948**
              **)**
              
              95,098
              
              
              33,958Other
                  assets
              
              
              —
              
              
              —
              
              
              (50,663
              )Trade
                  accounts payable
              
              
              **(1,121,538**
              **)**
              
              79,725
              
              
              31,435Accrued
                  compensation
              
              
              **62,764**
              
              
              59,095
              
              
              41,985Other
                  accrued liabilities
              
              
              **200,169**
              
              
              (628,781
              )
              
              357,170Net
                  cash provided by (used in) operating activities
              
              
              **3,161,598**
              
              
              (3,050,233
              )
              
              2,861,349**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              **(108,121**
              **)**
              
              (106,181
              )
              
              (244,063
              )Sale
                  of marketable securities
              
              
              —
              
              
              —
              
              
              31,460Net
                  cash used in investing activities
              
              
              **(108,121**
              **)**
              
              (106,181
              )
              
              (212,603
              )**Cash
                  flows from financing activities:**Proceeds
                  from sale of common stock
              
              
              **1,242,456**
              
              
              54,547
              
              
              366,056Proceeds
                  from long-term debt
              
              
              **—**
              
              
              —
              
              
              190,000Payments
                  on long-term debt
              
              
              **(35,024**
              **)**
              
              (32,476
              )
              
              (24,367
              )Net
                  cash provided by financing activities
              
              
              **1,207,432**
              
              
              22,071
              
              
              531,689**Increase
                  (decrease) in cash and cash equivalents**
              
              
              **4,260,909**
              
              
              (3,134,343
              )
              
              3,180,435**Cash
                  and cash equivalents at beginning of year**
              
              
              **4,133,531**
              
              
              7,267,874
              
              
              4,087,439**Cash
                  and cash equivalents at end of year**
              
              **$**
              **8,394,440**
              
              $
              4,133,531
              
              $
              7,267,874
 
 
 
 
 
   *The
              accompanying notes are an integral part of the consolidated financial
              statements.*
 F-6
  
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   **NOTE
        1: BUSINESS DESCRIPTION**
  Aetrium
        Incorporated designs, manufactures and markets a variety of electromechanical
        equipment used by the semiconductor industry to handle and test integrated
        circuits, or ICs, and discrete electronic devices. References in the Notes
        to
        Consolidated Financial Statements to “Aetrium,” “the company,” “we” or “our,”
unless the context otherwise requires, refer to Aetrium Incorporated and
        its
        consolidated subsidiaries and their respective predecessors.
  **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.
  **Discontinued
        Operations:** On
        December 31, 2006, as described in Note 3, we sold our
        product lines and operations located in Dallas, Texas. In accordance with SFAS
        No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
assets and liabilities included in our consolidated balance sheet and the
        results of operations included in our consolidated statements of operations
        related to those operations have been reclassified and presented as discontinued
        operations for all periods reported.
  **Cash
        Equivalents:** Cash
        equivalents include highly liquid investments purchased with an original
        maturity of three months or less. Cash and cash equivalents included
        certificates of deposit of $2.0 million and $2.8 million at December 31,
        2006
        and 2005, respectively.
  **Accounts
        Receivable and Allowance for Doubtful Accounts:** Trade
        accounts receivable are recorded at the invoiced amount and do not bear
        interest. The allowance for doubtful accounts is our best estimate of losses
        that may result from the uncollectibility of accounts receivable. We determine
        the allowance based primarily on an analysis of individual accounts. 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. Account
        balances are charged off against the allowance when we feel it is probable
        the
        receivable will not be recovered. We do not have any off-balance-sheet credit
        exposure related to our customers.
  **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
        approximately $0.2 million for each of the years ended December 31, 2006,
        2005
        and 2004. Maintenance and repairs are charged to expense as
        incurred.
   F-7
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   **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.
  **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 significant post-shipment
        obligations to be performed by Aetrium, revenue for the entire transaction
        is
        deferred until such obligations have been completed or, if applicable, the
        transaction is accounted for as a multiple-element arrangement. For arrangements
        containing multiple elements, the amounts allocated to delivered and undelivered
        elements are based on their fair value and revenue is recognized upon delivery
        of each element. In instances where contractual terms can only be satisfied
        after shipment, such as meeting customer-specified acceptance requirements
        at
        the customer’s site, revenue is not recognized until 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 as a component
        of
“other accrued liabilities” in our consolidated balance sheet. See also Notes 9
        and 10.
  **Warranty
        and Equipment Improvement Costs:** Our
        products are sold with warranty periods that vary by item and range up to
        two
        years. Estimated warranty costs are accrued in the period that the related
        revenue is recognized. On occasion, we may provide no-charge equipment
        improvements for customers at our discretion. Such costs are accrued when
        identified, quantified and approved by management. The following table
        summarizes product warranty and no-charge improvement expense accruals and
        settlements for the three years ended December 31, 2006 (in
        thousands):
  Balance
                  at
                beginning
                  of
                year
              
              Accruals
                  for
                warranties
                and
                  no-charge improvements
              
              Settlements
                made
              
              Balance
                  at
                end
                  of
                year2004
              
              $
              152
              
              $
              183
              
              $
              (205
              )
              $
              1302005
              
              
              130
              
              
              205
              
              
              (202
              )
              
              133**2006**
              
              
              **133**
              
              
              **948**
              
              
              **(715**
              **)**
              
              **366**
 
  F-8
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   There
        were no significant changes in estimated warranty accruals for any of the
        prior
        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.
  **Income
        (Loss) Per Common Share:** Basic
        income (loss) per common share is computed by dividing net income (loss)
        by the
        weighted-average number of common shares outstanding during each period.
        Diluted
        income per share is computed by dividing net income by the weighted-average
        number of common shares and common equivalent shares outstanding during each
        period. Common equivalent shares include stock options using the treasury
        stock
        method. For periods which include a loss from continuing operations, the
        computation of diluted income (loss) per share excludes the impact of stock
        options because they would be antidilutive and diluted income (loss) per
        share
        is therefore the same as basic loss per share. A reconciliation of the number
        of
        shares used in the computations of basic and diluted income (loss) per share
        follows (in thousands):
  Year
                  ended Dec. 31,
              
              **2006**
              
              2005
              
              2004Weighted
                  average common shares outstanding
              
              
              **10,028**
              
              
              9,634
              
              
              9,589Potentially
                  dilutive stock options
              
              
              **558**
              
              
              —
              
              
              524Weighted
                  average common shares outstanding, assuming dilution
              
              
              **10,586**
              
              
              9,634
              
              
              10,113
 
 For
        the
        years ended December 31, 2006 and 2004, respectively, options to purchase
        112,932 and 260,938 common shares are excluded from the diluted computations
        because their exercise prices exceeded the average market value of our common
        stock and they would therefore be antidilutive to income per share. For the
        year
        ended December 31, 2005, all stock options are excluded from the loss per
        share
        computations because they would be antidilutive. As of December 31, 2005,
        there
        were 1,737,827 outstanding stock options that could have potentially impacted
        diluted income per share.
  **Share-Based
        Employee Compensation:** On
        January 1, 2006, Aetrium adopted the provisions of Statement of Financial
        Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS
        123R), which requires the measurement and recognition of all share-based
        compensation under the fair value method. In accordance with SFAS 123R, we
        began
        recognizing compensation expense in 2006 for all share-based awards granted
        or
        modified in 2006 plus the unvested portion of awards granted prior to 2006.
        We
        implemented SFAS 123R using the modified prospective transition method. Under
        this
   F-9
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   transition
        method, our financial statements and related information pertaining to periods
        prior to our adoption of SFAS 123R have not been restated to reflect the
        impact
        of SFAS 123R .
        Prior
        to adopting SFAS 123R, we applied the recognition and measurement principles
        of
        APB Opinion No. 25, “Accounting for Stock Issued to Employees.” See Notes 4 and
        14 for additional information regarding share-based compensation and our
        stock
        incentive plans.
  **NOTE
        3: DISCONTINUED OPERATIONS**
  On
        December 31, 2006, we completed the sale of the product lines being manufactured
        at our Dallas, Texas facility, pursuant to an Asset Purchase Agreement dated
        December 28, 2006. The primary products included in the sale were our burn-in
        board loaders and turret-based test handlers. The decision to sell these
        product
        lines resulted from our determination that the future potential for these
        products had diminished and they were no longer a strategic fit for us in
        the
        long term.
  The
        product lines and Dallas operations were sold to WEB Technology, Inc. (WEB),
        a
        privately held company owned in part by certain former employees of our Dallas
        operations, including the general manager of the Dallas operations (see Note
        13). The primary terms of the sale included the following:
  ·  Aetrium
        transferred receivables, inventories, equipment, intellectual property, and
        other assets associated with the divested product lines to WEB.
 ·  Aetrium
        agreed to reimburse WEB for wages and related costs through March 31, 2007
        for
        20 employees who transferred to WEB concurrently with the sale, excluding
        the
        general manager.
 ·  WEB
        assumed responsibility for all liabilities and obligations related to the
        installed base of the divested product lines, including all product warranty
        obligations, and agreed to provide ongoing customer support, including field
        service, spare parts and change kits.
 ·  WEB
        assumed certain accounts payable and accrued liabilities associated with
        the
        Dallas operations.
 ·  WEB
        assumed all liabilities and obligations under the lease for the Dallas facility,
        which ends on April 30, 2008.
 ·  WEB
        agreed to pay Aetrium $522,000 plus 5% interest in quarterly installments
        over
        two years.
  Also
        in
        connection with the sale, in addition to the 20 employees who transferred
        to WEB
        for whom we agreed to reimburse WEB for wages, we terminated 8 other employees,
        including the general manager of the Dallas operation. These 8 employees
        were
        terminated on or before December 31, 2006 and severance costs amounted to
        approximately $285,000.
   F-10
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   We
        recorded a loss of $4.0 million on the sale of the product lines computed
        as
        follows (in thousands):
  Carrying
                  value of net assets transferred to WEB:-
                  Receivables
              
              $
              634-
                  Inventories
              
              
              3,252-
                  Equipment
              
              
              39-
                  Intangible assets
              
              
              138-
                  Accounts payable and accrued liabilities
              
              
              (211
              )3,852Additional
                  liabilities assumed by Aetrium:-
                  Severance costs for terminated employees
              
              
              285-
                  Reimbursement of wages and related costs
              
              
              360-
                  Transaction costs
              
              
              30675Net
                  assets sold and additional liabilities assumed
              
              
              4,527Note
                  receivable from WEB
              
              
              522Loss
                  on sale of discontinued operations
              
              $
              (4,005
              )
 
 The
        current portion of the note receivable from WEB ($188,000) is included in
        the
        caption “Other current assets” and the
        long-term portion ($334,000) is included in the caption “Other assets” in our
        consolidated balance sheet at December 31, 2006.
  Operating
        results related to the divested operations have been reclassified and presented
        in our consolidated statements of operations as discontinued operations for
        all
        periods reported. Condensed results of discontinued operations are summarized
        below (in thousands):
  ****Year
                  ended December 31,
              
              **2006**
              
              2005
              
              2004Net
                  sales
              
              **$**
              **3,260**
              
              $
              3,423
              
              $
              5,030Cost
                  of goods sold
              
              
              **2,063**
              
              
              1,874
              
              
              2,653Gross
                  profit
              
              
              **1,197**
              
              
              1,549
              
              
              2,377Operating
                  expenses
              
              
              **2,682**
              
              
              3,227
              
              
              3,724Loss
                  from discontinued operations
              
              **$**
              **(1,485**
              **)**
              $
              (1,678
              )
              $
              (1,347
              )
  No
        income
        tax benefit was allocated to the loss from discontinued operations for any
        of
        the years presented because continuing operations either had reported a loss
        or
        had existing net operating loss carryforwards available to offset the pretax
        income.
   F-11
  **AETRIUM
          INCORPORATED**
  Notes
          to
          Consolidated Financial Statements
 Assets
        and liabilities related to the divested operations have been reclassified
        and
        presented as discontinued operations in our consolidated balance sheet at
        December 31, 2005 as follows (in thousands):
  Accounts
                  receivable
              
              $
              359Inventories
              
              
              3,171Current
                  assets - discontinued operations
              
              $
              3,530Property
                  and equipment
              
              $
              648Less
                  accumulated depreciation
              
              
              (596
              )Property
                  and equipment, net - discontinued operations
              
              $
              52Developed
                  technology
              
              $
              2,400Core
                  technology
              
              
              2,600Customer
                  list
              
              
              1,100Less
                  accumulated amortization
              
              
              (5,771
              )Identifiable
                  intangible assets, net - discontinued operations
              
              $
              329Accounts
                  payable
              
              $
              187Accrued
                  compensation
              
              
              107Accrued
                  warranty
              
              
              31Other
                  accrued liabilities
              
              
              52Current
                  liabilities - discontinued operations
              
              $
              377
 
  **NOTE
        4: SHARE-BASED COMPENSATION**
  On
        January 1, 2006, we adopted the provisions of SFAS 123R, which requires the
        measurement and recognition of all share-based compensation under the fair
        value
        method. We
        determine the fair value of share-based awards on the grant date using the
        Black-Scholes option valuation model. We also use the Black-Scholes model
        to
        determine the fair value of modifications to awards by determining and comparing
        the fair value of the modified award with the fair value of the award
        immediately before the modification. Option valuation models, including
        Black-Scholes, require the input of subjective assumptions, and changes in
        the
        assumptions used can materially affect the determination of the fair value
        of an
        award. These assumptions include expected stock price volatility, risk-free
        interest rate, expected dividend yield, and the expected life of the award.
        We
        estimate future stock price volatility based primarily on historical daily
        stock
        price observations of our common stock. Risk-free interest rate is estimated
        based on U.S. Treasury bill rates consistent with the expected term of an
        award.
        We assume an expected dividend yield of zero based on our intention to retain
        any future earnings for use in our operations. Expected life of an award
        is
        estimated primarily based on vesting provisions, the contractual term of
        the
        award, and historical experience of previous awards with similar terms or,
        if
        appropriate in the circumstances, we use the simplified method for estimating
        the expected life of an award, as permitted by Staff Accounting Bulletin
        No.
        107. SFAS
        123R also
        requires that estimated forfeitures be considered in the calculation of future
        compensation expense at the date of grant. We use historical data, as adjusted
        if deemed appropriate, to estimate future option forfeiture rates for purposes
        of recognizing share-based compensation expense.
   F-12
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   Using
        the
        Black-Scholes option valuation model, the weighted-average fair value of
        options
        granted in 2006, 2005, and 2004 was determined to be $2.03, $1.63, and $2.46,
        respectively. Weighted average assumptions used in applying the Black-Scholes
        option-pricing model to estimate the fair value of options granted were as
        follows:
  **2006**
              
              2005
              
              2004Expected
                  dividend level
              
              
              **0**
              **%**
              
              0
              %
              
              0
              %Expected
                  stock price volatility
              
              
              **59**
              **%**
              
              70
              %
              
              70
              %Risk-free
                  interest rate
              
              
              **5.0**
              **%**
              
              4.1
              %
              
              2.9
              %Expected
                  life of options (years)
              
              
              **3.5**
              
              
              3.5
              
              
              3.5
  In
        November 2006, we modified the terms of 173,000 stock options originally
        granted
        in June 2006 to 46 employees, excluding officers and directors, to reduce
        the
        exercise price from $4.33 per share to $3.00 per share (the then fair market
        value of a share of our common stock). At the same time, we also modified
        the
        terms for 50,000 stock options originally granted to an officer in 2004 to
        reduce the exercise price from $4.81 per share to $3.00 per share. The total
        incremental compensation cost resulting from these option modifications amounted
        to approximately $100,000. In December 2006, in connection with the sale
        of our
        product lines in Dallas, Texas and as part of the severance package provided
        to
        the general manager of the Dallas operations, we modified the terms of options
        previously granted to the general manager. The options were modified to extend
        the expiration dates for varying periods up to nine months. The incremental
        compensation cost resulting from these modifications amounted to approximately
        $30,000 and is included in the severance costs of $285,000 related to the
        divestiture as discussed in Note 3.
  We
        recorded no share-based compensation expense in fiscal years 2005 and 2004.
        Share-based compensation expense included in our consolidated statement of
        operations (including the effects of the modifications) for the year ended
        December 31, 2006 was as follows (in thousands):
  Cost
                  of goods sold
              
              **$**
              **18**Selling,
                  general and administrative
              
              
              **97**Research
                  and development
              
              
              **18**Loss
                  from discontinued operations
              
              
              **27**Loss
                  on sale of discontinued operations
              
              
              **30**Total
                  share-based compensation expense
              
              **$**
              **190**
  As
        of December
        31, 2006, we had approximately $734,000 of unrecognized pretax share-based
        compensation expense, which is expected to be recognized over a weighted
        average
        3.5 years.
  Prior
        to
        our adoption of SFAS 123R on January 1, 2006, we accounted for share-based
        awards to employees under Accounting Principles Board Opinion Number 25,
        “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, no
        share-based employee compensation cost was reflected in our consolidated
        statements of operations, as all options granted under our share-based
        compensation plans had an exercise price equal to the market value of the
        underlying common stock on the date of grant. The pro forma information
        presented in the following table illustrates the effect on net income (loss)
        and
        net income (loss) per share if we had applied the fair value recognition
        provisions of SFAS No. 123, “Accounting for Stock-Based
        Compensation,” ** as
        amended by SFAS No. 148, “Accounting for Stock
   F-13
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   Based
        Compensation - Transition and Disclosure,” to share-based employee compensation
        in 2005 and 2004:
  Year
                  ended December 31,
              
              2005
              
              2004Net
                  income (loss), as reported
              
              $
              (1,922
              )
              $
              3,403Deduct:
                  Total share-based employee compensation expense determined under
                  fair
                  value based method for all grants
              
              
              (1,501
              )
              
              (436
              )Pro
                  forma net income (loss)
              
              $
              (3,423
              )
              $
              2,967Net
                  income (loss) per share:Basic
                  - as reported
              
              $
              (0.20
              )
              $
              0.35Basic
                  - pro forma
              
              $
              (0.36
              )
              $
              0.31Diluted
                  - as reported
              
              $
              (0.20
              )
              $
              0.34Diluted
                  - pro forma
              
              $
              (0.36
              )
              $
              0.30Pro
                  forma diluted weighted average common shares outstanding
              
              
              9,634
              
              
              10,040
  On
        May 25, 2005, the Compensation Committee of our board of directors
        accelerated the vesting of 453,832 unvested and “out-of-the-money” stock options
        held by employees with exercise prices ranging from $2.76 to $4.81 per share.
        The options would have otherwise vested over various periods through September
        2008. On June 2, 2005, our board of directors accelerated the vesting of
        22,500 unvested and “out-of-the-money” stock options held by each of our three
        independent directors with exercise prices of $2.76 per share. The options
        would
        have otherwise vested through December 2007.
  Approximately
        $753,000 of the pro forma stock-based employee compensation expense in fiscal
        2005 above resulted from the acceleration of the vesting of such stock options
        and approximately $526,000 related to stock options granted in 2005 which
        were
        immediately exercisable. At that time, our board of directors and its
        Compensation Committee determined that the acceleration of the vesting of
        the
        stock options was in the best interests of the Company to enhance the incentive
        of the affected options and to provide us with greater flexibility for future
        grants of share-based incentives as SFAS 123R became effective. The acceleration
        of vesting enabled us to avoid recognizing compensation expense associated
        with
        these options in periods following the adoption of SFAS 123R in
        January 2006.
   F-14
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   **NOTE
        5: RECENT ACCOUNTING PRONOUNCEMENTS**
  In
        September 2006, the Financial
        Accounting Standards Board (FASB) issued
        Statement of Financial Accounting Standards No. 157, “Fair Value”
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
        measuring fair value in accordance with generally accepted accounting
        principles, and expands disclosures about fair value measurements. SFAS 157
        becomes effective for fiscal years beginning after November 15, 2007. We
        do not
        expect the implementation of SFAS 157 to have a material impact on our
        financial position or results of operations.
  In
        June 2006, the Financial Accounting Standards Board (FASB) issued FASB
        Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - An
        Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the
        accounting for uncertainty in income taxes by defining a threshold for
        recognizing the
        benefits of tax return positions and
        providing guidance on the measurement and
        classification of income tax uncertainties  in
        financial statements.  FIN 48
        also increases disclosure requirements associated with any recorded income
        tax
        uncertainties. FIN
        48 is
        effective for fiscal years beginning after December 15, 2006. Therefore, we
        will adopt this pronouncement in fiscal year 2007. We
        do not
        expect the implementation of FIN 48 to have a material impact on our financial
        position or results of operations.
  **NOTE
        6: OTHER (EXPENSE), NET**
  In
        the
        second quarter of 2004, we settled a claim against a customer for past-due
        invoices for products we had delivered plus charges related to a purchase
        order
        cancelled by the customer in 2001. We accepted shares of the customer’s common
        stock with a market value of approximately $233,000 in settlement of these
        claims. Of this amount, approximately $106,000 was applied to the customer’s
        past-due accounts receivable amounts owed to us. The remaining $127,000,
        related
        to purchase order cancellation charges, was recorded as a gain in the second
        quarter of 2004. Prior to December 31, 2004, we sold the shares for
        approximately $31,000 and realized a loss of approximately $202,000 in the
        fourth quarter of 2004. The net effect of these transactions was a net loss
        of
        $74,196, which is presented as “Other (expense), net” in our Consolidated
        Statement of Operations.
  **NOTE
        7: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**
  Cash
        payments (refunds) for interest and income taxes were as follows (in
        thousands):
  Year
                  ended Dec. 31,****
              
              **2006**
              
              2005
              
              2004Interest
                  paid
              
              **$**
              **9**
              
              $
              11
              
              $
              10Income
                  taxes paid (refunded), net
              
              **$**
              **25**
              
              $
              (48
              )
              $
              66
 
  F-15
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   **NOTE
        8: IDENTIFIABLE INTANGIBLE ASSETS**
  Identifiable
        intangible assets are comprised of the following (in thousands):
  December
                  31,
              
              **2006**
              
              2005**Gross**
              
              **Accumulated
                  amortization**
              
              **Net**
              
              Gross
              
              Accumulated
                  amortization
              
              NetContinuing
                  operations:Developed
                  technology
              
              **$**
              **200**
              
              **$**
              **(200**
              **)**
              $
              —
              
              $
              200
              
              $
              (200
              )
              $
              0Core
                  technology
              
              
              **567**
              
              
              **(567**
              **)**
              
              —
              
              
              567
              
              
              (567
              )
              
              —Other
              
              
              **95**
              
              
              **(92**
              **)**
              
              **3**
              
              
              95
              
              
              (81
              )
              
              14Total
                  - continuing operations
              
              
              **862**
              
              
              **(859**
              **)**
              
              **3**
              
              
              862
              
              
              (848
              )
              
              14Discontinued
                  operations:Developed
                  technology
              
              
              —
              
              
              —
              
              
              —
              
              
              2,400
              
              
              (2,400
              )
              
              —Core
                  technology
              
              
              —
              
              
              —
              
              
              —
              
              
              2,600
              
              
              (2,519
              )
              
              81Customer
                  list
              
              
              —
              
              
              —
              
              
              —
              
              
              1,100
              
              
              (852
              )
              
              248Other
              
              
              —
              
              
              —
              
              
              —
              
              
              4
              
              
              (4
              )
              
              —Total
                  - discontinued operations
              
              
              —
              
              
              —
              
              
              —
              
              
              6,104
              
              
              (5,775
              )
              
              329Total
              
              **$**
              **862**
              
              **$**
              **(859**
              **)**
              **$**
              **3**
              
              $
              6,966
              
              $
              (6,623
              )
              $
              343
  The
        net
        carrying value of identifiable intangible assets related to continuing
        operations is included in the caption “Other assets” in
        our
        consolidated balance sheet at December 31, 2006 and 2005. As
        discussed in Note 3, intangible assets with a net book value of $137,500
        were
        sold on December 31, 2006 in connection with the divestiture of our Dallas,
        Texas operations.
  Amortization
        expense related to identifiable intangible assets included in our statements
        of
        operations was as follows (in thousands):
  Year
                  ended Dec. 31,****
              
              **2006**
              
              2005
              
              2004Continuing
                  operations
              
              **$**
              **11**
              
              $
              15
              
              $
              93Discontinued
                  operations
              
              **$**
              **191**
              
              $
              521
              
              $
              778
  **NOTE
        9: INVENTORIES**
  A
        summary
        of the composition of inventories is as follows (in thousands):
  December
                  31,****
              
              **2006**
              
              2005Purchased
                  parts and completed subassemblies
              
              **$**
              **3,044**
              
              $
              2,277Work-in-process
              
              
              **1,847**
              
              
              1,923Finished
                  goods, including saleable demonstration equipment
              
              
              **2,372**
              
              
              1,023Equipment
                  shipped, subject to revenue deferral
              
              
              **100**
              
              
              398Total
                  inventories
              
              **$**
              **7,363**
              
              $
              5,621
 
 We
        adjust
        our inventories for estimated excess and obsolete inventory equal to the
        difference between the cost of inventory and its estimated realizable 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 adjustments may be required.
        As of
        December 31, 2006, our provision for excess and obsolete inventory was $1.7
        million.
   F-16
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   **NOTE
        10: OTHER ACCRUED LIABILITIES:**
  Other
        accrued liabilities are comprised of the following (in thousands):
  December
                  31,
              
              **2006**
              
              2005Accrued
                  commissions
              
              **$**
              **6**
              
              $
              145Accrued
                  warranty
              
              
              **366**
              
              
              133Customer
                  deposits and deferred revenue
              
              
              **199**
              
              
              67Accrued
                  severance and other related costs
              
              
              **645**
              
              
              —Other
              
              
              **230**
              
              
              247Total
                  other accrued liabilities
              
              **$**
              **1,446**
              
              $
              592
  As
        discussed in Note 3, the accrued severance and other related costs of $645,000
        at December 31, 2006 are related to the sale of our Dallas, Texas operations.
        We
        estimate that these costs will be paid approximately as follows: $460,000
        by
        March 31, 2007; $60,000 by June 30, 2007; $20,000 per quarter
        thereafter.
  **NOTE
        11: CREDIT AGREEMENT AND LONG-TERM DEBT**
  In
        October 2005, we entered into a revolving credit line agreement with a bank
        that
        provides for borrowings up to the lesser of $2.0 million or 90% of eligible
        accounts receivable plus 75% of eligible inventories and bears interest at
        the
        prime rate plus 0.25%. The agreement is collateralized by substantially all
        Company assets and provides that Aetrium maintain certain financial covenants.
        The initial credit agreement provided for a term of one year and in October
        2006
        it was extended for an additional year with the same terms and conditions.
        As of
        December 31, 2006, there were no borrowings under the line of credit agreement
        and Aetrium was in compliance with all covenants under the
        agreement.
  In
        2004,
        we executed a note payable to a bank for $190,000, payable in monthly
        installments of $3,966 through March 2009. The note is collateralized by
        certain
        data processing equipment and bears interest at the prime rate plus 1.5%
        with a
        minimum loan interest rate of 5.5% and maximum rate of 7.5% (the prime interest
        rate was 8.25% at December 31, 2006). The loan balance at December 31, 2006
        was
        $98,132. Future maturities of long-term debt as of December 31, 2006 are
        as
        follows (in thousands):
  2007
              
              $
              422008
              
              
              452009
              
              
              11Total
              
              $
              98
  **NOTE
        12: LEASE OBLIGATIONS**
  We
        lease
        our facility in North St. Paul, Minnesota from a limited liability company
        controlled by a shareholder of Aetrium. The shareholder is neither a director
        nor officer of Aetrium, and, to our knowledge, does not own more than five
        percent of our common stock. The lease agreement provides for monthly base
        rents
        which were $23,333 as of December 31, 2006 and increase 2% annually through
        the
        end of the lease term. The agreement expires on February 28, 2011, at which
        time
        we have an option to extend the lease for an additional five-year
        term.
   F-17
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   Aetrium
        is subject to a lease for a facility located in Dallas, Texas under an agreement
        that expires in April 2008. As discussed in Note 3, in connection with the
        divestiture of our Dallas operations, this lease was assigned to WEB Technology,
        Inc. (WEB) on December 31, 2006. We remain contingently liable under the
        lease
        if WEB were to default.
  In
        2000,
        we vacated a leased facility in Poway, California. The lease expires in January
        2010. 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 the lease was re-assigned to Aetrium. As of February,
        2007, this facility is subleased to two independent parties with the sublease
        terms running concurrently with our remaining lease term.
  As
        indicated above, the vacated facilities in Dallas, Texas and Poway, California
        are occupied by tenants who are under contract through the remainder of our
        lease terms. We believe the lease assignment and sublease income, including
        scheduled sublease rent increases, will cover our remaining lease obligations.
        However, if WEB were to default on the Dallas lease and/or if one or more
        of the
        Poway subtenants were to default on their sublease agreements we may have
        to
        record charges related to our future obligations under these
        leases.
  As
        of
        December 31, 2006, future minimum annual lease payments under operating leases
        were as follows (in thousands):
  2007
              
              $
              7822008
              
              
              8002009
              
              
              8182010
              
              
              3472011
              
              
              50Total
                  minimum lease payments
              
              $
              2,797
 
 The
        above
        minimum lease payments have not been reduced by minimum sublease rentals
        of $1.7
        million for the Poway, California facility due in the future under
        noncancellable subleases which expire in January 2010. Also, the above minimum
        lease payments do not include the Dallas, Texas facility lease that is assigned
        to WEB Technology, Inc. for which the remaining minimum payments amounted
        to
        $0.2 million at December 31, 2006.
  Rent
        expense from continuing operations, including facility and various short-term
        equipment operating leases, was as follows (in thousands):
  Year
                  ended Dec. 31,****
              
              **2006**
              
              2005
              
              2004Leased
                  from shareholder
              
              **$**
              **316**
              
              $
              438
              
              $
              438Leased
                  from others
              
              
              **487**
              
              
              437
              
              
              606Sublease/assigned
                  lease income
              
              
              **(416**
              **)**
              
              (585
              )
              
              (745
              )Total
                  net rent expense
              
              **$**
              **387**
              
              $
              290
              
              $
              299
  
   F-18
  **AETRIUM
          INCORPORATED**
  Notes
          to
          Consolidated Financial Statements
 **NOTE
        13: RELATED PARTY TRANSACTIONS**
  On
        December 31, 2006, as discussed in Note 3, we completed the sale of the product
        lines being manufactured at our Dallas, Texas facility to WEB Technology,
        Inc.
        (WEB). WEB is a privately held company owned in part by certain former Aetrium
        employees of the Dallas operation, including the general manager. The divested
        product lines were some of our lowest revenue and less strategic product
        lines,
        included our burn-in board loaders and turret-based test handlers, and had
        been
        unprofitable for several quarters. The sale transaction was reviewed and
        approved by our board of directors, including all the members of our Audit
        Committee.
  During
        fiscal years 2004 through 2006, we purchased machined parts from two suppliers
        in which the general manager of our discontinued Dallas, Texas operations
        has a
        minority ownership interest. Purchases from these suppliers included terms
        which
        we believe were no less favorable than would have been obtained from other
        suppliers and amounted to a total of $180,000, $163,000, and $210,000 in
        the
        years ended December 31, 2006, 2005 and 2004, respectively.
  **NOTE
        14: STOCK OPTION PLANS**
  Aetrium’s
        1993 Stock Incentive Plan (the 1993 Plan) terminated in June 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.
        In
        May 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% 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 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. To date,
        nonqualified stock options are the only awards that we have granted under
        our
        2003 Plan. 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.
   F-19
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   The
        following table summarizes activity under our stock incentive plans for the
        year
        ended December 31, 2006:
  Number
                of
                  Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Remaining Contract Term
              
              Aggregate
                  Intrinsic Value (in thousands)Outstanding,
                  January 1, 2006
              
              
              1,737,827
              
              $
              2.60Granted
              
              
              445,000
              
              
              4.33Exercised
              
              
              (631,958
              )
              
              2.06Forfeited
              
              
              (63,917
              )
              
              3.64Outstanding,
                  December 31, 2006
              
              
              1,486,952
              
              $
              3.09Options
                  at December 31, 2006:Exercisable
                  and expected to become exercisable
              
              
              1,457,213
              
              $
              3.09
              
              
              2.8
                  years
              
              $
              933Exercisable
              
              
              1,112,074
              
              $
              2.87
              
              
              2.2
                  years
              
              $
              857
  As
        discussed in Note 4, the terms of 173,000 stock options granted in June 2006
        were subsequently modified to reduce the exercise price from $4.33 per share
        to
        $3.00 per share. The aggregate intrinsic value in the table above represents
        the
        total pretax intrinsic value (the difference between Aetrium’s closing stock
        price on December 31, 2006 and the option exercise price) of all in-the-money
        stock options that would have been received by the option holders had they
        exercised their options on December 31, 2006. The total intrinsic value of
        options exercised during the year ended December 31, 2006 was approximately
        $1.4
        million. The total fair value of options vested during the year ended December
        31, 2006 was approximately $190,000.
  The
        following table summarizes information related to stock options outstanding
        at
        December 31, 2006, all of which are nonqualified options and expire five years
        after the grant date and of which 322,460 options were fully exercisable
        when
        granted, 30,000 options became exercisable over 32 months from date of grant,
        576,642 options were initially scheduled to become exercisable over four
        years
        from date of grant and were subsequently modified in the second quarter of
        2005
        to become fully exercisable to the extent not then exercisable, and 557,850
        options become exercisable over four years from date of grant **:**
  Options
                  Outstanding****
              
              Options
                  ExercisableRange
                  of Exercise Prices
              
              Number
                  Outstanding
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighted
                  Average Exercise Price****
              
              Number
                  Exercisable
              
              Weighted
                  Average Exercise Price$
                  0.87 to 1.03
              
              
              25,000
              
              
              0.9
                  years
              
              $
              0.95
              
              
              24,583
              
              $
              0.952.05
                  to 3.13
              
              
              1,170,577
              
              
              2.5
                  years
              
              
              2.80
              
              
              1,003,491
              
              
              2.774.33
                  to 4.81
              
              
              291,375
              
              
              4.1
                  years
              
              
              4.41
              
              
              84,000
              
              
              4.62$
                  0.87 to 4.81
              
              
              1,486,952
              
              
              2.8
                  years
              
              $
              3.09
              
              
              1,112,074
              
              $
              2.87
 
  **NOTE
        15: EMPLOYEE SAVINGS 401(k) PLAN**
  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 are at the
        discretion of management. We contributed
   F-20
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   $117,278
        and $116,723, respectively, to the plan in 2006 and 2004. We made no
        contributions to the plan in 2005.
  **NOTE
        16: INCOME TAXES**
  Income
        tax expense (benefit) from continuing operations consists of the following
        components (in thousands):
  Year
                  ended December 31,****
              
              **2006**
              
              2005
              
              2004Current
                  tax expense (benefit):Federal
              
              **$**
              **—**
              
              $
              (34
              )
              $
              49State
              
              
              **5**
              
              
              4
              
              
              3Total
                  current expense (benefit)
              
              
              **5**
              
              
              (30
              )
              
              52Deferred
                  tax expense (benefit):Federal
              
              
              **—**
              
              
              —
              
              
              —State
              
              
              **—**
              
              
              —
              
              
              —Total deferred expense (benefit)
              
              
              **—**
              
              
              —
              
              
              —Total
                  income tax expense (benefit)
              
              **$**
              **5**
              
              $
              (30
              )
              $
              52
 
 A
        reconciliation of income tax expense (benefit) from continuing operations
        computed using the federal statutory rate to the income tax expense (benefit)
        reported in our consolidated statements of operations is as follows (in
        thousands): ****
  Year
                  ended December 31,****
              
              **2006**
              
              2005
              
              2004Tax
                  computed at federal statutory rate
              
              **$**
              **1,681**
              
              $
              (93
              )
              $
              1,633State
                  taxes, net of federal benefit
              
              
              **181**
              
              
              (63
              )
              
              118Change
                  in tax rates
              
              
              **—**
              
              
              **—**
              
              
              (197
              )Increase
                  (decrease) in tax from:Business
                  meals and entertainment
              
              
              **18**
              
              
              8
              
              
              26Tax
                  credits
              
              
              **(114**
              **)**
              
              (168
              )
              
              **—**Valuation
                  allowance change
              
              
              **(1,768**
              **)**
              
              315
              
              
              (1,553
              )Other,
                  net
              
              
              **7**
              
              
              (29
              )
              
              25Reported
                  income tax expense (benefit)
              
              **$**
              **5**
              
              $
              (30
              )
              $
              52
 
 
 Deferred
        tax assets (liabilities) are comprised of the following (in
        thousands):
  December
                  31,****
              
              **2006**
              
              2005Accounts
                  receivable
              
              **$**
              **17**
              
              $
              43Inventories
              
              
              **694**
              
              
              1,013Employee
                  compensation and benefits
              
              
              **194**
              
              
              99Amortization
                  of intangibles
              
              
              **1,180**
              
              
              5,824NOL
                  and tax credit carryforwards
              
              
              **24,107**
              
              
              18,490Severance
                  and related cost accruals
              
              
              **138**
              
              
              —Warranty
                  accrual
              
              
              **132**
              
              
              59Other,
                  net
              
              
              **54**
              
              
              72Deferred
                  tax assets
              
              **$**
              **26,516**
              
              $
              25,600Less,
                  valuation allowance
              
              
              **(26,516**
              **)**
              
              (25,600
              )Net
                  deferred tax assets
              
              **$**
              **—**
              
              $
              —
 
  F-21
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   We
        carry
        the benefit we will derive in future accounting periods from tax losses and
        credits and deductible temporary differences as “deferred tax assets” on our
        balance sheet. Since 2000, we have maintained a valuation allowance to fully
        reserve our deferred tax assets. We recorded the valuation allowance in 2000
        because the cumulative losses we had incurred over the previous three years
        made
        it questionable whether we would realize value from the deferred tax assets.
        We
        assess the realizability of our deferred tax assets and the need for this
        valuation allowance in accordance with SFAS No. 109. We expect to continue
        to
        maintain a full valuation allowance until we determine that we can sustain
        a
        level of profitability that demonstrates our ability to use these assets.
        To the
        extent we determine that the realization of some or all of these benefits
        is
        more likely than not based upon expected future taxable income, a portion
        or all
        of the valuation allowance will be reversed.  Such a reversal would be
        recorded as an income tax benefit and, for some portion related to deductions
        for stock option exercises, an increase in shareholders' equity.
  Approximately
        $0.9 million of the $26.5 million valuation allowance at December 31, 2006
        is
        related to deductions for exercised stock options (of which $0.6 million
        is
        related to options exercised in 2006), which would be recorded as an increase
        in
        shareholders’ equity if the valuation allowance were to be reversed in a future
        period.
  Aetrium
        has federal net operating loss carryforwards of approximately $63 million
        that
        will begin to expire in 2020 if not utilized. We also have state net operating
        loss carryforwards of approximately $22 million that will expire at various
        times, beginning in 2007, if not utilized. We also have federal and state
        research tax credit carryforwards of approximately $1.4 million that will
        expire
        at various times, beginning in 2013, if not utilized. The utilization of
        net
        operating loss carryforwards and research tax credit carryforwards may be
        subject to annual limitations in the event of future changes in ownership
        pursuant to the requirements of Section 382 of the Internal Revenue Code.
         Such limitations could result in the expiration of net operating loss and
        tax credit carryforwards before utilization.
  **NOTE
        17: PRODUCT LINE, GEOGRAPHIC, SIGNIFICANT CUSTOMER AND CONCENTRATION OF CREDIT
        RISK DATA**
  The
        following table sets forth the various components of net sales by product
        line
        as a percentage of total sales:
  Year
                  ended December 31,****
              
              **2006**
              
              2005
              
              2004Test
                  handler products
              
              
              **67**
              **%**
              
              44
              %
              
              57
              %Reliability
                  test equipment products
              
              
              **15**
              
              
              26
              
              
              23Change
                  kits and spare parts
              
              
              **18**
              
              
              30
              
              
              20Total
              
              
              **100**
              **%**
              
              100
              %
              
              100
              %
 
   F-22
  **AETRIUM
          INCORPORATED**
  Notes
          to
          Consolidated Financial Statements
  All
        of
        our long-lived assets are located in the United States. Sales by geographic
        area
        based on product shipment destination were as follows (in
        thousands):
  Year
                  ended December 31,****
              
              **2006**
              
              2005
              
              2004United
                  States
              
              **$**
              **10,121**
              
              $
              4,583
              
              $
              10,972Philippines
              
              
              **6,586**
              
              
              3,701
              
              
              9,854Malaysia
              
              
              **3,979**
              
              
              1,993
              
              
              14Thailand
              
              
              **3,528**
              
              
              262
              
              
              300France
              
              
              **2,197**
              
              
              1,211
              
              
              66Other
                  foreign countries
              
              
              **1,773**
              
              
              1,234
              
              
              1,553Total
              
              **$**
              **28,184**
              
              $
              12,984
              
              $
              22,759
 
 Sales
        to
        customers comprising more than 10% of our total net sales were as
        follows:
  Year
                  ended December 31,****
              
              **2006**
              
              2005
              
              2004Customer
                  A
              
              
              **51**
              **%**
              
              41
              %
              
              64
              %Customer
                  B
              
              
              **20**
              **%**
              
              24
              %
              
              *Customer
                  C
              
              
              *
              
              
              *
              
              
              14
              %
 ______________
 *
        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,****
              
              **2006**
              
              2005Customer
                  A
              
              
              **54**
              **%**
              
              46
              %Customer
                  B
              
              
              *****
              
              
              27
              %Customer
                  D
              
              
              **25**
              **%**
              
              *
 ______________
 *
        Accounts receivable from customer were less than 10% of total accounts
        receivable.
  We
        sell
        our products principally to manufacturers of integrated circuits. Our accounts
        receivable balance is concentrated with customers principally in one industry.
        We regularly monitor the creditworthiness of our customers to manage this
        collection risk. 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.
   F-23
 **AETRIUM
        INCORPORATED**
  Notes
        to
        Consolidated Financial Statements
   **NOTE
        18: QUARTERLY FINANCIAL DATA (UNAUDITED)**
  The
        following table sets forth quarterly financial data for the years ended December
        31, 2006 and 2005 (in thousands, except per share data):
  First
                Quarter
              
              Second
                Quarter
              
              Third
                Quarter
              
              Fourth
                Quarter**2006
                  Net sales**
              
              **$**
              **6,899**
              
              **$**
              **7,986**
              
              **$**
              **8,226**
              
              **$**
              **5,073****Gross
                  profit**
              
              
              **3,493**
              
              
              **3,876**
              
              
              **4,208**
              
              
              **2,137****Income
                  from continuing operations**
              
              
              **955**
              
              
              **1,669**
              
              
              **1,564**
              
              
              **751****Loss
                  from discontinued operations**
              
              
              **(479**
              **)**
              
              **(393**
              **)**
              
              **(271**
              **)**
              
              **(4,347)**1**Net
                  income (loss)**********
              
              
              **476**
              
              
              **1,276**
              
              
              **1,293**
              
              
              **(3,596)**1**Basic
                  income (loss) per share:**2**Continuing
                  operations**
              
              
              **0.10**
              
              
              **0.17**
              
              
              **0.15**
              
              
              **0.07****Discontinued
                  operations**
              
              
              **(0.05**
              **)**
              
              **(0.04**
              **)**
              
              **(0.03**
              **)**
              
              **(0.43**
              **)****Net
                  income (loss)**********
              
              
              **0.05**
              
              
              **0.13**
              
              
              **0.13**
              
              
              **(0.35**
              **)****Diluted
                  income (loss) per share:**2**Continuing
                  operations**
              
              
              **0.09**
              
              
              **0.16**
              
              
              **0.15**
              
              
              **0.07****Discontinued
                  operations**
              
              
              **(0.05**
              **)**
              
              **(0.04**
              **)**
              
              **(0.03**
              **)**
              
              **(0.41**
              **)****Net
                  income (loss)**********
              
              
              **0.05**
              
              
              **0.12**
              
              
              **0.12**
              
              
              **(0.34**
              **)**2005
                  Net sales
              
              $
              2,503
              
              $
              2,329
              
              $
              3,009
              
              $
              5,143Gross
                  profit
              
              
              1,388
              
              
              1,337
              
              
              1,271
              
              
              2,546Income
                  (loss) from continuing operations
              
              
              (135
              )
              
              (169
              )
              
              (520
              )
              
              581Loss
                  from discontinued operations
              
              
              (133
              )
              
              (513
              )
              
              (463
              )
              
              (569
              )Net
                  income (loss)
              
              
              (268
              )
              
              (682
              )
              
              (983
              )
              
              12Basic
                  income (loss) per share:2Continuing
                  operations
              
              
              (0.01
              )
              
              (0.02
              )
              
              (0.05
              )
              
              (0.06
              )Discontinued
                  operations
              
              
              (0.01
              )
              
              (0.05
              )
              
              (0.05
              )
              
              (0.06
              )Net
                  income (loss)
              
              
              (0.03
              )
              
              (0.07
              )
              
              (0.10
              )
              
              0.00Diluted
                  income (loss) per share:2Continuing
                  operations
              
              
              (0.01
              )
              
              (0.02
              )
              
              (0.05
              )
              
              (0.06
              )Discontinued
                  operations
              
              
              (0.01
              )
              
              (0.05
              )
              
              (0.05
              )
              
              (0.06
              )Net
                  income (loss)
              
              
              (0.03
              )
              
              (0.07
              )
              
              (0.10
              )
              
              0.00
 _________________________________
  1.
              Includes
                  a $4.0 million loss on the sale of discontinued operations. See
                  Note 3 to
                  the Consolidated Financial Statements.2.
              The
                  sum of continuing operations and discontinued operations may not
                  equal the
                  total and the sum of the four quarters may not equal the year total
                  due to
                  rounding.
 
 
  F-24
 
    **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
  **AETRIUM
                  INCORPORATED**Date:
                  March 28, 2007
              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 28, 2007 by the following persons on behalf of the
        registrant and in the capacities indicated.
  Signature
              
              Title/s/
                  Joseph C. Levesque
              
              Chairman
                  of the BoardJoseph
                  C. Levesque/s/
                  Darnell L. Boehm
              
              DirectorDarnell
                  L. Boehm/s/
                  Terrence W. Glarner
              
              DirectorTerrence
                  W. Glarner/s/
                  Andrew J. Greenshields
              
              DirectorAndrew
                  J. Greenshields/s/
                  Douglas L. Hemer
              
              DirectorDouglas
                  L. Hemer
  
   
    **AETRIUM
        INCORPORATED**
 **EXHIBIT
        INDEX TO ANNUAL REPORT ON FORM 10-K**
 **FOR
        THE FISCAL YEAR ENDED DECEMBER 31, 2006**
 **Item**
                **No.**********
              **Item******
              **Method
                  of Filing******3.1
              Our
                  Restated Articles of Incorporation, as amended.
              Incorporated
                  by reference to Exhibit 3.1 to our Registration Statement on Form
                  SB-2
                  (File No. 33-64962C).3.2
              Amendment
                  to Restated Articles of Incorporation
              Incorporated
                  by reference to Exhibit 3.2 to our Quarterly Report for the quarter
                  ended
                  September 30, 1998 (File No. 0-22166).3.3
              Our
                  Bylaws, as amended.
              Incorporated
                  by reference to Exhibit 3.2 to our Registration Statement on Form
                  SB-2
                  (File No. 33-64962C).4.1
              Specimen
                  Form of our Common Stock Certificate.
              Incorporated
                  by reference to Exhibit 4.1 to our Registration Statement on Form
                  SB-2
                  (File No. 33-64962C).10.1
              1993
                  Stock Incentive Plan, as amended.
              Incorporated
                  by reference to Exhibit 10.2 to our Annual Report on Form 10-K
                  for year
                  ended December 31, 1997 (File No. 0-22166).10.2
              Salary
                  Savings Plan.
              Incorporated
                  by reference to Exhibit 10.3 to our Registration Statement on Form
                  SB-2
                  (File No. 33-64962C).10.3
              Form
                  of Incentive Stock Option Agreement.
              Incorporated
                  by reference to Exhibit 10.6 to our Annual Report on Form 10-KSB
                  for the
                  year ended December 31, 1993 (File No. 0-22166).10.4
              Form
                  of Non-Statutory Option Agreement.
              Incorporated
                  by reference to Exhibit 10.7 to our Annual Report on Form 10-KSB
                  for the
                  year ended December 31, 1993 (File No. 0-22166).10.5
              Employment
                  Agreement dated April 1, 1986, between Joseph C. Levesque and
                  us.
              Incorporated
                  by reference to Exhibit 10.6 to our Registration Statement on Form
                  SB-2
                  (File No. 33-64962C).10.6
              Credit
                  Agreement dated August 11, 1989, between Harris Bank and
                  us.
              Incorporated
                  by reference to Exhibit 10.7 to our Registration Statement on Form
                  SB-2
                  (File No. 33-64962C).10.7
              Lease
                  Agreement, dated July 19, 1995, between KAMKO Investments and
                  us.
              Incorporated
                  by reference to Exhibit 10.12 to our Registration Statement on
                  Form SB-2
                  (File No. 33-98040).
   E-1
  10.8
              Amendment
                  to Lease Agreement, dated September 26, 1995, between KAMKO Investments
                  and us.
              Incorporated
                  by reference to Exhibit 10.13 to our Registration Statement on
                  Form SB-2
                  (File No. 33-98040).10.9
              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).10.10
              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).10.11
              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).10.12
              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).10.13
              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).10.14
              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).10.15
              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).10.16
              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).10.17
              Form
                  of Change of Control Agreement.
              Incorporated
                  by reference to Exhibit 10.19 to our Annual Report on Form 10-K
                  for the
                  year ended December 31, 2003 (File No.
                  0-22166).
   E-2
  10.18
              Assignment
                  Agreement, dated January 20, 2004, by and between us and Littlefeet,
                  Inc.
              Incorporated
                  by reference to Exhibit 10.20 to our Annual Report on Form 10-K
                  for the
                  year ended December 31, 2003 (File No. 0-22166).10.19
              Sales
                  Incentive Program.
              Incorporated
                  by reference to Exhibit 10.21 to our Annual Report on Form 10-K
                  for the
                  year ended December 31, 2003 (File No. 0-22166).10.20
              Business
                  Loan Agreement, dated October 3, 2005, between Bremer Bank and
                  us.
              Incorporated
                  by reference to Exhibit 20.21 to our Quarterly Report on Form 10-Q
                  for the
                  quarter ended September 30, 2004 (File No. 0-22166).10.21
              Note,
                  dated October 3, 2005, issued by us to Bremer Bank.
              Incorporated
                  by reference to Exhibit 20.22 to our Quarterly Report on Form 10-Q
                  for the
                  quarter ended September 30, 2004 (File No. 0-22166).10.22
              Commercial
                  Security Agreement, dated October 3, 2005, between Bremer Bank
                  and
                  us.
              Incorporated
                  by reference to Exhibit 20.23 to our Quarterly Report on Form 10-Q
                  for the
                  quarter ended September 30, 2004 (File No. 0-22166).10.23
              Commercial
                  Lease dated February 24, 2006 between Kamko I, LLC and us.
              Incorporated
                  by reference to Exhibit 10.24 to our Annual Report on Form 10-K
                  for the
                  year ended December 31, 2006 (File No. 0-22166).10.24
              Asset
                  Purchase Agreement, dated December 28, 2006, between WEB Technology,
                  Inc.
                  and us.
              Incorporated
                  by reference to Exhibit 10.1 to our Current Report on Form 8-K
                  dated
                  January 5, 2007 (File No. 0-22166).10.25
              Executive
                  Officer Profit Sharing Program.
              Incorporated
                  by reference to Exhibit 10.1 to our Current Report on Form 8-K
                  dated
                  January 23, 2007 (File No. 0-22166).14.1
              Code
                  of Business Conduct and Ethics.
              Incorporated
                  by reference to Exhibit 14.1 to our Annual Report on Form 10-K
                  for the
                  year ended December 31, 2003 (File No. 0-22166).21.1
              Subsidiaries
                  of the Registrant.
              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).23.1
              Independent
                  Registered Public Accounting Firm’s Consent.
              Filed
                  herewith electronically.23.2
              Independent
                  Registered Public Accounting Firm’s 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.
   E-3
  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-4
   
   **SCHEDULE
        II**
  **Valuation
        and Qualifying Accounts**
  **Additions********Description******
              
              **Balance
                  at**
                **beginning
                  of**
                **year******
              
              **Charged
                  (credited) to costs and expenses**
              
              **Charged
                  to**
                **other
                  accounts**
              
              **Deductions******
              
              **Balance****at**
                **end
                  of**
                **year********Allowance
                  for doubtful accounts:**2004
              
              $
              181
              
              $
              0
              
              $
              0
              
              $
              (11
              )
              $
              1702005
              
              
              170
              
              
              0
              
              
              0
              
              
              (124
              )
              
              462006
              
              
              46
              
              
              0
              
              
              0
              
              
              0
              
              
              46**Inventory
                  excess and obsolescence reserve (1):**2004
              
              $
              3,293
              
              $
              0
              
              $
              0
              
              $
              (631
              )
              $
              2,6622005
              
              
              2,662
              
              
              0
              
              
              0
              
              
              (405
              )
              
              2,2572006
              
              
              2,257
              
              
              0
              
              
              0
              
              
              (588
              )
              
              1,669**Valuation
                  allowance on deferred tax assets (2):**2004
              
              $
              25,112
              
              $
              (747
              )
              $
              217
              
              $
              0
              
              $
              24,5822005
              
              
              24,582
              
              
              1,012
              
              
              6
              
              
              0
              
              
              25,6002006
              
              
              25,600
              
              
              274
              
              
              642
              
              
              0
              
              
              26,516
  (1)  Deductions
        represent sales or disposals of reserved inventory.
 (2)  Amounts
        charged to other accounts represent the portion of the valuation allowance
        charged to Additional Paid-In Capital for income tax benefits related to
        stock
        option exercises.
  S-1