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, 2008
 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, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” 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 30, 2008 (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 $30,231,000.
  As of
March 10, 2009, 10,598,131shares 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 2009 Annual Meeting of Stockholders to be
held May 20, 2009 (the “2009 Proxy Statement”).
  
  
  Form
10-K
   For
the fiscal year ended December 31, 2008
   TABLE
OF CONTENTS
  PART
      IITEM
      1.
                BUSINESS.
                1ITEM
      1A.
                RISK
      FACTORS
                8ITEM
      1B.
                UNRESOLVED
      STAFF COMMENTS
                10ITEM
      2.
                PROPERTIES
                10ITEM
      3.
                LEGAL
      PROCEEDINGS
                10ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                10ITEM
      4A.
                EXECUTIVE
      OFFICERS OF THE REGISTRANT
                10PART
      IIITEM
      5.
                MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
                13ITEM
      7.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION
                14ITEM
      8.
                FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
                21ITEM
      9.
                CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
                21ITEM
      9A(T)
                CONTROLS
      AND PROCEDURES
                21ITEM
      9B.
                OTHER
      INFORMATION
                22PART
      IIIITEM
      10.
                DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
                23ITEM
      11.
                EXECUTIVE
      COMPENSATION
                23ITEM
      12.
                SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
                23ITEM
      13.
                CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                23ITEM
      14.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                24PART
      IVITEM
      15.
                EXHIBITS  AND
      FINANCIAL STATEMENT SCHEDULES
                24
 
  
  
  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 can 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 59% and 69% of our net sales in 2008 and 2007,
respectively.  Reliability test equipment accounted for 15% and 17% of
our net sales in 2008 and 2007, respectively.  Change kits and spare
parts accounted for 26% and 14% of our net sales in 2008 and 2007,
respectively.
  IC unit
sales began to decline in late 2006 and 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. According to SEMI,
a semiconductor equipment industry trade association, revenues for test related
equipment in 2007 declined 21% from 2006 revenues.
  IC unit
sales again resumed growth by the end of the first quarter of 2008 and by early
third quarter exceeded the 2007 peak. However, the worldwide financial collapse
that became apparent by the end of the third quarter resulted in one of the
steepest declines ever in the semiconductor industry. Semiconductor companies in
our primary industry segments reported revenue declines of over 25% from third
quarter to fourth quarter 2008. Bookings in the TAP segment of the semiconductor
equipment industry began declining by the end of the second quarter of 2008, and
as a result of the worldwide financial collapse declined precipitously in the
fourth quarter. According to SEMI, revenues for test related equipment finished
the year 32% below 2007 revenues and 46% below 2006 revenues.
  We
outperformed our industry segment in 2007, but our bookings declined
significantly in the fourth quarter, due substantially to a cautiousness among
our customers as they assessed the potential impact of risks to the U.S.
economy. While our bookings rebounded somewhat during the second and third
quarters of 2008, we were also substantially impacted by the worldwide financial
collapse by the end of the third quarter and for the remainder of the year.
While we outperformed our industry segment during the two year period, our 2008
revenues nevertheless declined by 39% from 2006 revenues.
  Analysts
of the semiconductor industry are forecasting a decline of IC units in 2009,
which would be only the third annual IC unit decline in over 25 years. Analysts
forecast that IC revenues will decline by 15-25% from 2008, with most recent
forecasts warning that the decline could reach 33%.
  In
response to these conditions, we eliminated our contract workers in early fourth
quarter 2008, reduced our regular workforce by 15% by the end of the quarter,
and early in the first quarter of 2009 reduced wages for all of our remaining
employees by 10% and for our executive officers by up to 25%. 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,
positions us to not only weather this current difficult industry downturn, but
to be in a strong position to outperform our industry segment when conditions
improve.
  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.
  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 inserted 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 DFNs or QFNs), have electrical
contact pads flush with the sides and bottoms of the ICs. MLPs are typically
tested with gravity feed test handlers, particularly for analog and linear
applications, but may also be tested with turret based or pick-and-place test
handlers. 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 current test handler product lines
are all 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 Celsius to
   3
  +155
degrees Celsius.  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
MLPs.  The 55V Series offers a small footprint, a vertical backplane
that can accommodate nearly 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. In 2008 we
accelerated efforts to expand 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 primarily
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 structures designed to exemplify IC failure modes, collect and
analyze relevant data, and predict lifetime performance of ICs.  This
equipment can be utilized to perform reliability testing of packaged and wafer
level test structures.
  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.  Fifteen 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 (a Dover Corporation company), Rasco (a division of Cohu, Inc.) and
TESEC 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.
   5
  Customers
  We rely
on a limited number of customers for a substantial percentage of our net
sales.  In 2008, our top three customers accounted for 40%, 25% and
11% of our net sales, respectively. In 2007, two of those same customers
accounted for 40% and 37% 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 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, 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 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,
California, and Kuala Lumpur and Penang, Malaysia.  As of December 31,
2008, we had international distributors located in the United Kingdom, France,
Italy, Korea, Japan, Taiwan, 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 85% and 76% of our net sales in 2008 and 2007,
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
   6
  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 2008 and 2007, our expenses relating to
research and development were approximately $3.0 million and $3.5 million,
respectively, or 17.5% and 12.7% 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 such as 2008.
  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 eight 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, 2008, we had 69 employees, two of whom were part-time. They
consisted of 30 in manufacturing, 16 in engineering and product development, 15
in sales, marketing and customer service, and 8 in general administration and
finance.  None of our employees are represented by a labor union or
are subject to any collective bargaining agreement.  We have never
experienced a work stoppage, and we believe that our employee relations are
satisfactory.
   7
  ITEM
      1A.
              RISK
      FACTORS.
  Several
important risks and uncertainties exist that 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. The worldwide financial collapse that became
apparent by the end of the third quarter of 2008 has resulted in an
unprecedented downturn in the semiconductor industry and in the semiconductor
equipment industry. Forecasters predict continuing deteriorating conditions in
the semiconductor industry that could extend throughout 2009. Such conditions
would likely further substantially reduce our revenues and operating results and
require application of some of our cash reserves. Presently there are no
reliable indicators of which we are aware as to when conditions in our industry
may bottom or start to improve.
  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.
   8
  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
face of the current sustained downturn in our industry and continuing decline in
our revenues, we have implemented cost reduction actions, including workforce
reductions, pay freezes and reductions, and reductions in other expenditures. In
doing so, we have attempted to maintain the necessary infrastructures to allow
us to take full advantage of subsequent improvements in conditions, and we will
attempt to do so as we continue to address the challenges our industry
presents.  However, there can be no assurance that reductions we have
made or may make in personnel and expenditure levels and the loss of the
capabilities of personnel we have terminated or may terminate will not inhibit
us in the timely completion of product development efforts, the effective
service of and responsiveness to customer requirements, and the timely ramp up
of production in response to improving market conditions.
  Potential
for Increase to Our Deferred Tax Asset Valuation Allowance
  If the
current global economic crisis and semiconductor industry downturn worsen and/or
continue for an extended period of time, the potential realization of our
deferred tax assets would likely be adversely impacted, in which case we could
be required to increase our valuation allowance and record a corresponding
charge to income tax expense.
  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.
   9
   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, at which time we
have an option to extend the lease for an additional five-year term. We consider
our present facilities to be sufficient for our current operations.
  In
addition, as of December 31, 2008, we leased a 45,000 square foot facility in
Poway, California, which we vacated in 2000.  This lease expires in
January 2010. The facility is subleased to two independent parties with the
sublease terms running concurrently with our remaining lease term. We remain
liable under the lease on a contingent basis in the event a subtenant defaults.
In March 2009, one of the subtenants was in default under its sublease agreement
with us for failure to pay the past three months’ rent totaling approximately
$100,000. This subtenant has indicated that it recently received a substantial
long-term contract, is in the process of obtaining additional financing to
support delivery under the contract, and expects to cure the default by June
2009.
  ITEM
      3.
              LEGAL
      PROCEEDINGS.
  We are
not a party to, and none of our property is the subject of, any material pending
legal, governmental, administrative or other proceedings.
  ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
  We did
not submit any matter to a vote of our security holders during the fourth
quarter of fiscal year 2008.
  ITEM
      4A.
              EXECUTIVE
      OFFICERS OF THE REGISTRANT.
  Our
executive officers, their ages and the offices they held as of March 1, 2009 are
as follows:
  Name
                Age
                PositionJoseph
      C. Levesque
                64
                Chairman
      of the Board, President and Chief Executive OfficerDouglas
      L. Hemer
                62
                Chief
      Administrative Officer, Secretary and DirectorJohn
      J. Pollock
                49
                Vice
      President — General ManagerDaniel
      M. Koch
                55
                Vice
      President — Worldwide SalesPaul
      H. Askegaard
                57
                TreasurerTimothy
      G. Foley
                49
                Vice
      President — ManufacturingDean
      K. Hedstrom
                59
                Vice
      President — TechnologyTimothy
      A. McMullen
                41
                Vice
      President — Reliability Test SystemsW.
      Charles Sletten, II
                57
                Vice
      President — Engineering
 
  10
  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.
Pollock has served as the Vice President and General Manager of our North
St. Paul operations since December 2001.  From August 1998 to December
2001, Mr. Pollock served as our Vice President of Product Development and
Marketing.  From April 1998 to August 1998, Mr. Pollock served as
interim general manager of our North St. Paul operations.  From
November 1997 to May 1998, Mr. Pollock served as interim general manager of
a test handler product line we had recently acquired.  From September
1996 to August 1997, Mr. Pollock served as a Business Unit Manager.
  Mr. 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 PC
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.
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
  11
 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.
   12
  PART
II
  ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      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
      2008
                  High
                  
                  $
                  5.92
                  
                  
                  $
                  4.23
                  
                  
                  $
                  3.75
                  
                  
                  $
                  2.82Low
                  
                  $
                  3.64
                  
                  
                  $
                  2.98
                  
                  
                  $
                  2.61
                  
                  
                  $
                  1.01Fiscal
      2007
                  High
                  
                  $
                  4.70
                  
                  
                  $
                  4.70
                  
                  
                  $
                  5.00
                  
                  
                  $
                  6.24Low
                  
                  $
                  3.25
                  
                  
                  $
                  3.62
                  
                  
                  $
                  3.90
                  
                  
                  $
                  4.56
 Holders
  As of
March 10, 2009, there were ­­­­­­135 shareholders of
record.  We estimate that an additional 3,300 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
2008.
  Issuer’s
Purchases of Equity Securities
  We did
not make any purchases of our common stock during the fourth quarter of fiscal
2008.
  
 
  13
  ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
  Overview:
  Aetrium
designs, manufactures and markets a variety of electromechanical equipment used
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 depends 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.
  Semiconductor
industry conditions were generally favorable in 2006 but weakened in the second
half of the year. Industry conditions continued to be relatively weak in 2007
although they 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 net sales increased
sequentially to $9.3 million in the fourth quarter of 2007, new orders decreased
significantly from third quarter levels, consistent with generally weakening
demand for equipment in the TAP segment of the semiconductor equipment industry.
Our total sales in 2007 were $28.0 million compared with $28.2 million in
2006.
  Amid
general economic concerns, semiconductor and semiconductor equipment industry
conditions continued to be weak in the first half of 2008. In the first quarter
of 2008 our net sales decreased to $5.6 million compared with $9.3 million in
the fourth quarter of 2007. In the second quarter of 2008, our orders increased
over first quarter levels but a significant portion of the orders were received
late in the quarter for shipment in subsequent periods and our net sales
decreased further to $3.2 million. Our net sales increased to $5.5 million in
the third quarter but worldwide economic and semiconductor industry business
conditions deteriorated during the quarter as the well publicized global
financial crisis deepened. Aetrium’s business outlook weakened as well. Our
order activity slowed significantly in the latter part of the third quarter and
total orders decreased from second quarter levels.  Business
conditions continued to deteriorate during the fourth quarter as weak economic
conditions evolved into a full-blown global financial collapse. As the end of
the year approached, many IC manufacturers, including Aetrium’s primary
customers, made significant adjustments to their operations and reduced their
capital expenditure plans in anticipation of significantly declining demand for
ICs. Consequently, our net sales decreased to $2.9 million in the fourth
quarter. Fiscal year 2008 sales totaled $17.2 million compared with $28.0
million in 2007, a decrease of 38%. In fourth quarter 2008, as it became clear
that general economic and semiconductor industry business conditions may be weak
for an extended period of time, we immediately took steps to reduce our expenses
accordingly.  We eliminated contract workers, terminated twelve
employees, or 15% of our regular workforce, and reduced other operating expenses
as well.  In January
   14
  2009 we
implemented wage reductions of 10% for all employees and up to 25% for our
executive officers.
  Our order
activity has continued to be very weak in early 2009 and we expect general
economic and Aetrium business conditions to be challenging at least through the
first half of the year. Any prolonged continuation or worsening of the industry
slowdown will likely adversely impact our longer term operating results as
well.
  Off-Balance
Sheet Arrangements:
  We did
not have any off-balance sheet arrangements as of December 31, 2008 or
2007.
  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 taxes.
  Share-Based
Compensation
  We
account for share-based compensation in accordance with 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 using the fair value
method.
  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.
   15
  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 reported
operating 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.
   16
  Income
Taxes
  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 $25.6 million to fully reserve our deferred tax
assets.  At December 31, 2007, we reduced the valuation allowance to
approximately $21.7 million based on our assessment of the realizability of our
deferred tax assets at that date. At December 31, 2008, we assessed the
realizability of our deferred tax assets and the amount of our valuation
allowance.  Based on our evaluation of future profit potential and
other relevant factors, we determined that there was not sufficient positive or
negative evidence to warrant an increase or decrease in the amount of the
valuation allowance and that a valuation allowance of $21.7 million was
appropriate at December 31, 2008. 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 2008 and 2007
were as follows:
  2008
                  
                  
                  2007Net
      sales
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of goods sold
                  
                  
                  52.0
                  
                  
                  
                  49.7Gross
      profit
                  
                  
                  48.0
                  
                  
                  
                  50.3Operating
      expenses:Selling,
      general and administrative
                  
                  
                  37.9
                  
                  
                  
                  23.3Research
      and development
                  
                  
                  17.5
                  
                  
                  
                  12.7Total
      operating expenses
                  
                  
                  55.4
                  
                  
                  
                  36.0Income
      (loss) from operations
                  
                  
                  (7.4
                  )%
                  
                  
                  14.3
                  %
  Net
Sales:
  Our net
sales by product line as a percentage of total sales for 2008 and 2007 were as
follows:
 2008
                        
                        
                        2007Test
      handler products
                        
                        
                        59
                        %
                        
                        
                        69
                        %Reliability
      test equipment products
                        
                        
                        15
                        
                        
                        
                        17Change
      kits and spare parts
                        
                        
                        26
                        
                        
                        
                        14Total
                        
                        
                        100
                        %
                        
                        
                        100
                        %
 Net sales
were $17.2 million in 2008 compared with $28.0 million in 2007, a 38% decrease.
Net sales of test handlers were $10.2 million compared with $19.2 million in
2007, a decrease of 47%. Net sales of reliability test equipment were $2.5
million in 2008 compared with $4.8 million in 2007, also a decrease of 47%. The
decreases in test handler and reliability test equipment sales in 2008 were
attributed to a general weakness in the semiconductor equipment industry that
developed late in 2007, continued into fiscal year 2008 and worsened in the
second half of the year as global economic conditions
   17
   deteriorated.
Sales of change kits and spare parts were $4.5 million in 2008 compared with
$4.0 million in 2007, an increase of 12%. Sales of change kits and spare parts
sometimes increase in periods of reduced equipment sales as some customers
strive to improve the utilization of existing equipment rather than purchase new
equipment, which we believe occurred to some extent in 2008.
  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 the mix of products sold, distribution
channel mix, price discounting, product maturity, inventory writedowns, and
utilization of manufacturing capacity associated with varying production levels.
Gross profit was 48.0% of net sales in 2008 compared with 50.3% in 2007. Our
gross margin decreased in 2008 primarily due to inefficiencies associated with
lower production and net sales levels and to a less favorable distribution mix.
Discounted sales to distributors represented 54% of total net sales in 2008
compared with 45% in 2007.
  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 each of fiscal years 2008 and 2007.   Wages,
share-based compensation and related costs increased $0.6 million in 2008
primarily due to wage increases and additional personnel hired for field service
and sales support activities. Travel and equipment demonstration expenses
increased $0.3 million to support increased field service activities and sales
efforts to expand our customer base. These expense increases in 2008 were offset
by $0.4 million in reduced commission expense and $0.5 million in reduced sales
and profit-related incentives due to lower sales and profits in
2008.
  Research
and Development Expenses:
  Research
and development expenses were $3.0 million in 2008 compared with $3.5 million in
2007, a decrease of 15%. The decrease in 2008 was primarily attributable to
reductions in contract services and travel costs. Research and development
expenses represented 17.5% of total net sales in 2008 compared with 12.7% of
total net sales in 2007. New product development is an essential part of our
strategy to gain market share. Over time, we expect to invest approximately 12%
to 15% of our revenues in research and development although we may exceed this
range in periods of reduced revenues as was the case in 2008.
  Interest
Income, Net:
  Interest
income, net, amounted to $0.3 million and $0.4 million in 2008 and 2007,
respectively. These amounts consisted primarily of interest income from the
investment of excess funds. The decrease in interest income in 2008 reflects
generally declining interest rates offset in part by an increase in average
invested cash balances.
  Income
Tax Benefit:
  We
recorded an income tax benefit of $0.3 million in 2008, which reflected a 33.7%
effective tax rate. In 2007, we recorded an income tax net benefit of $2.2
million, which included income tax expense of $1.8 million (37.5% effective tax
rate) and an income tax benefit of approximately $4.0 million resulting from a
reduction in our deferred tax asset valuation allowance as explained
below.
   18
  From
fiscal year 2000 through 2006, Aetrium had provided a valuation allowance
to fully reserve our deferred tax assets. The valuation allowance amounted to
$25.6 million at December 31, 2006. At December 31, 2007, we reduced the
valuation allowance by $4.0 million based on our assessment of the realizability
of our deferred tax assets at that date. See Note 13 to our consolidated
financial statements.
  If the
current global economic crisis and semiconductor industry downturn worsen and/or
continue for an extended period of time, the potential realization of our
deferred tax assets would likely be adversely impacted, in which case we could
be required to increase our valuation allowance and record a corresponding
charge to income tax expense.
  Financial
Condition, Liquidity and Capital Resources:
  Cash and
cash equivalents decreased by approximately $0.5 million in the year ended
December 31, 2008. We used $0.4 million in cash to fund operating activities
during this period. The major components of cash flows from operating activities
were our net loss of $0.6 million, a $0.3 million increase in deferred taxes, a
$1.5 million increase in inventories, a $0.2 million decrease in accounts
payable, a $0.4 million decrease in accrued compensation and a $0.3 million
decrease in other accrued liabilities, offset in part by $0.7 million in
non-cash depreciation and share-based compensation expense, a $2.0 million
decrease in accounts receivable and a $0.1 million decrease in other assets.
Inventories increased due to selective increases of certain inventories in the
first half of 2008 to meet anticipated customer delivery requirements, an
increase in the number of demonstration equipment units used for new customer
evaluations, and lower-than-anticipated net sales in the second half of the
year. Accounts payable decreased primarily due to reduced inventory purchases in
the fourth quarter of 2008 compared with the fourth quarter of 2007. Accrued
compensation decreased primarily due to the elimination of profit-related
incentives in the second half of 2008. The decrease in accrued liabilities
included a $0.1 million decrease in accrued warranty and no-charge equipment
improvement costs due primarily to lower sales and a $0.1 million decrease in
deferred revenue. Accounts receivable decreased primarily due to a significant
decrease in net sales in the fourth quarter of 2008 compared with the fourth
quarter of 2007. Net cash provided by investing activities in 2008 was not
significant. Net cash used in financing activities in 2008 amounted to $0.1
million and was primarily related to the repurchase of shares of common stock in
connection with stock option exercises.
  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 included primarily
the payment of $0.6 million in severance and related costs associated with the
2006 sale of our Dallas, Texas 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.
   19
  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 $11.6
million at December 31, 2008 will be sufficient to meet capital expenditure and
working capital needs at least through 2009. 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 2009.  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. As discussed
above, worldwide economic conditions are very weak and it is not known how long
the current downturn in the semiconductor industry may last. A worsening or
prolonged continuation of the current slowdown in our industry would likely
adversely 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 March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (SFAS 161). This statement is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. SFAS 161 became effective for Aetrium at the
beginning of fiscal year 2009 and had no impact on our consolidated financial
position, results of operations or cash flows.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (SFAS 160). This statement amends Accounting
Research Bulletin No. 51, “Consolidated Financial Statements,”to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS 160 became effective for Aetrium at
the beginning of fiscal year 2009 and had no impact on our consolidated
financial position, results of operations or cash flows.
  In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141(Revised 2007),
“Business
Combinations”
(SFAS 141R).  SFAS 141R establishes principles and requirements
for how the acquirer in a business combination recognizes and measures in its
financial statements the fair value of identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree at the
acquisition date. SFAS 141R determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination.  SFAS 141R became effective for Aetrium
at the beginning of fiscal year 2009 and had no impact on our consolidated
financial position, results of operations or cash flows.
  In
February 2007, the FASB issued 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 that were not previously required to be measured at
fair value. SFAS 159 became effective for Aetrium at the beginning of fiscal
year 2008, and its implementation had no impact on our consolidated financial
position, results of operations or cash flows.
  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 became
  20
  effective
for Aetrium at the beginning of fiscal year 2008, and its implementation had no
impact on our consolidated financial position, results of operations or cash
flows.
  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.
  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, 2008, 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, 2008.
  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 2008 that have materially affected, or are
reasonably likely to materially affect, Aetrium’s internal control over
financial reporting.
   21
  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.
   22
  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 2009 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 2009 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 2009 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 2009 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 2009 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 2009 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 2009 Proxy Statement is incorporated
in this Annual Report on Form 10-K by reference.
   23
   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 Firm—Audit and Non-Audit Fees” and “Independent
Registered Public Accounting Firm—Pre-approval Policies and Procedures” in our
2009 Proxy Statement is incorporated in this Annual Report on Form 10-K by
reference.
  PART
IV
  ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES.
  (a)
1. Financial Statements of Registrant.
  The
following Consolidated Financial Statements of Aetrium Incorporated and the
Independent Registered Public Accounting Firm’s Report 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-18
  (a)
2.  Financial Statement Schedule of Registrant.
  Schedule
      II -  Valuation and Qualifying Accounts
                S-1
  All other
schedules are omitted as the required information is inapplicable or the
information is presented in the financial statements or related
notes.
  (a)
3.  Exhibits.
  The
exhibits to this Annual Report on Form 10-K are listed in the Exhibit Index
beginning on page E-1 of this Annual Report on Form 10-K.
  If
you were one of our shareholders on March 31, 2009 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.
   24
  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 (incorporated by reference to
      Exhibit 10.18 to our Annual Report on Form 10-K for the year ended
      December 31, 2007) (File No. 0-22166).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).
 
  
   25
  
 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, 2008 and 2007, and the related consolidated state­ments of
opera­tions, changes in shareholders’ equity and cash flows for each of the
two years in the period ended December 31, 2008.  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, 2008 and 2007, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2008 in confor­mity with accounting principles generally
accepted in the United States of America.  Also, in our opinion, the
related financial statement schedule, when consi­dered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
   /s/GRANT
THORNTON LLP
   Minneapolis,
Minnesota
   March 27,
2009
   F -
1
  
  AETRIUM
INCORPORATED
 Consolidated
Statements of Operations
  
  Year
      Ended December 31,
                  
                  2008
                  
                  
                  2007Net
      sales
                  
                  $
                  17,217,477
                  
                  
                  $
                  27,989,744Cost
      of goods sold
                  
                  
                  8,949,602
                  
                  
                  
                  13,918,687Gross
      profit
                  
                  
                  8,267,875
                  
                  
                  
                  14,071,057Operating
      expenses:Selling,
      general and administrative
                  
                  
                  6,519,929
                  
                  
                  
                  6,522,170Research
      and development
                  
                  
                  3,018,141
                  
                  
                  
                  3,535,340Total
      operating expenses
                  
                  
                  9,538,070
                  
                  
                  
                  10,057,510Income
      (loss) from operations
                  
                  
                  (1,270,195
                  )
                  
                  
                  4,013,547Interest
      income, net
                  
                  
                  346,752
                  
                  
                  
                  436,159Income
      (loss) before income taxes
                  
                  
                  (923,443
                  )
                  
                  
                  4,449,706Income
      tax benefit
                  
                  
                  (311,000
                  )
                  
                  
                  (2,247,000
                  )Net
      income (loss)
                  
                  $
                  (612,443
                  )
                  
                  $
                  6,696,706Income
      (loss) per share:Basic
                  
                  $
                  (0.06
                  )
                  
                  $
                  0.64Diluted
                  
                  
                  (0.06
                  )
                  
                  
                  0.62Weighted
      average common shares outstanding:Basic
                  
                  
                  10,583,000
                  
                  
                  
                  10,396,000Diluted
                  
                  
                  10,583,000
                  
                  
                  
                  10,726,000
  
   The
accompanying notes are an integral part of the consolidated financial
statements.
 F -
2
  
  AETRIUM
INCORPORATED
 Consolidated
Balance Sheets
  
  December
      31,
                                
                                2008
                                
                                
                                2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                11,628,962
                                
                                
                                $
                                12,104,858Accounts
      receivable, net of allowance for doubtfulaccounts of $40,000 in 2008 and
      $46,000 in 2007
                                
                                
                                1,539,345
                                
                                
                                
                                3,542,426Inventories
                                
                                
                                9,161,840
                                
                                
                                
                                7,694,869Deferred
      income taxes
                                
                                
                                127,000
                                
                                
                                
                                315,000Other
      current assets
                                
                                
                                297,982
                                
                                
                                
                                588,730Total
      current assets
                                
                                
                                22,755,129
                                
                                
                                
                                24,245,883Property
      and equipment:Furniture
      and fixtures
                                
                                
                                521,450
                                
                                
                                
                                527,433Equipment
                                
                                
                                1,203,214
                                
                                
                                
                                1,269,690Less
      accumulated depreciation and amortization
                                
                                
                                (1,581,980
                                )
                                
                                
                                (1,612,089
                                )Property
      and equipment, net
                                
                                
                                142,684
                                
                                
                                
                                185,034Deferred
      income taxes
                                
                                
                                2,489,000
                                
                                
                                
                                2,002,000Other
      assets
                                
                                
                                214,947
                                
                                
                                
                                150,238Total
      assets
                                
                                $
                                25,601,760
                                
                                
                                $
                                26,583,155LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Current
      portion of long-term debt
                                
                                $
                                11,678
                                
                                
                                $
                                44,838Trade
      accounts payable
                                
                                
                                571,224
                                
                                
                                
                                781,866Accrued
      compensation
                                
                                
                                286,375
                                
                                
                                
                                669,282Other
      accrued liabilities
                                
                                
                                632,733
                                
                                
                                
                                933,886Total
      current liabilities
                                
                                
                                1,502,010
                                
                                
                                
                                2,429,872Long-term
      debt, less current portion
                                
                                
                                —
                                
                                
                                
                                11,711Commitments
      and contingencies (See Note 10)Shareholders’
      equity:Common
      stock, $.001 par value; 30,000,000 sharesauthorized; 10,598,131 and
      10,542,611 shares issuedand outstanding, respectively
                                
                                
                                10,598
                                
                                
                                
                                10,543Additional
      paid-in capital
                                
                                
                                63,665,060
                                
                                
                                
                                63,094,494Accumulated
      deficit
                                
                                
                                (39,575,908
                                )
                                
                                
                                (38,963,465
                                )Total
      shareholders’ equity
                                
                                
                                24,099,750
                                
                                
                                
                                24,141,572Total
      liabilities and shareholders’ equity
                                
                                $
                                25,601,760
                                
                                
                                $
                                26,583,155
 
 
  The
accompanying notes are an integral part of the consolidated financial
statements.
 F -
3
  
  AETRIUM
INCORPORATED
 Consolidated
Statements of Changes in Shareholders’ Equity
   Common
      Stock
                          
                          
                          
                          
                          
                          
                          
                          
                          TotalShares
                          
                          
                          Amount
                          
                          
                          Additional
                            Paid-in
      Capital
                          
                          
                          Accumulated
      Deficit
                          
                          
                          Shareholders’
      EquityBalance,
      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
                          )
                          
                          
                          24,141,572Exercise
      of stock options
                          
                          
                          165,159
                          
                          
                          
                          165
                          
                          
                          
                          455,767
                          
                          
                          
                          —
                          
                          
                          
                          455,932Repurchase
      of shares in connection with exercise of stock options
                          
                          
                          (109,639
                          )
                          
                          
                          (110
                          )
                          
                          
                          (487,451
                          )
                          
                          
                          —
                          
                          
                          
                          (487,561
                          )Share-based
      compensation expense
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          602,250
                          
                          
                          
                          —
                          
                          
                          
                          602,250Net
      loss
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (612,443
                          )
                          
                          
                          (612,443
                          )Balance,
      December 31, 2008
                          
                          
                          10,598,131
                          
                          
                          $
                          10,598
                          
                          
                          $
                          63,665,060
                          
                          
                          $
                          (39,575,908
                          )
                          
                          $
                          24,099,750
 
 
 
 
  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,
                  
                  2008
                  
                  
                  2007Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  (612,443
                  )
                  
                  $
                  6,696,706Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                  
                  
                  100,773
                  
                  
                  
                  115,366Share-based
      compensation expense
                  
                  
                  602,250
                  
                  
                  
                  360,420Deferred
      income taxes
                  
                  
                  (299,000
                  )
                  
                  
                  (2,317,000
                  )Tax
      benefit from stock option exercises
                  
                  
                  —
                  
                  
                  
                  (13,461
                  )Provision
      for bad debts
                  
                  
                  (6,212
                  )
                  
                  
                  —Provision
      for excess and obsolete inventories
                  
                  
                  —
                  
                  
                  
                  179,000Loss
      on disposal of equipment
                  
                  
                  —
                  
                  
                  
                  2,043Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  2,009,293
                  
                  
                  
                  (1,378,050
                  )Inventories
                  
                  
                  (1,466,971
                  )
                  
                  
                  (510,780
                  )Other
      current assets
                  
                  
                  62,707
                  
                  
                  
                  (106,811
                  )Other
      assets
                  
                  
                  72,665
                  
                  
                  
                  (71,801
                  )Trade
      accounts payable
                  
                  
                  (210,642
                  )
                  
                  
                  291,602Accrued
      compensation
                  
                  
                  (382,907
                  )
                  
                  
                  290,535Other
      accrued liabilities
                  
                  
                  (301,153
                  )
                  
                  
                  (498,649
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  (431,640
                  )
                  
                  
                  3,039,120Cash
      flows from investing activities:Purchase
      of property and equipment
                  
                  
                  (58,423
                  )
                  
                  
                  (105,672
                  )Collection
      of note receivable
                  
                  
                  90,667
                  
                  
                  
                  188,155Net
      cash provided by investing activities
                  
                  
                  32,244
                  
                  
                  
                  82,483Cash
      flows from financing activities:Proceeds
      from exercise of stock options
                  
                  
                  56,469
                  
                  
                  
                  616,938Repurchase
      of shares in connection with exercise of stock options
                  
                  
                  (88,098
                  )
                  
                  
                  —Tax
      benefit from stock option exercises
                  
                  
                  —
                  
                  
                  
                  13,461Payments
      on long-term debt
                  
                  
                  (44,871
                  )
                  
                  
                  (41,584
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  (76,500
                  )
                  
                  
                  588,815Increase
      (decrease) in cash and cash equivalents
                  
                  
                  (475,896
                  )
                  
                  
                  3,710,418Cash
      and cash equivalents at beginning of year
                  
                  
                  12,104,858
                  
                  
                  
                  8,394,440Cash
      and cash equivalents at end of year
                  
                  $
                  11,628,962
                  
                  
                  $
                  12,104,858
 
 
 
 
  The
accompanying 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.
  Cash
Equivalents:Cash equivalents consist of highly liquid
investments with a maturity of three months or less when purchased, including
money market funds and bank certificates of deposit.  Cash and cash
equivalents included certificates of deposit of $3.5 million and $2.0 million at
December 31, 2008 and 2007, respectively. We maintain our cash equivalents in
accounts that, at times, may exceed the insurance limits of the Federal Deposit
Insurance Corporation.
  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 $0.1 million for the each
of the years ended December 31, 2008 and 2007,
respectively.  Maintenance and repairs are charged to expense as
incurred.
  Valuation of Long-Lived
Assets:  Aetrium reviews its 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
   F -
6
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  impairment
loss as the amount by which the carrying value of the asset exceeds its fair
value. There were no impairment charges during the years ended December 31, 2008
and 2007.
  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.  Sales tax billed to customers is excluded from revenue. 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 7 and 8.
  Advertising
Costs:Advertising costs are expensed as incurred. Advertising
costs were immaterial for each of the years ended December 31, 2008 and
2007.
  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, 2008 (in thousands):
  Accrual
                    Balance
      at
                    beginning
      of
                    year
                  
                  
                  Accruals
      for
                    warranties
                    and
      no-charge improvements
                  
                  
                  Settlements
                    made
                  
                  
                  Accrual
                    Balance
      at
                    end
      of
                    year2007
                  
                  $
                  366
                  
                  
                  $
                  389
                  
                  
                  $
                  (479
                  )
                  
                  $
                  2762008
                  
                  
                  276
                  
                  
                  
                  415
                  
                  
                  
                  (562
                  )
                  
                  
                  129
 
 There
were no significant changes in estimated warranty accruals for fiscal year 2008
or 2007. Accrued warranty costs are included in the caption “Other accrued
liabilities” in our consolidated balance sheet. See Note 8.
   F -
7
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  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 loss periods, the computation of diluted
loss per share excludes the impact of stock options because they would be
antidilutive and diluted loss per share is therefore the same as basic loss per
share.  A reconciliation of the number of shares used in the
computations of basic and diluted income (loss) per share follows (in
thousands):
  Year
      ended Dec. 31,
                  
                  2008
                  
                  
                  2007Weighted
      average common shares outstanding
                  
                  
                  10,583
                  
                  
                  
                  10,396Potentially
      dilutive stock options
                  
                  
                  —
                  
                  
                  
                  330Weighted
      average common shares outstanding,  assuming
      dilution
                  
                  
                  10,583
                  
                  
                  
                  10,726
 
 For the
year ended December 31, 2008, all stock options are excluded from the loss per
share computation because they would be antidilutive.  As of December
31, 2008, there were 1,818,144 outstanding stock options that could have
potentially impacted diluted income per share. For the year
   F -
8
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  ended
December 31, 2007, options to purchase 217,933 common shares are excluded from
the diluted computation 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:We accounted for share-based compensation in
accordance with 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.  See Notes 4 and 11 for additional information
regarding share-based compensation and our stock incentive plan.
  NOTE
3: NOTE RECEIVABLE
  In
connection with the sale of our Dallas, Texas operations to WEB Technology, Inc.
(WEB) in 2006, we received a promissory note from WEB that provided for
installment payments through December 2008. In July 2008, at WEB’s request, the
note was restructured to provide for installment payments through December 2010.
The current portion of the note receivable balance is included in the caption
“Other current assets” and the long-term portion is included in the caption
“Other assets” in our consolidated balance sheet as follows (in
thousands):
  December
      31,
                      
                      2008
                      
                      
                      2007Current
      portion - included in “Other current assets”
                      
                      $
                      106
                      
                      
                      $
                      334Long-term
      portion - included in “Other assets”
                      
                      
                      137
                      
                      
                      
                      —Total
      note receivable
                      
                      $
                      243
                      
                      
                      $
                      334
  NOTE
4: SHARE-BASED COMPENSATION
  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 2008 and 2007 was determined to be $1.07 and $1.74,
respectively.  Weighted average assumptions used
   F -
9
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  in
applying the Black-Scholes option-pricing model to estimate the fair value of
options granted were as follows:
  Year ended
      December 31,
                  
                  2008
                  
                  
                  2007Expected
      dividend yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      stock price volatility
                  
                  
                  42
                  %
                  
                  
                  56
                  %Risk-free
      interest rate
                  
                  
                  2.5
                  %
                  
                  
                  4.5
                  %Expected
      life of options (years)
                  
                  
                  3.5
                  
                  
                  
                  3.5
  In
November 2006, we modified the terms of 223,000 stock options to reduce the
exercise prices to $3.00 per share (the then fair market value of a share of our
common stock).  The options had been originally granted pursuant to
our 2003 Stock Incentive Plan (Plan). None of the modified stock options were
held by named executive officers or directors of Aetrium.  In December
2008, we discovered that the Plan does not permit repricing of outstanding
options. In order to remain compliant with the provisions of the Plan, we
determined that the repriced options be deemed to continue to be outstanding on
their original terms and that the repricing action taken in November 2006 be
deemed a grant of 223,000 additional stock options at an exercise prices of
$3.00 and otherwise on the terms granted in November 2006. Cumulative
share-based compensation expense associated with the new options through fourth
quarter 2008 amounted to $98,000 and was recorded in the fourth quarter of
2008.  Aetrium’s financial statements for prior periods were not
restated as the impact of the additional stock options and related compensation
expense was determined to be immaterial.
  Share-based
compensation expense included in our consolidated statements of
operations was as follows (in thousands):
  Year
      ended December 31,
                        
                        2008
                        
                        
                        2007Cost
      of goods sold
                        
                        $
                        81
                        
                        
                        $
                        44Selling,
      general and administrative
                        
                        
                        412
                        
                        
                        
                        254Research
      and development
                        
                        
                        109
                        
                        
                        
                        62Total
      share-based compensation expense
                        
                        $
                        602
                        
                        
                        $
                        360
  As of
December 31, 2008, 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 2.4 years.
  NOTE
5: RECENT ACCOUNTING PRONOUNCEMENTS
  In March
2008, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 161, “Disclosures about
Derivative Instruments and Hedging Activities” (SFAS 161). This statement is
intended to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. SFAS 161 became effective for Aetrium at the
beginning of fiscal year 2009 and had no impact on our consolidated financial
position, results of operations or cash flows.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (SFAS 160). This statement amends Accounting
Research Bulletin No. 51, “Consolidated Financial Statements,”to establish accounting
and reporting standards for the noncontrolling interest in a
   F -
10
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  subsidiary
and for the deconsolidation of a subsidiary. SFAS 160 became effective for
Aetrium at the beginning of fiscal year 2009 and had no impact on our
consolidated financial position, results of operations or cash
flows.
  In
December 2007, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141(Revised 2007),
“Business
Combinations”
(SFAS 141R).  SFAS 141R establishes principles and requirements
for how the acquirer in a business combination recognizes and measures in its
financial statements the fair value of identifiable assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree at the
acquisition date. SFAS 141R determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination.  SFAS 141R became effective for Aetrium
at the beginning of fiscal year 2009 and had no impact on our consolidated
financial position, results of operations or cash flows.
  In
February 2007, the FASB issued 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 that were not previously required to be measured at
fair value. SFAS 159 became effective for Aetrium at the beginning of fiscal
year 2008, and its implementation had no impact on our consolidated financial
position, results of operations or cash flows.
  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 became effective for Aetrium
at the beginning of fiscal year 2008, and its implementation had no impact on
our consolidated financial position, results of operations or cash
flows.
  NOTE
6: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash
payments (receipts) for interest and income taxes were as follows (in
thousands):
  Year
      ended Dec. 31,
                  
                  2008
                  
                  
                  2007Interest
      paid
                  
                  $
                  2
                  
                  
                  $
                  6Income
      taxes paid (refunded), net
                  
                  $
                  (13
                  )
                  
                  $
                  62
 
 NOTE
7: INVENTORIES
  Inventories
are comprised of the following (in thousands):
  December
      31,
                  
                  2008
                  
                  
                  2007Purchased
      parts and completed subassemblies
                  
                  $
                  5,978
                  
                  
                  $
                  3,911Work-in-process
                  
                  
                  456
                  
                  
                  
                  2,336Finished
      goods, including saleable demonstration equipment
                  
                  
                  2,686
                  
                  
                  
                  1,343Equipment
      shipped, subject to revenue deferral
                  
                  
                  42
                  
                  
                  
                  105Total
      inventories
                  
                  $
                  9,162
                  
                  
                  $
                  7,695
 
 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
   F -
11
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  and
market conditions. If actual product demand or market conditions are less
favorable than those projected by management, additional inventory adjustments
may be required.  Our reserve for excess and obsolete inventories was
$1.6 million and $1.8 million at December 31, 2008 and 2007,
respectively.
  NOTE
8: OTHER ACCRUED LIABILITIES:
  Other
accrued liabilities are comprised of the following (in thousands):
  December
      31,
                  
                  2008
                  
                  
                  2007Accrued
      commissions
                  
                  $
                  75
                  
                  
                  $
                  114Accrued
      warranty and no-charge equipment improvements
                  
                  
                  129
                  
                  
                  
                  276Customer
      deposits and deferred revenue
                  
                  
                  61
                  
                  
                  
                  189Accrued
      severance and related costs
                  
                  
                  102
                  
                  
                  
                  93Other
                  
                  
                  266
                  
                  
                  
                  262Total
      other accrued liabilities
                  
                  $
                  633
                  
                  
                  $
                  934
  The
accrued severance and related costs of $102,000 at December 31, 2008 are related
to a workforce reduction implemented in December 2008.  In response to
a significant decline in business activity, we terminated twelve employees in
manufacturing, sales, field service and engineering.  These costs will
be paid in the first half of fiscal 2009.
  NOTE
9: 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% with a
minimum interest rate of 4.25%.  The agreement is collateralized by
substantially all of our assets and provides that we maintain certain financial
covenants.  At December 31, 2008 and 2007, there were no borrowings
under the line of credit agreement.  As of December 31, 2008, we were
not in compliance with a net income covenant under the agreement. However, the
bank waived this requirement in March 2009.  The credit line agreement
expires in October 2009. We believe we will be able to extend the agreement at
that time or obtain similar financing, if needed. However, there can be no
assurance that such financing will be available with terms favorable to us or at
all.
  In 2004,
we financed certain equipment purchases by executing a note payable to a bank
that provided for monthly installment payments through March
2009.  The loan balance at December 31, 2008 was $11,678.
  NOTE
10: 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 $24,276 as of December 31, 2008 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 2000,
we vacated a leased facility in Poway, California.  The lease expires
in January 2010.  The facility is subleased to two independent parties
with the sublease terms running concurrently with our
   F -
12
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  remaining
lease term. We believe future sublease income will cover our remaining lease
obligations, which totaled approximately $0.7 million at December 31,
2008.  In March 2009, one of the subtenants was in default under its
sublease agreement with us for failure to pay the past three months’ rent
totaling approximately $100,000. This subtenant has indicated that it recently
received a substantial long-term contract, is in the process of obtaining
additional financing to support delivery under the contract, and expects to cure
the default by June 2009. If this subtenant remains in default and/or the other
subtenant was to default on its sublease agreement, we may have to record
charges related to our future obligations under the lease.
  As of
December 31, 2008, future minimum annual lease payments under operating leases
were as follows (in thousands):
  2009
                      
                      $
                      8182010
                      
                      
                      3472011
                      
                      
                      50Total
      minimum lease payments
                      
                      $
                      1,215
 
 The above
minimum lease payments have not been reduced by minimum sublease rentals of $0.7
million for the Poway, California facility due in the future under
noncancellable subleases which expire in January 2010.
  Rent
expense, including facility and various short-term equipment operating leases,
was as follows (in thousands):
  Year
      ended Dec. 31,
                  
                  2008
                  
                  
                  2007Paid
      to shareholder
                  
                  $
                  291
                  
                  
                  $
                  295Paid
      to others
                  
                  
                  536
                  
                  
                  
                  508Sublease/assigned
      lease income
                  
                  
                  (521
                  )
                  
                  
                  (452
                  )Total
      net rent expense
                  
                  $
                  306
                  
                  
                  $
                  351
  NOTE
11: STOCK OPTION PLAN
  In May
2003, Aetrium’s shareholders approved the adoption of the 2003 Stock Incentive
Plan (Plan).  Employees, officers, directors, consultants and
independent contractors providing services to us are eligible to receive awards
under the Plan.  The number of shares available for issuance under the
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. The 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 Plan may be incentive stock
options or nonqualified stock options.  To date, nonqualified stock
options are the only awards that we have granted under the Plan.  The
Plan will terminate on February 28, 2013.  The Plan provides that the
Compensation Committee may, at its discretion, allow the exercise price of stock
options to be paid, in whole or in part, by tendering previously acquired shares
that have been held by the option holder for at least six months.
   F -
13
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  The
following table summarizes activity under our stock incentive plan for the year
ended December 31, 2008:
  Number
                  Of
      Shares
                
                
                Weighted
      Average Exercise Price
                
                Weighted
                  Average
      Remaining Contract Term
                
                Aggregate
      Intrinsic Value
                  (in
      thousands)Outstanding,
      January 1, 2008
                
                
                1,879,564
                
                
                $
                3.41Granted
                
                
                440,000
                
                
                
                3.19Exercised
                
                
                (165,159
                )
                
                
                2.76Forfeited
                
                
                (47,378
                )
                
                
                3.73Expired
                
                
                (288,883
                )
                
                
                2.76Outstanding,
      December 31, 2008
                
                
                1,818,144
                
                
                $
                3.65
                
                2.9
      years
                
                $
                —Options
      at December 31, 2008Exercisable
      and expected to become exercisable
                
                
                1,781,781
                
                
                $
                3.65
                
                2.9
      years
                
                $
                —Exercisable
                
                
                985,746
                
                
                $
                3.71
                
                2.4
      years
                
                $
                —
  The
number of options outstanding at January 1, 2008 in the table above includes
178,000 options with exercise prices of $3.00 per share that
were  deemed to have been granted in November 2006 as discussed in
Note 4.
  During
fiscal year 2008, in connection with certain stock option exercises, employees
surrendered 89,831 shares ($399,463 fair market value) and 19,808 shares
($88,098 fair market value) of common stock as payment for the exercise prices
and related withholding tax obligations, respectively, of such
options.
  The
aggregate intrinsic values as of December 31, 2008 in the table above are zero
because the exercise prices of all outstanding options exceeded Aetrium’s
closing stock price at that date.  The total intrinsic value of
options exercised during the year ended December 31, 2008 was approximately
$270,000.  The total fair value of options vested during the year
ended December 31, 2008 was approximately $602,000.
  The
following table summarizes information related to stock options outstanding at
December 31, 2008, 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, 100,000 options were initially scheduled to become exercisable over
four years from date of grant and were subsequently modified in the second
quarter of 2005 to become fully exercisable to the extent not then exercisable,
and 1,438,644 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$
                  3.00
      to 3.13
                  
                  
                  
                  834,437
                  
                  3.1
      years
                  
                  $
                  3.08
                  
                  
                  
                  444,379
                  
                  
                  $
                  3.073.87 to 4.81
                  
                  
                  
                  983,707
                  
                  2.8
      years
                  
                  
                  4.14
                  
                  
                  
                  541,367
                  
                  
                  
                  4.24$
                  3.00
      to 4.81
                  
                  
                  
                  1,818,144
                  
                  2.9
      years
                  
                  $
                  3.65
                  
                  
                  
                  985,746
                  
                  
                  $
                  3.71
  
   F -
14
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
   NOTE
12: 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.  Aetrium contributed $103,251 and
$90,561, respectively, to the plan in 2008 and 2007.
  NOTE
13: INCOME TAXES
  Income
tax benefit consists of the following components (in thousands):
  Year
      ended December 31,
                  
                  2008
                  
                  
                  2007Current
      tax expense:Federal
                  
                  $
                  —
                  
                  
                  $
                  62State
                  
                  
                  6
                  
                  
                  
                  8Total
      current expense
                  
                  
                  6
                  
                  
                  
                  70Deferred
      tax benefit:Federal
                  
                  
                  (283
                  )
                  
                  
                  (2,213
                  )State
                  
                  
                  (34
                  )
                  
                  
                  (104
                  )Total
      deferred benefit
                  
                  
                  (317
                  )
                  
                  
                  (2,317
                  )Total
      income tax benefit
                  
                  $
                  (311
                  )
                  
                  $
                  (2,247
                  )
 
 A
reconciliation of income tax expense (benefit) computed using the federal
statutory rate to the income tax benefit reported in our consolidated statements
of operations is as follows (in thousands):
  Year
      ended December 31,
                  
                  2008
                  
                  
                  2007Tax
      computed at federal statutory rate
                  
                  $
                  (314
                  )
                  
                  $
                  1,513State
      taxes, net of federal benefit
                  
                  
                  (48
                  )
                  
                  
                  126Increase
      (decrease) in tax from:Business
      meals and entertainment
                  
                  
                  15
                  
                  
                  
                  18Tax
      credits
                  
                  
                  23
                  
                  
                  
                  22Valuation
      allowance change
                  
                  
                  —
                  
                  
                  
                  (3,964
                  )Other,
      net
                  
                  
                  13
                  
                  
                  
                  38Reported
      income tax benefit
                  
                  $
                  (311
                  )
                  
                  $
                  (2,247
                  )
 
 Deferred
tax assets are comprised of the following (in thousands):
  December
      31,
                  
                  2008
                  
                  
                  2007Accounts
      receivable
                  
                  $
                  15
                  
                  
                  $
                  17Inventories
                  
                  
                  643
                  
                  
                  
                  711Employee
      compensation and benefits
                  
                  
                  428
                  
                  
                  
                  229Amortization
      of intangibles
                  
                  
                  599
                  
                  
                  
                  892NOL
      and tax credit carryforwards
                  
                  
                  22,489
                  
                  
                  
                  21,969Severance
      and related cost accruals
                  
                  
                  36
                  
                  
                  
                  33Warranty
      accrual
                  
                  
                  47
                  
                  
                  
                  99Other,
      net
                  
                  
                  38
                  
                  
                  
                  46Deferred
      tax assets
                  
                  $
                  24,295
                  
                  
                  $
                  23,996Less,
      valuation allowance
                  
                  
                  (21,679
                  )
                  
                  
                  (21,679
                  )Net
      deferred tax assets
                  
                  $
                  2,616
                  
                  
                  $
                  2,317
 
  F -
15
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  Deferred
tax assets are classified in our consolidated balance sheet as follows (in
thousands):
 December
      31,
                      
                      2008
                      
                      
                      2007Current
      assets
                      
                      $
                      127
                      
                      
                      $
                      315Noncurrent
      assets
                      
                      
                      2,489
                      
                      
                      
                      2,002Total
                      
                      $
                      2,616
                      
                      
                      $
                      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 $25.6 million to fully reserve our deferred tax
assets.  At December 31, 2007, we reduced the valuation allowance to
approximately $21.7 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 involved 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.
  At
December 31, 2008, we assessed the realizability of our deferred tax assets and
the amount of our valuation allowance.  Based on our evaluation of
future profit potential and other relevant factors, we determined that there was
not sufficient positive or negative evidence to warrant an increase or decrease
in the amount of the valuation allowance and that a valuation allowance of $21.7
million was appropriate at December 31, 2008. 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.
  Aetrium
has federal net operating loss carryforwards of approximately $62 million that
will begin to expire in 2020 if not utilized.  We also have state net
operating loss carryforwards of approximately $22 million that will expire at
various times, beginning in 2009, if not utilized.  We also have
federal and state research tax credit and alternative minimum tax credit
carryforwards of approximately $1.3 million that will expire at various times,
beginning in 2013, if not utilized.  The utilization of net operating
loss carryforwards and research tax credit carryforwards may be subject to
annual limitations in the event of future changes in ownership pursuant to the
requirements of Section 382 of the Internal Revenue Code. Such limitations could
result in the expiration of net operating loss and tax credit carryforwards
before utilization.
  Our
federal and state operating loss carryforwards include losses related to
windfall tax deductions from stock option exercises.  In accordance
with SFAS 123R, the amount of windfall tax benefit recognized in additional
paid-in capital is limited to the amount of benefit realized in income taxes
payable.  As of
   F -
16
  December
31, 2008 and 2007, Aetrium had suspended additional paid-in capital credits of
$1.2 million and $1.1 million respectively. Upon realization of the net
operating loss carryforwards from such windfall tax deductions, we would record
a benefit of approximately $1.2 million in additional paid-in
capital.
  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 record 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.  At the adoption date, we applied FIN 48 to all tax
positions for which the statute of limitations remained open.  As a
result of the implementation of FIN 48, we did not record a liability for
unrecognized income tax benefits.  Aetrium does not have any
unrecognized tax benefits as of December 31, 2008 or December 31,
2007.
  Aetrium
is subject to income tax examinations in the U.S. federal and certain state
jurisdictions.  There are currently no income tax examinations in
progress.  Federal and state income tax returns are subject to review
for fiscal years 2005 through 2008.
  If
applicable, interest expense and penalties related to income taxes are included
in income tax expense.
  NOTE
14: 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,
                  
                  2008
                  
                  
                  2007Test
      handler products
                  
                  
                  59
                  %
                  
                  
                  69
                  %Reliability
      test equipment products
                  
                  
                  15
                  
                  
                  
                  17Change
      kits and spare parts
                  
                  
                  26
                  
                  
                  
                  14Total
                  
                  
                  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,
                  
                  2008
                  
                  
                  2007United
      States
                  
                  $
                  2,625
                  
                  
                  $
                  6,685Malaysia
                  
                  
                  7,986
                  
                  
                  
                  9,296Philippines
                  
                  
                  3,017
                  
                  
                  
                  5,948Thailand
                  
                  
                  163
                  
                  
                  
                  2,021Other
      foreign countries
                  
                  
                  3,426
                  
                  
                  
                  4,040Total
                  
                  $
                  17,217
                  
                  
                  $
                  27,990
 
  F -
17
 AETRIUM
INCORPORATED
  Notes
to Consolidated Financial Statements
  Sales to
customers comprising more than 10% of our total net sales and accounts
receivable from customers comprising more than 10% of our total accounts
receivable are summarized below:
  Percent
      of total sales for
                    year
      ended December 31,
                  
                  
                  Percent
      of total accounts
                    receivable
      as of December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Customer
      A
                  
                  
                  40
                  %
                  
                  
                  37
                  %
                  
                  
                  *
                  
                  
                  
                  49
                  %Customer
      B
                  
                  
                  25
                  %
                  
                  
                  40
                  %
                  
                  
                  61
                  %
                  
                  
                  32
                  %Customer
      C
                  
                  
                  11
                  %
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  *Customer
      D
                  
                  
                  *
                  
                  
                  
                  *
                  
                  
                  
                  14
                  %
                  
                  
                  14
                  %
 ______________
 * Percent
was less than 10% of the total.
  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 -
18
  
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
  AETRIUM
      INCORPORATEDDate:  March
      30, 2009
                  By:  /s/ Joseph C.
      LevesqueJoseph
      C. LevesqueChief
      Executive Officer and President(principal
      executive officer)By:/s/ Paul H.
      AskegaardPaul
      H. AskegaardTreasurer(principal
      financial and accounting
officer)
  
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on March 30, 2009 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/ Daniel A. Carr
              
              DirectorDaniel
      A. Carr/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, 2008
 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
                            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).10.2
                            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).10.3
                            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).10.4
                            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).10.5
                            Form
      of Amendments to Change of Control Agreement
                            Incorporated
      by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the
      year ended December 31, 2007 (File No. 0-22166).10.6
                            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).
  E -
1
   
  10.7
                            Business
      Loan Agreement, dated October 24, 2008, between Bremer Bank and
      us.
                            Incorporated
      by reference to Exhibit 20.26 to our Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2008 (File No. 0-22166).10.8
                            Note,
      dated October 24, 2008, issued by us to Bremer Bank.
                            Incorporated
      by reference to Exhibit 20.27 to our Quarterly Report on Form 10-Q for the
      quarter ended September 30, 2008 (File No. 0-22166).10.9
                            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).10.10
                            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).10.11
                            Executive
      Officer Profit Sharing Program.
                            Incorporated
      by reference to Exhibit 10.1 to our Current Report on Form 8-K dated
      January 23, 2007 (File No. 0-22166).14.1
                            Code
      of Business Conduct and Ethics.
                            Incorporated
      by reference to Exhibit 14.1 to our Annual Report on Form 10-K for the
      year ended December 31, 2003 (File No. 0-22166).21.1
                            Subsidiaries
      of the Registrant.
                            Incorporated
      by reference to Exhibit 21.1 to our Annual Report on Form 10-K for the
      year ended December 31, 2007 (File No. 0-22166).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.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 -
2
  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:2007
                  
                  $
                  46
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  462008
                  
                  
                  46
                  
                  
                  
                  (6
                  )
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  40Inventory
      excess and obsolescence reserve (1):2007
                  
                  $
                  1,669
                  
                  
                  $
                  179
                  
                  
                  $
                  0
                  
                  
                  $
                  (88
                  )
                  
                  $
                  1,7602008
                  
                  
                  1,760
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  (198
                  )
                  
                  
                  1,562Valuation
      allowance on deferred tax assets:2007
                  
                  $
                  25,643
                  
                  
                  $
                  (3,964
                  )
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  21,6792008
                  
                  
                  21,679
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  21,679
  (1)
              Deductions
      represent disposals of reserved
inventory.
   S -
1