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, 2007
 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:
 Title Of Each Class
              Name Of Each Exchange On Which
      RegisteredCOMMON
      STOCK, PAR VALUE $.001 PER SHARE
              The
      NASDAQ Stock Market LLC
 
 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.  T
  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  £  Smaller
reporting company  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 29, 2007 (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 Nasdaq Stock Market), excluding outstanding shares beneficially
owned by directors and executive officers, was $44,316,000.
  As of
March 14, 2008, 10,581,722shares 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 2008 Annual Meeting of Stockholders to be
held May 21, 2008 (the “2008 Proxy Statement”).
  
  
  
  
  Form
10-K
   For
the fiscal year ended December 31, 2007
   TABLE
OF CONTENTS
   
 PART
I
  ITEM
1.                        BUSINESS.........................................................................................................................................................................2
 ITEM
1A.                     RISK
FACTORS .............................................................................................................................................................7
 ITEM
1B.                     UNRESOLVED STAFF
COMMENTS..........................................................................................................................9
 ITEM
2.                        PROPERTIES...................................................................................................................................................................9
 ITEM
3.                        LEGAL
PROCEEDINGS.................................................................................................................................................9
 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
7.                        MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
 OF
OPERATION............................................................................................................................................................13
 ITEM
8.                        FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA............................................................................19
 ITEM
9.                        CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
 ACCOUNTING AND FINANCIAL
DISCLOSURE.................................................................................................19
 ITEM
9A(T)                CONTROLS
AND
PROCEDURES.............................................................................................................................20
 ITEM
9B.                     OTHER
INFORMATION..............................................................................................................................................20
  PART
III
  ITEM
10.                       DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE...............................................21
 ITEM
11.                       EXECUTIVE
COMPENSATION...............................................................................................................................21
 ITEM
12.                       SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 AND RELATED STOCKHOLDER
MATTERS.....................................................................................................21
 ITEM
13.                       CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
 DIRECTOR
INDEPENDENCE..................................................................................................................................21
 ITEM
14.                       PRINCIPAL
ACCOUNTANT FEES AND
SERVICES.........................................................................................22
  PART
IV
  ITEM
15.                        EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES........................................................................................22
  
  
  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
Securities and Exchange Commission.  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
subsidiary 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 69% and 67% of our net sales in 2007 and 2006,
respectively.  Reliability test equipment accounted for 17% and 15% of
our net sales in 2007 and 2006, respectively.  Change kits and spare
parts accounted for 14% and 18% of our net sales in 2007 and 2006,
respectively.
  Industry
conditions for the semiconductor equipment industry were strong in 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. IC unit sales continued to decline into 2007 but resumed growth by
the end of the first quarter and continued to grow until tailing off at the end
of 2007. However, average selling prices for ICs declined during 2007. While
bookings in the TAP segment of the semiconductor equipment industry, and in
particular for test related equipment, improved somewhat in early 2007, they
then steadily declined for the remainder of 2007, and revenues for test related
equipment in 2007 declined 21% from 2006 revenues.
  Our
results in 2006 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.
  In 2007
we significantly outperformed our industry segment, with our revenues matching
our 2006 revenues. However, our bookings declined significantly in the fourth
quarter, due in part to substantial bookings we received at the end of our third
quarter that we expected in the fourth quarter, but due as well to a
cautiousness among our customers as they assessed the potential impact of risks
to the U.S. economy.
  Analysts
of the semiconductor industry are generally forecasting continued unit growth in
that industry in 2008.  Forecasts predict a decline for the
semiconductor equipment industry as a whole in 2008, but predict solid growth
for the TAP segment within it, and in particular for test related
equipment.  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 again outperform our industry
segment, and we are planning for revenue growth of at least 20% in
2008.
  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 former 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 allowed 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.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 Securities and
Exchange Commission.  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
  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 MLFTMs, 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
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
   3
  +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. In 2007 we started volume production of the 55V16 and expanded
evaluations of our 55V series of test handlers to additional potential new
customers.
  Change Kits, Upgrades and Spare
Parts
  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.  Change kits consist of the parts necessary to reconfigure a
test handler for another type or size of device package. 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, the effectiveness of our
post-sale support 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, printed circuit 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 2007, our top two customers accounted for 40% and 36% of
our net sales, respectively. In 2006, those same customers accounted for 51% and
20% of our net sales, respectively. The loss of or a significant reduction in
orders by these or other significant customers, including reductions due to
market, economic or
   5
  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, Santa Clara
and San Diego, California, and Kuala Lumpur, Malaysia.  As of December
31, 2007, 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 76% and 64% of our net sales in 2007 and 2006,
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, if appropriate, 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.
  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 2007 and 2006, our expenses relating to
research and development were approximately $3.5 million and $3.4 million,
respectively, or 12.9% and 11.9% of our net sales, respectively. 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.
   6
   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 nine 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.
  Employees
  As of
December 31, 2007, we had 78 employees, four of which were part-time. They
consisted of 36 in manufacturing, 18 in engineering and product development, 16
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.
  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 three quarters of 2007. A
continuation of this trend could have a material and adverse impact on our
operations.
   7
  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 will 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 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, 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.
   8
  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.
  In
addition, as of December 31, 2007, 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.
   9
  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 2007.
  ITEM
4A.                     EXECUTIVE
OFFICERS OF THE REGISTRANT.
  Our
executive officers, their ages and the offices they held as of March 1, 2008 are
as follows:
  Name
              Age
              PositionJoseph
      C. Levesque
              63
              Chairman
      of the Board, President and Chief Executive OfficerDouglas
      L. Hemer
              61
              Chief
      Administrative Officer, Secretary and DirectorDaniel
      M. Koch
              54
              Vice
      President — Worldwide SalesJohn
      J. Pollock
              48
              Vice
      President — General ManagerPaul
      H. Askegaard
              56
              TreasurerTimothy
      G. Foley
              48
              Vice
      President — ManufacturingDean
      K. Hedstrom
              58
              Vice
      President — TechnologyTimothy
      A. McMullen
              40
              Vice
      President — Reliability Test SystemsW.
      Charles Sletten, II
              56
              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 former 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.
  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.
   10
  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 – Technology since June 2007.
Prior to that, he served as the Vice President – Engineering of our North St.
Paul operations since joining us in 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.
  Mr.
McMullen has served as the Vice President – Reliability Test Systems
since April 2007. Prior to that, he served at our North St. Paul Operations as
Vice President – Marketing/Applications from February 2002 until April 2007, as
Product Director of our reliability test equipment from March 2000 until
February 2002, and as an electrical engineer since joining us in
1994.
  Mr.
Sletten has served as the Vice President – Engineering since joining us
in January 2008. Prior to that, he served as President of EnergyFlo Corporation
from 2003 to 2007, as Vice President, General Manager of Goodall Mfg. Llc. From
2002 to 2003, and in various capacities including Chief Engineer, Vice President
and Senior Vice President at Nilfisk-Advance from 1984 to 2001.
   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 QuarterFiscal
      2007
              High
              
              $
              4.70
              
              
              $
              4.70
              
              
              $
              5.00
              
              
              $
              6.24Low
              
              $
              3.25
              
              
              $
              3.62
              
              
              $
              3.90
              
              
              $
              4.56Fiscal
      2006
              High
              
              $
              6.20
              
              
              $
              5.79
              
              
              $
              5.69
              
              
              $
              6.23Low
              
              $
              4.05
              
              
              $
              4.16
              
              
              $
              3.70
              
              
              $
              2.87
 Holders
  As of
March 14, 2008, there were 116 shareholders of record.  We estimate
that an additional 3,200 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
2007.
  Issuer’s
Purchases of Equity Securities
  We did
not make any purchases of our common stock during the fourth quarter of fiscal
2007.
  
 
  12
  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 for fiscal year 2006 related to those
operations are presented as discontinued operations and, unless otherwise
indicated, the following management discussion and analysis refers to our
continuing operations only.
  Overview:
  Aetrium
designs, manufactures and markets 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, the latest IC package designs, and the latest IC
manufacturing processes.  Our test handler products are purchased
primarily by semiconductor manufacturers and their assembly and test
subcontractors and are used in the test, assembly and packaging, or TAP, segment
of semiconductor manufacturing. Our reliability test products are used to
validate IC designs and monitor semiconductor wafer fabrication
processes.  Our products automate critical functions to improve
manufacturing yield, raise quality levels, increase product reliability and
reduce manufacturing costs.
  As an
equipment supplier to the semiconductor industry, Aetrium’s results are driven
primarily by worldwide demand for ICs, which in turn depend on end-user demand
for electronic products.  The demand for our products can fluctuate
significantly from period to period due to the direct or indirect impact of
numerous factors, including but not limited to, changes in the supply and demand
for ICs, changes in IC manufacturing capacity, advancements in industry
technologies, changes in U.S. and worldwide economic conditions and competitive
factors.  For these and other reasons, our operating results for 2007
and 2006 may not be indicative of future operating results.
  Semiconductor
industry conditions were generally favorable in the first half of 2006 but
weakened in the second half of the year.  Aetrium’s revenues were
strong during this period and our net sales increased to $6.9 million, $8.0
million, and $8.2 million in the first three quarters of 2006, respectively.
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% 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
  Semiconductor
industry conditions in general continued to be relatively weak in the first half
of 2007 although conditions improved for some segments where the demand for
certain IC device types increased.  Aetrium experienced increasing
order activity in the first three quarters of 2007 for some of our test handler
models, particularly those that are used in analog device-type
applications.  This led to sequential increases in quarterly net sales
in 2007 to $5.1 million, $5.9 million, $7.7 million and $9.3 million,
respectively.  Although our revenues increased sequentially to $9.3
million in the fourth quarter of 2007, new orders decreased significantly from
third quarter levels, which was consistent with generally weakening demand for
equipment in the TAP segment of the semiconductor equipment
industry.  Business conditions have continued to be slow in early 2008
and, in the short term, we expect semiconductor manufacturers will continue to
be cautious regarding capital expenditures. There can be no assurance that
changes in semiconductor industry conditions, general domestic and global
economic conditions, and/or other factors will not adversely impact Aetrium’s
future operating results.
   13
  Off-Balance
Sheet Arrangements:
  We did
not have any off-balance sheet arrangements as of December 31, 2007 or
2006.
  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, 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
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 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.
   14
  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.
  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.
   15
  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” which are
included in the caption “Deferred income taxes” on our consolidated balance
sheet.  In accordance with Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes,” we record a valuation allowance to
reduce the carrying value of our deferred tax assets if, based on all available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized. At December 31, 2006, we provided a valuation allowance of
approximately $26.5 million to fully reserve our deferred tax
assets.  At December 31, 2007, we reduced the valuation allowance to
approximately $22.8 million based on our assessment of the realizability of our
deferred tax assets at that date.  We will continue to assess the
assumptions used to determine the amount of our valuation allowance and we may
adjust the valuation allowance in future periods based on changes in assumptions
of estimated future income and other factors.  If the valuation
allowance is reduced, we would record an income tax benefit in the period the
valuation allowance is reduced. If the valuation allowance is increased, we
would record additional income tax expense.
  Results of
Operations:
  Selected
statement of operations data as a percentage of our net sales for 2007 and 2006
were as follows:
  2007
              
              
              2006Net
      sales
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of goods sold
              
              
              49.7
              
              
              
              48.7Gross
      profit
              
              
              50.3
              
              
              
              51.3Operating
      expenses:Selling,
      general and administrative
              
              
              23.3
              
              
              
              22.7Research
      and development
              
              
              12.7
              
              
              
              11.9Total
      operating expenses
              
              
              36.0
              
              
              
              34.6Income
      from operations
              
              
              14.3
              %
              
              
              16.7
              %
  Net
Sales:
  Our net
sales by product line as a percentage of total sales for 2007 and 2006 were as
follows:
  2007
              
              
              2006Test
      handler products
              
              
              69
              %
              
              
              67
              %Reliability
      test equipment products
              
              
              17
              
              
              
              15Change
      kits and spare parts
              
              
              14
              
              
              
              18Total
              
              
              100
              %
              
              
              100
              %
  Net sales
were $27.9 million in 2007 compared with $28.2 million in 2006, a 1% decrease.
Net sales of test handlers, representing 69% of total net sales, were $19.1
million in 2007, compared with $19.0 million in 2006.  Net sales of
reliability test equipment, representing 17% of total net sales, were $4.8
million in 2007 compared with $4.3 million in 2006, an increase of
11%.  Net sales of change kits and spare parts, representing 14% of
total net sales, were $4.0 million in 2007 compared with $4.9 million in 2006, a
decrease of 18%.  Net sales of change kits and spare parts in 2007
decreased from 2006 levels in part because certain customers, in anticipation of
weakening business conditions, increased their purchases of change kits in late
2006 to expand their equipment flexibility rather than buy additional test
handlers.
   16
  Gross
Profit:
  Aetrium’s
gross profit as a percentage of net sales can fluctuate based on a number of
factors, including but not limited to product mix sold, distribution channel
mix, sales discounting, product maturity, inventory writedowns, and utilization
of manufacturing capacity associated with varying production levels. Gross
profit was 50.3% of net sales in 2007 compared with 51.3% of net sales in
2006.  Gross margins decreased in 2007 primarily due to a higher mix
of distributor sales and a $179,000 inventory obsolescence charge related to a
discontinued product, offset in part by a slightly more favorable product
mix.
  Selling,
General and Administrative Expenses:
  Selling,
general and administrative, or SG&A, expenses consist primarily of employee
compensation and related costs, independent representative commissions, travel,
warranty and no-charge equipment improvement costs.  SG&A expenses
were $6.5 million in 2007 compared with $6.4 million in 2006. Employee
compensation increased $0.4 million primarily due to increased wages and
share-based compensation expense.  Representative commission expense
increased $0.3 million due to a higher average commission rate on commissionable
direct sales. These expense increases were offset by a $0.6 million decrease in
warranty and no-charge equipment improvement costs.
  Research
and Development Expenses:
  Research
and development expenses consist primarily of employee compensation and related
costs, contractor services, engineering materials and travel costs. Research and
development expenses were $3.5 million in 2007 compared with $3.4 million in
2006.  Employee compensation increased $0.2 million primarily due to
increased wages and share-based compensation expense, which was partially offset
by a $0.1 million decrease in materials expense. New product development is an
essential part of our strategy to gain market share. As a percentage of net
sales, our research and development expenses were 12.7% and 11.9% of net sales
in 2007 and 2006, respectively. Over time, we expect to invest approximately 12%
to 15% of our revenues in research and development.
  Interest
Income, Net:
  Interest
income, net, amounted to $436,000 and $244,000 in 2007 and 2006,
respectively.  These amounts consisted primarily of interest income
from the investment of excess funds. Interest income increased in 2007 primarily
due to our higher average cash balances partially offset by generally declining
interest rates, particularly in the second half of the year.
  Income
Tax Expense (Benefit):
  We
recorded an income tax net benefit of $2,247,000 in 2007, which included a tax
benefit of approximately $2.3 million related to a reduction in our deferred tax
asset valuation allowance.  At December 31, 2006, we had provided a
valuation allowance of approximately $26.5 million to fully reserve our deferred
tax assets.  At December 31, 2007, we reduced the valuation allowance
to approximately $22.8 million based on our assessment of the realizability of
our deferred tax assets at that date.  We estimated the realizable
amount of our deferred tax assets at December 31, 2007 to be approximately $2.3
million and reduced our valuation allowance accordingly.  We will
continue to assess the assumptions used to determine the amount of our valuation
allowance and we may adjust the valuation allowance in future periods based on
changes in assumptions of estimated future income and other
factors.  If the valuation allowance is reduced, we would record an
income tax benefit in the period the valuation allowance is reduced. If the
valuation allowance is increased, we would record additional
   17
    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,” results for fiscal year 2006 related to those operations are presented
as discontinued operations.  Condensed results of discontinued
operations for the year ended December 31, 2006 are summarized below (in
thousands):
  Net
      sales
              
              $
              3,260Cost
      of goods sold
              
              
              2,063Gross
      profit
              
              
              1,197Operating
      expenses
              
              
              2,682Loss
      from discontinued operations
              
              $
              (1,485
              )
 
  Financial
Condition, Liquidity and Capital Resources:
  Cash and
cash equivalents increased by approximately $3.7 million in the year ended
December 31, 2007.  We generated $3.0 million in cash from operating
activities during this period. The major components of cash flows from operating
activities were net income of $6.7 million, $0.5 million in non-cash
depreciation, amortization and share-based compensation expense, a $0.2 million
non-cash inventory obsolescence charge, a $0.3 million increase in accounts
payable and a $0.3 million increase in accrued compensation, partially offset by
a $2.3 million increase in deferred income taxes, a $1.4 million increase in
accounts receivable, a $0.5 million increase in inventories, a $0.1 million
increase in other current assets, and a $0.5 million decrease in other accrued
liabilities. Inventories and accounts payable increased as we increased
purchases to support anticipated sales levels, demo equipment needs, and
customer delivery requirements.  Deferred income taxes increased due
to a reduction in our deferred tax asset valuation allowance.  Accrued
compensation increased primarily due to higher incentives based on the profits
achieved in the fourth quarter of 2007 compared with the fourth quarter of
2006.  Accounts receivable increased primarily due to the higher net
sales level in the fourth quarter of 2007 compared with the fourth quarter of
2006.  The decrease in other accrued liabilities includes primarily
the payment of $0.6 million in severance and related costs associated with the
sale of our Dallas operations.  Net cash provided by investing
activities in 2007 was not significant.  Net cash provided by
financing activities amounted to $0.6 million in 2007, consisting primarily of
proceeds from employee stock option exercises.
  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
   18
    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 $12.1
million at December 31, 2007 will be sufficient to meet capital expenditure and
working capital needs at least through 2008. In addition, we have a revolving
credit line agreement with a bank that provides for borrowings up to $2.0
million.  The credit agreement expires in October 2008.  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. We experienced
a significant reduction in order activity in the fourth quarter of 2007 and
business conditions have continued to be soft in early 2008.  A
prolonged continuation of weak business conditions in our industry 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.
  Recent
Accounting Pronouncements:
  In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159).  This
pronouncement permits entities to choose to measure many financial instruments
and certain other items at fair value which were not previously required to be
measured at fair value.  SFAS 159 is effective for Aetrium at the
beginning of fiscal year 2008.  We do not expect the implementation of
SFAS 159 to have a material impact on our financial position or results of
operations.
  In
September 2006, the FASB issued SFAS 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 Aetrium beginning in the first quarter of fiscal year 2008.  We do
not expect the implementation of SFAS 157 to have a material impact on our
financial position or results of operations.
  ITEM
8.                    FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
  The
information required by this Item is included in our Consolidated Financial
Statements and the report of our independent registered public accounting firm,
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.
   19
  ITEM
9A(T).CONTROLS
AND PROCEDURES.
  Disclosure
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)). Based on their evaluation, they
concluded that our disclosure controls and procedures were effective as of
December 31, 2007, the end of the period covered by this annual
report.
  Management’s
Report on Internal Control over Financial Reporting:
  Aetrium’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our President and Chief Executive Officer, our Chief
Administrative Officer and our Treasurer, our management conducted an evaluation
of the effectiveness of our internal control over financial reporting based on
the framework in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation, our
management concluded that our internal control over financial reporting was
effective as of December 31, 2007.
  This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
  Changes
in Internal Control over Financial Reporting:
  There
were no changes in our internal control over financial reporting that occurred
during the fourth quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, Aetrium’s internal control over
financial reporting.
  Inherent
Limitations of Disclosure Controls and Procedures and Internal Control over
Financial Reporting:
  It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In designing and operating a control system, one must
consider the potential benefits of controls relative to their costs and the
reality of limited resources available to allocate to control activities,
particularly in smaller companies.  In addition, the design of any
control system is based in part upon certain assumptions about the likelihood of
future events and there can be no assurance that any control will meet its
objectives under all potential future conditions.  Because of such
inherent limitations in any control system, there can be no absolute assurance
that control issues, misstatements, and/or fraud will be prevented or
detected.
  ITEM
9B.                    OTHER
INFORMATION.
  None.
   20
  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 2008 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 2008 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 2008 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 2008 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” and “Executive
Compensation and Other Benefits—Compensation Committee—Compensation Committee
Interlocks and Insider Participation” in our 2008 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 2008 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” in our 2008 Proxy Statement is incorporated
in this Annual Report on Form 10-K by reference.
  21
  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
2008 Proxy Statement is incorporated in this Annual Report on Form 10-K by
reference.
  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)Report
      of Independent Registered Public Accounting Firm
              F-1Consolidated
      Financial Statements:Consolidated Statements of
      Operations
              F-2Consolidated Balance
      Sheets
              F-3Consolidated Statements of
      Changes in Shareholders’ Equity
              F-4Consolidated
      Statements of Cash Flows
              F-5Notes
      to Consolidated Financial Statements
              F-6
      – F-20
  (a)
2.  Financial Statement Schedule of Registrant.
  Schedule
      II -  Valuation and Qualifying Accounts
              S-1
  All other
schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related
notes.
  (a)
3.  Exhibits.
  The
exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index
beginning on page E-1 of this Annual Report on Form 10-K.
  If
you were one of our shareholders on March 31, 2008 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.
  22
  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).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.
              Form
      of Amendments to Change of Control Agreement (filed herewith
      electronically).9.
              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.
              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).
 
  
   23
  
 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 sheets of Aetrium Incorpo­rated (a Minnesota
corporation) (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated state­ments of opera­tions, changes in
shareholders’ equity and cash flows for the years then ended.  Our
audits of the basic financial statements included the financial statement
schedule listed in the index appearing under Item 15.  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 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 audits
provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Aetrium Incorporated as of
Decem­ber 31, 2007 and 2006, and the results of its operations and its
cash flows for the years then ended in confor­mity with accounting
principles generally accepted in the United States of America.  Also,
in our opinion, the financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
 
 
  /s/ GRANT
THORNTON LLP
  
 
 Minneapolis,
Minnesota
 March 14,
2008
  
   F-1
  
  AETRIUM
INCORPORATED
 Consolidated
Statements of Operations
  
  Year
      Ended December 31,
              
              2007
              
              
              2006Net
      sales
              
              $
              27,989,744
              
              
              $
              28,183,661Cost
      of goods sold
              
              
              13,918,687
              
              
              
              13,713,846Gross
      profit
              
              
              14,071,057
              
              
              
              14,469,815Operating
      expenses:Selling,
      general and administrative
              
              
              6,522,170
              
              
              
              6,405,651Research
      and development
              
              
              3,535,340
              
              
              
              3,364,295Total
      operating expenses
              
              
              10,057,510
              
              
              
              9,769,946Income
      from operations
              
              
              4,013,547
              
              
              
              4,699,869Interest
      income, net
              
              
              436,159
              
              
              
              244,295Income
      from continuing operations before income taxes
              
              
              4,449,706
              
              
              
              4,944,164Income
      tax expense (benefit)
              
              
              (2,247,000
              )
              
              
              5,000Income
      from continuing operations
              
              
              6,696,706
              
              
              
              4,939,164Discontinued
      operations (see Note 3):Loss
      from discontinued operations
              
              
              —
              
              
              
              (1,485,416
              )Loss
      on sale of discontinued operations
              
              
              —
              
              
              
              (4,004,798
              )Net
      income (loss)
              
              $
              6,696,706
              
              
              $
              (551,050
              )Basic
      income (loss) per share:Continuing
      operations
              
              $
              0.64
              
              
              $
              0.49Discontinued
      operations
              
              
              —
              
              
              
              (0.55
              )Net
      income (loss)
              
              $
              0.64
              
              
              $
              (0.05
              )Diluted
      income (loss) per share:Continuing
      operations
              
              $
              0.62
              
              
              $
              0.47Discontinued
      operations
              
              
              —
              
              
              
              (0.52
              )Net
      income (loss)
              
              $
              0.62
              
              
              $
              (0.05
              )Weighted
      average common shares outstanding:Basic
              
              
              10,396,000
              
              
              
              10,028,000Diluted
              
              
              10,726,000
              
              
              
              10,586,000
  
   
   The
accompanying notes are an integral part of the consolidated financial
statements.
 F-2
  
  AETRIUM
INCORPORATED
 Consolidated
Balance Sheets
  
  December
      31,
              
              2007
              
              
              2006ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              12,104,858
              
              
              $
              8,394,440Accounts
      receivable, net of allowance for doubtfulaccounts of $46,000 in 2007 and
      2006
              
              
              3,542,426
              
              
              
              2,164,376Inventories
              
              
              7,694,869
              
              
              
              7,363,089Deferred
      income taxes
              
              
              315,000
              
              
              
              —Other
      current assets
              
              
              588,730
              
              
              
              336,229Total
      current assets
              
              
              24,245,883
              
              
              
              18,258,134Property
      and equipment:Furniture
      and fixtures
              
              
              527,433
              
              
              
              535,928Equipment
              
              
              1,269,690
              
              
              
              1,268,101Less
      accumulated depreciation and amortization
              
              
              (1,612,089
              )
              
              
              (1,610,316
              )Property
      and equipment, net
              
              
              185,034
              
              
              
              193,713Deferred
      income taxes
              
              
              2,002,000
              
              
              
              —Other
      assets
              
              
              150,238
              
              
              
              415,340Total
      assets
              
              $
              26,583,155
              
              
              $
              18,867,187LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt
              
              $
              44,838
              
              
              $
              41,561Trade
      accounts payable
              
              
              781,866
              
              
              
              490,264Accrued
      compensation
              
              
              669,282
              
              
              
              378,747Other
      accrued liabilities
              
              
              933,886
              
              
              
              1,445,996Total
      current liabilities
              
              
              2,429,872
              
              
              
              2,356,568Long-term
      debt, less current portion
              
              
              11,711
              
              
              
              56,572Commitments
      and contingencies (See Note 11)Shareholders’
      equity:Common
      stock, $.001 par value; 30,000,000 shares authorized; 10,542,611 and
      10,266,252 shares issued and outstanding, respectively
              
              
              10,543
              
              
              
              10,266Additional
      paid-in capital
              
              
              63,094,494
              
              
              
              62,103,952Accumulated
      deficit
              
              
              (38,963,465
              )
              
              
              (45,660,171
              )Total
      shareholders’ equity
              
              
              24,141,572
              
              
              
              16,454,047Total
      liabilities and shareholders’ equity
              
              $
              26,583,155
              
              
              $
              18,867,187
 
 
  The
accompanying notes are an integral part of the consolidated financial
statements.
 F-3
  
  AETRIUM
INCORPORATED
 Consolidated
Statements of Changes in Shareholders’ Equity
  TotalCommon
      Stock
                Additional
                Accumulated
                Shareholders’Shares
                Amount
                Paid-in
      Capital
                Deficit
                Equity
 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
              )
              
              
              16,454,047Exercise
      of stock options
              
              
              276,359
              
              
              
              277
              
              
              
              616,661
              
              
              
              —
              
              
              
              616,938Share-based
      compensation expense
              
              
              —
              
              
              
              —
              
              
              
              360,420
              
              
              
              —
              
              
              
              360,420Tax
      benefit from stock option exercises
              
              
              —
              
              
              
              —
              
              
              
              13,461
              
              
              
              —
              
              
              
              13,461Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              6,696,706
              
              
              
              6,696,706Balance,
      December 31, 2007
              
              
              10,542,611
              
              
              $
              10,543
              
              
              $
              63,094,494
              
              
              $
              (38,963,465
              )
              
              $
              24,141,572




















The
accompanying notes are an integral part of the consolidated financial
statements.
 F-4
    AETRIUM
INCORPORATED
 Consolidated
Statements of Cash Flows
  
  Year
      Ended December 31,
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income (loss)
              
              $
              6,696,706
              
              
              $
              (551,050
              )Loss
      on sale of discontinued operations
              
              
              —
              
              
              
              4,004,798Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              115,366
              
              
              
              353,445Share-based
      compensation expense
              
              
              360,420
              
              
              
              159,946Deferred
      income taxes
              
              
              (2,317,000
              )
              
              
              —Tax
      benefit from stock option exercises
              
              
              (13,461
              )
              
              
              —Provision
      for excess and obsolete inventories
              
              
              179,000
              
              
              
              90,000Loss
      on disposal of equipment
              
              
              2,043
              
              
              
              —Changes
      in assets and liabilities:Accounts
      receivable
              
              
              (1,378,050
              )
              
              
              1,943,950Inventories
              
              
              (510,780
              )
              
              
              (1,912,938
              )Other
      current assets
              
              
              (106,811
              )
              
              
              (67,948
              )Other
      assets
              
              
              (71,801
              )
              
              
              —Trade
      accounts payable
              
              
              291,602
              
              
              
              (1,121,538
              )Accrued
      compensation
              
              
              290,535
              
              
              
              62,764Other
      accrued liabilities
              
              
              (498,649
              )
              
              
              200,169Net
      cash provided by operating activities
              
              
              3,039,120
              
              
              
              3,161,598Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (105,672
              )
              
              
              (108,121
              )Collection
      of note receivable
              
              
              188,155
              
              
              
              —Net
      cash provided by (used in) investing activities
              
              
              82,483
              
              
              
              (108,121
              )Cash
      flows from financing activities:Proceeds
      from exercise of stock options
              
              
              616,938
              
              
              
              1,242,456Tax
      benefit from stock option exercises
              
              
              13,461
              
              
              
              —Payments
      on long-term debt
              
              
              (41,584
              )
              
              
              (35,024
              )Net
      cash provided by financing
      activities
              
              
              588,815
              
              
              
              1,207,432Increase
      in cash and cash equivalents
              
              
              3,710,418
              
              
              
              4,260,909Cash
      and cash equivalents at beginning of year
              
              
              8,394,440
              
              
              
              4,133,531Cash
      and cash equivalents at end of year
              
              $
              12,104,858
              
              
              $
              8,394,440
 
 
 
 
  Theaccompanying notes are an integral part of the consolidated financial
statements.
 F-5
 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.  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
subsidiary 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
subsidiary.  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,” results for fiscal year 2006 related to those
operations are presented as discontinued operations in our consolidated
statements of operations.
  Cash
Equivalents:Cash equivalents include highly liquid
investments with a maturity of three months or less when
purchased.  Cash and cash equivalents included certificates of deposit
of $2.0 million at December 31, 2007 and 2006.
  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 $0.1
million and $0.2 million for the years ended December 31, 2007 and 2006,
respectively.  Maintenance and repairs are charged to expense as
incurred.
   F-6
 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.
See also Note 7.
  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 8 and 9.
  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 equipment improvement expense accruals and settlements
for the two years ended December 31, 2007 (in thousands):
  Accrual
      Balance at
                beginning
      of
                year
              
              
              Accruals
      for
                warranties
                and
      no-charge improvements
              
              
              Settlements
                made
              
              
              Accrual
      Balance at
                end
      of
                year2006
              
              $
              133
              
              
              $
              948
              
              
              $
              (715
              )
              
              $
              3662007
              
              
              366
              
              
              
              389
              
              
              
              (479
              )
              
              
              276
 
  F-7
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  There
were no significant changes in estimated warranty accruals for fiscal year 2007
or 2006. Accrued warranty costs are included in the caption “Other accrued
liabilities” in our consolidated balance sheet. See Note 9.
  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.
  Effective
January 1, 2007, we adopted 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.  We assess our income tax positions and recorded tax
benefits for all years subject to examination based upon our evaluation of the
facts, circumstances and information available at the reporting dates. For those
tax positions where it is more likely than not that a tax benefit
will be sustained, we record the largest amount of tax benefit with a greater
than 50 percent likelihood of being realized upon ultimate settlement with a
taxing authority that has full knowledge of all relevant information. For those
income tax positions where it is not more likely than not that a
tax benefit will be sustained, no tax benefit is recorded. If applicable,
associated interest expense is recorded and classified as income tax
expense.  The adoption of FIN 48 had no impact on our financial
position or results of operations.
  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
   F-8
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  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,
              
              2007
              
              
              2006Weighted
      average common shares outstanding
              
              
              10,396
              
              
              
              10,028Potentially
      dilutive stock options
              
              
              330
              
              
              
              558Weighted
      average common shares outstanding,  assuming
      dilution
              
              
              10,726
              
              
              
              10,586
 
 For the
years ended December 31, 2007 and 2006, respectively, options to purchase
217,933 and 112,932 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.
  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.  See
Notes 4 and 13 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
12).  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.
   F-9
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
   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.
 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 ($334,000 and $188,000 at
December 31, 2007 and 2006, respectively) is included in the caption “Other
current assets” and the long-term portion ($0 and $334,000 at December 31, 2007
and 2006, respectively) is included in the caption “Other assets” in our
consolidated balance sheet.
  Operating
results for the year ended December 31, 2006 related to the divested operations,
which are presented as discontinued operations in our consolidated statements of
operations, are summarized below (in thousands):
  Net
      sales
              
              $
              3,260Cost
      of goods sold
              
              
              2,063Gross
      profit
              
              
              1,197Operating
      expenses
              
              
              2,682Loss
      from discontinued operations
              
              $
              (1,485
              )
  No income
tax benefit was allocated to the loss from discontinued operations because
Aetrium had net operating loss carryforwards available to offset pretax income
generated from continuing operations.
  NOTE
4: SHARE-BASED COMPENSATION
 We
account for share-based compensation in accordance with Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share-Based
Payment” (SFAS 123R), which requires the
  F-10
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  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.
  Using the
Black-Scholes option valuation model, the weighted-average fair value of options
granted in 2007 and 2006 was determined to be $1.74 and $2.03,
respectively.  Weighted average assumptions used in applying the
Black-Scholes option-pricing model to estimate the fair value of options granted
were as follows:
  Year ended
      December 31,
              
              2007
              
              
              2006Expected
      dividend level
              
              
              0
              %
              
              
              0
              %Expected
      stock price volatility
              
              
              56
              %
              
              
              59
              %Risk-free
      interest rate
              
              
              4.5
              %
              
              
              5.0
              %Expected
      life of options (years)
              
              
              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.
   F-11
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  Share-based
compensation expense included in our consolidated statement of operations
(including the effects of the modifications) was as follows (in
thousands):
  Year
      ended December 31,
              
              2007
              
              
              2006Cost
      of goods sold
              
              $
              44
              
              
              $
              18Selling,
      general and administrative
              
              
              254
              
              
              
              97Research
      and development
              
              
              62
              
              
              
              18Loss
      from discontinued operations
              
              
              —
              
              
              
              27Loss
      on sale of discontinued operations
              
              
              —
              
              
              
              30Total
      share-based compensation expense
              
              $
              360
              
              
              $
              190
  As of
December 31, 2007, we had approximately $1.2 million of unrecognized pretax
share-based compensation expense, which is expected to be recognized over a
weighted average period of 3.0 years.
  NOTE
5: RECENT ACCOUNTING PRONOUNCEMENTS
  In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159).  This
pronouncement permits entities to choose to measure many financial instruments
and certain other items at fair value which were not previously required to be
measured at fair value.  SFAS 159 is effective for Aetrium at the
beginning of fiscal year 2008.  We do not expect the implementation of
SFAS 159 to have a material impact on our financial position or results of
operations.
  In
September 2006, the FASB issued SFAS 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 Aetrium beginning in the first quarter of fiscal year 2008.  We do
not expect the implementation of SFAS 157 to have a material impact on our
financial position or results of operations.
  NOTE
6: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash
payments for interest and income taxes were as follows (in
thousands):
  Year
      ended Dec. 31,
              
              2007
              
              
              2006Interest
      paid
              
              $
              6
              
              
              $
              9Income
      taxes paid
              
              $
              62
              
              
              $
              25
 
 
  F-12
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  NOTE
7: IDENTIFIABLE INTANGIBLE ASSETS
  Identifiable
intangible assets are comprised of the following (in thousands):
  December
      31,
              
              2007
              
              
              2006Gross
              
              
              Accumulated
      amortization
              
              
              Net
              
              
              Gross
              
              
              Accumulated
      amortization
              
              
              NetDeveloped
      technology
              
              $
              200
              
              
              $
              (200
              )
              
              $
              —
              
              
              $
              200
              
              
              $
              (200
              )
              
              $
              —Core
      technology
              
              
              567
              
              
              
              (567
              )
              
              
              —
              
              
              
              567
              
              
              
              (567
              )
              
              
              —Other
              
              
              95
              
              
              
              (95
              )
              
              
              —
              
              
              
              95
              
              
              
              (92
              )
              
              
              3Total
              
              $
              862
              
              
              $
              (862
              )
              
              $
              —
              
              
              $
              862
              
              
              $
              (859
              )
              
              $
              3
  The net
carrying value of identifiable intangible assets is included in the caption
“Other assets” in our consolidated balance sheet.
  Amortization
expense related to identifiable intangible assets included in our statements of
operations was as follows (in thousands):
  Year
      ended Dec. 31,
              
              2007
              
              
              2006Continuing
      operations
              
              $
              3
              
              
              $
              11Discontinued
      operations
              
              $
              —
              
              
              $
              191
  NOTE
8: INVENTORIES
  A summary
of the composition of inventories is as follows (in thousands):
  December
      31,
              
              2007
              
              
              2006Purchased
      parts and completed subassemblies
              
              $
              3,911
              
              
              $
              3,044Work-in-process
              
              
              2,336
              
              
              
              1,847Finished
      goods, including saleable demonstration equipment
              
              
              1,343
              
              
              
              2,372Equipment
      shipped, subject to revenue deferral
              
              
              105
              
              
              
              100Total
      inventories
              
              $
              7,695
              
              
              $
              7,363
 
 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, 2007, our provision for excess and
obsolete inventory was $1.8 million.
  NOTE
9: OTHER ACCRUED LIABILITIES:
  Other
accrued liabilities are comprised of the following (in thousands):
  December
      31,
              
              2007
              
              
              2006Accrued
      commissions
              
              $
              114
              
              
              $
              6Accrued
      warranty
              
              
              276
              
              
              
              366Customer
      deposits and deferred revenue
              
              
              189
              
              
              
              199Accrued
      severance and other related costs
              
              
              93
              
              
              
              645Other
              
              
              262
              
              
              
              230Total
      other accrued liabilities
              
              $
              934
              
              
              $
              1,446
  
   F-13
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
   As
discussed in Note 3, the accrued severance and other related costs of $645,000
at December 31, 2006 were related to the sale of our Dallas, Texas
operations.  Approximately $552,000 of these costs was paid during the
fiscal year ended December 31, 2007.  We estimate that the remaining
accrual of $93,000 at December 31, 2007 will be paid in 2008 at the rate of
approximately $24,000 per quarter.
  NOTE
10: CREDIT AGREEMENT AND LONG-TERM DEBT
  Aetrium
has a revolving credit line agreement with a bank that provides for borrowings
up to $2.0 million and bears interest at the prime rate less
0.25%.  The agreement is collateralized by substantially all of our
assets and provides that we maintain certain financial covenants.  At
December 31, 2007 and 2006, there were no borrowings under the line of credit
agreement and we were in compliance with all covenants under the
agreement.  The agreement expires in October 2008.
  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 7.25% at December 31, 2007).  The loan balance
at December 31, 2007 was $56,549.  Future maturities of long-term debt
as of December 31, 2007 are as follows (in thousands):
  2008
              
              $
              452009
              
              
              12Total
              
              $
              57
  NOTE
11: 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 $23,800 as of December 31, 2007 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.
  In
connection with the sale of our Dallas, Texas operations to WEB Technology, Inc.
(WEB) on December 31, 2006, the lease related to our Dallas facility was
assigned to WEB. The lease expires on April 30, 2008.  We remain
contingently liable for the remaining lease payments, which totaled
approximately $49,000 at December 31, 2007, if WEB were to default.
  In 2000,
we vacated a leased facility in Poway, California.  The lease expires
in January 2010.  This facility is subleased to two independent
parties with the sublease terms running concurrently with our remaining lease
term. We remain contingently liable for the remaining lease payments, which
totaled approximately $1.1 million at December 31, 2007, if either or both of
the subtenants were to default.
  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
   F-14
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  to
default on their sublease agreements, we may have to record charges related to
our future obligations under these leases.
  As of
December 31, 2007, future minimum annual lease payments under operating leases
were as follows (in thousands):
  2008
              
              $
              8002009
              
              
              8182010
              
              
              3472011
              
              
              51Total
      minimum lease payments
              
              $
              2,016
 
 The above
minimum lease payments have not been reduced by minimum sublease rentals of $1.2
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 approximately $49,000 at December 31, 2007.
  Rent
expense from continuing operations, including facility and various short-term
equipment operating leases, was as follows (in thousands):
  Year
      ended Dec. 31,
              
              2007
              
              
              2006Leased
      from shareholder
              
              $
              295
              
              
              $
              316Leased
      from others
              
              
              508
              
              
              
              487Sublease/assigned
      lease income
              
              
              (452
              )
              
              
              (416
              )Total
      net rent expense
              
              $
              351
              
              
              $
              387
  NOTE
12: 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 year 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 approximately $180,000.
  NOTE
13: 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 continued to be exercisable according to their
individual terms. As of December 31, 2007, there were no stock options remaining
outstanding under the 1993 Plan.  In May 2003, Aetrium’s shareholders
approved the adoption of the
   F-15
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  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.
  The
following table summarizes activity under our stock incentive plans for the year
ended December 31, 2007:
  Numberof 
      Shares
              
              
              Weighted
      Average Exercise Price
              
              Weighted
      Average Remaining Contract Term
              
              Aggregate
      Intrinsic Value (in thousands)Outstanding,
      January 1, 2007
              
              
              1,486,952
              
              
              $
              3.09Granted
              
              
              508,000
              
              
              
              3.87Exercised
              
              
              (286,967
              )
              
              
              2.30Forfeited
              
              
              (6,421
              )
              
              
              2.98Outstanding,
      December 31, 2007
              
              
              1,701,564
              
              
              $
              3.45
              
              2.9
      years
              
              $
              4,315Options
      at December 31, 2007:Exercisable
      and expected to become exercisable
              
              
              1,667,533
              
              
              $
              3.45
              
              2.9
      years
              
              $
              4,229Exercisable
              
              
              1,013,640
              
              
              $
              3.20
              
              2.1
      years
              
              $
              2,824
  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, 2007 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, 2007.  The total
intrinsic value of options exercised during the year ended December 31, 2007 was
approximately $609,000.  The total fair value of options vested during
the year ended December 31, 2007 was approximately $360,000.
  The
following table summarizes information related to stock options outstanding at
December 31, 2007, all of which are nonqualified options and expire five years
after the grant date and of which 279,500 options were fully exercisable when
granted, 500,292 options were initially scheduled to become exercisable over
four years from date of grant and were subsequently modified in the second
quarter of
   F-16
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  2005 to
become fully exercisable to the extent not then exercisable, and 921,772 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$
              2.76
      to 3.13
              
              
              
              906,564
              
              2.0
      years
              
              $
              2.92
              
              
              
              790,103
              
              
              $
              2.903.87
      to 4.81
              
              
              
              795,000
              
              3.9
      years
              
              
              4.07
              
              
              
              223,537
              
              
              
              4.26$
              2.76
      to 4.81
              
              
              
              1,701,564
              
              2.9
      years
              
              $
              3.45
              
              
              
              1,013,640
              
              
              $
              3.20
 
 NOTE
14: 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 $90,561 and $117,278,
respectively, to the plan in 2007 and 2006.
  NOTE
15: INCOME TAXES
  Income
tax expense (benefit) from continuing operations consists of the following
components (in thousands):
  Year
      ended December 31,
              
              2007
              
              
              2006Current
      tax expense (benefit):Federal
              
              $
              62
              
              
              $
              —State
              
              
              8
              
              
              
              5Total
      current expense (benefit)
              
              
              70
              
              
              
              5Deferred
      tax expense (benefit):Federal
              
              
              (2,213
              )
              
              
              —State
              
              
              (104
              )
              
              
              —Total
      deferred expense (benefit)
              
              
              (2,317
              )
              
              
              —Total
      income tax expense (benefit)
              
              $
              (2,247
              )
              
              $
              5
 
 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,
              
              2007
              
              
              2006Tax
      computed at federal statutory rate
              
              $
              1,513
              
              
              $
              1,681State
      taxes, net of federal benefit
              
              
              126
              
              
              
              181Increase
      (decrease) in tax from:Business
      meals and entertainment
              
              
              18
              
              
              
              18Tax
      credits
              
              
              22
              
              
              
              (114
              )Valuation
      allowance change
              
              
              (3,964
              )
              
              
              (1,768
              )Other,
      net
              
              
              38
              
              
              
              7Reported
      income tax expense (benefit)
              
              $
              (2,247
              )
              
              $
              5
 
  F-17
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  Deferred
tax assets (liabilities) are comprised of the following (in
thousands):
  December
      31,
              
              2007
              
              
              2006Accounts
      receivable
              
              $
              17
              
              
              $
              17Inventories
              
              
              711
              
              
              
              694Employee
      compensation and benefits
              
              
              229
              
              
              
              194Amortization
      of intangibles
              
              
              892
              
              
              
              1,180NOL
      and tax credit carryforwards
              
              
              23,065
              
              
              
              24,107Severance
      and related cost accruals
              
              
              33
              
              
              
              138Warranty
      accrual
              
              
              99
              
              
              
              132Other,
      net
              
              
              46
              
              
              
              54Deferred
      tax assets
              
              $
              25,092
              
              
              $
              26,516Less,
      valuation allowance
              
              
              (22,775
              )
              
              
              (26,516
              )Net
      deferred tax assets
              
              $
              2,317
              
              
              $
              —
 
  We record
the benefit we will derive in future accounting periods from tax losses and
credits and deductible temporary differences as “deferred tax assets,” which are
included in the caption “Deferred income taxes” on our consolidated balance
sheet.  In accordance with Statement of Financial Accounting Standards
No. 109 (SFAS 109), we record a valuation allowance to reduce the carrying
value of our deferred tax assets if, based on all available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. At December 31, 2006, we provided a valuation allowance of
approximately $26.5 million to fully reserve our deferred tax
assets.  At December 31, 2007, we reduced the valuation allowance to
approximately $22.8 million based on our assessment of the realizability of our
deferred tax assets at that date.  We estimated the realizable amount
of our deferred tax assets at December 31, 2007 to be approximately $2.3
million.  This amount was determined in accordance with SFAS 109 by
considering all available positive and negative evidence, including our
historical operating results, current financial condition, and potential future
taxable income.  Potential future taxable income was evaluated based
primarily on anticipated operating results for fiscal year 2008.  We
determined that projecting operating results beyond 2008 involves substantial
uncertainty and we substantially discounted forecasts beyond fiscal year 2008 as
a basis to support our deferred tax assets under the more likely than not
realization requirement in SFAS 109.  We will continue to assess the
assumptions used to determine the amount of our valuation allowance and may
adjust the valuation allowance in future periods based on changes in assumptions
of estimated future income and other factors.  If the valuation
allowance is reduced, we would record an income tax benefit in the period the
valuation allowance is reduced. If the valuation allowance is increased, we
would record additional income tax expense.
  Approximately
$1.1 million of the $22.8 million valuation allowance at December 31, 2007 is
related to deductions for exercised stock options, 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 $60 million that
will begin to expire in 2020 if not utilized.  We also have state net
operating loss carryforwards of approximately $21 million that will expire at
various times, beginning in 2008, if not utilized.  We also have
federal and state research tax credit and alternative minimum 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.
   F-18
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  Such
limitations could result in the expiration of net operating loss and tax credit
carryforwards before utilization.
  Effective
January 1, 2007, Aetrium adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”
(FIN 48).  In accordance with FIN 48, we assess our income tax
positions and recorded tax benefits for all years subject to examination based
upon our evaluation of the facts, circumstances and information available at the
reporting dates. For those tax positions where we determine it is
more likely than not that a tax benefit will be sustained, we
record the largest amount of tax benefit with a greater than 50 percent
likelihood of being realized upon ultimate settlement with a taxing authority
that has full knowledge of all relevant information. For those income tax
positions where we determine it is not more likely than not that
a tax benefit will be sustained, no tax benefit is recorded. If applicable,
associated interest expense is recorded and classified as income tax expense.
The Internal Revenue Service and Minnesota Department of Revenue have reviewed
our tax returns through 1998. As of December 31, 2007, Aetrium had no unrecorded
income tax benefits.
  NOTE
16: 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,
              
              2007
              
              
              2006Test
      handler products
              
              
              69
              %
              
              
              67
              %Reliability
      test equipment products
              
              
              17
              
              
              
              15Change
      kits and spare parts
              
              
              14
              
              
              
              18Total
              
              
              100
              %
              
              
              100
              %
 
  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,
              
              2007
              
              
              2006United
      States
              
              $
              6,685
              
              
              $
              10,121Malaysia
              
              
              9,296
              
              
              
              3,979Philippines
              
              
              5,948
              
              
              
              6,586Thailand
              
              
              2,021
              
              
              
              3,528Other
      foreign countries
              
              
              4,040
              
              
              
              3,970Total
              
              $
              27,990
              
              
              $
              28,184
 
 Sales to
customers comprising more than 10% of our total net sales were as
follows:
  Year
      ended December 31,
              
              2007
              
              
              2006Customer
      A
              
              
              40
              %
              
              
              51
              %Customer
      B
              
              
              36
              %
              
              
              20
              %
 
  F-19
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  Accounts
receivable from customers comprising more than 10% of our total accounts
receivable were as follows:
  December
      31,
              
              2007
              
              
              2006Customer
      A
              
              
              32
              %
              
              
              54
              %Customer
      B
              
              
              49
              %
              
              
              *Customer
      C
              
              
              14
              %
              
              
              *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-20
  
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  AETRIUM
      INCORPORATEDDate:  March
      31, 2008
              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 31, 2008 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, 2007
 Item
                No.
              Item
              Method of Filing3.1
              Our
      Restated Articles of Incorporation, as amended.
              Incorporated
      by reference to Exhibit 3.1 to our Registration Statement on Form SB-2
      (File No. 33-64962C).3.2
              Amendment
      to Restated Articles of Incorporation
              Incorporated
      by reference to Exhibit 3.2 to our Quarterly Report for the quarter ended
      September 30, 1998 (File No. 0-22166).3.3
              Our
      Bylaws, as amended.
              Incorporated
      by reference to Exhibit 3.2 to our Registration Statement on Form SB-2
      (File No. 33-64962C).4.1
              Specimen
      Form of our Common Stock Certificate.
              Incorporated
      by reference to Exhibit 4.1 to our Registration Statement on Form SB-2
      (File No. 33-64962C).10.1
              1993
      Stock Incentive Plan, as amended.
              Incorporated
      by reference to Exhibit 10.2 to our Annual Report on Form 10-K for year
      ended December 31, 1997 (File No. 0-22166).10.2
              Salary
      Savings Plan.
              Incorporated
      by reference to Exhibit 10.3 to our Registration Statement on Form SB-2
      (File No. 33-64962C).10.3
              Form
      of Incentive Stock Option Agreement.
              Incorporated
      by reference to Exhibit 10.6 to our Annual Report on Form 10-KSB for the
      year ended December 31, 1993 (File No. 0-22166).10.4
              Form
      of Non-Statutory Option Agreement.
              Incorporated
      by reference to Exhibit 10.7 to our Annual Report on Form 10-KSB for the
      year ended December 31, 1993 (File No. 0-22166).10.5
              Employment
      Agreement dated April 1, 1986, between Joseph C. Levesque and
      us.
              Incorporated
      by reference to Exhibit 10.6 to our Registration Statement on Form SB-2
      (File No. 33-64962C).10.6
              Credit
      Agreement dated August 11, 1989, between Harris Bank and
    us.
              Incorporated
      by reference to Exhibit 10.7 to our Registration Statement on Form SB-2
      (File No. 33-64962C).10.7
              Lease
      Agreement, dated July 19, 1995, between KAMKO Investments and
      us.
              Incorporated
      by reference to Exhibit 10.12 to our Registration Statement on Form SB-2
      (File No. 33-98040).
  E-1
 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).10.18
              Form
      of Amendments to Change of Control Agreement
              Filed
      herewith electronically.
  E-2
 10.19
              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).10.20
              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).10.21
              Business
      Loan Agreement, dated October 25, 2007, 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, 2007 (File No. 0-22166).10.22
              Note,
      dated October 25, 2007, 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, 2007 (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.
              Filed
      herewith electronically.23.1
              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.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.
  E-3
   
  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
  AdditionsDescription
              
              Balance
      at
                beginning
      of
                year
              
              
              Charged
      (credited) to costs and expenses
              
              
              Charged
      to other accounts
              
              
              Deductions
              
              
              Balance
      at
                end
      of
                yearAllowance
      for doubtful accounts:2006
              
              $
              46
              
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              462007
              
              
              46
              
              
              
              0
              
              
              
              0
              
              
              
              0
              
              
              
              46Inventory
      excess and obsolescence reserve (1):2006
              
              $
              2,257
              
              
              $
              0
              
              
              $
              0
              
              
              $
              (588
              )
              
              $
              1,6692007
              
              
              1,669
              
              
              
              179
              
              
              
              0
              
              
              
              (88
              )
              
              
              1,760Valuation
      allowance on deferred tax assets (2):2006
              
              $
              25,600
              
              
              $
              274
              
              
              $
              642
              
              
              $
              0
              
              
              $
              26,5162007
              
              
              26,516
              
              
              
              (3,964
              )
              
              
              223
              
              
              
              0
              
              
              
              22,775
  (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