** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**
| **x**                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **For the  quarterly period ended July 1, 2006**                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **OR**                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **For the  transition period from                                     to                                    ** |

 

**CommissionFile No. 0-22384**

**MICROCOMPONENT TECHNOLOGY, INC.**

(Exact name ofregistrant as specified in its charter)

| **Minnesota**                    | ** ** | **41-0985960**       |
|----------------------------------|------------|----------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

**2340 WestCounty Road C, St. Paul, MN 55113-2528**(Address of principal executive offices)

**(651)697-4000**(Registrant’s telephone number)

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days

Yes           x               No          o          

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

Large Accelerated Filer o    Accelerated Filer o     Non-Accelerated Filer x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o  No x

The number of sharesoutstanding of the Registrant’s Common Stock, as of August 10, 2006 was 29,212,041.

 

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**MICRO COMPONENT TECHNOLOGY, INC**.

FORM 10-Q

TABLE OF CONTENTS
| **PART I - FINANCIAL  INFORMATION** | ** ** |
|-------------------------------------|------------|
|                                |       | ** ** |
|                                | ITEM 1.    | FINANCIAL STATEMENTS | ** ** |
|                                |       |   | ** ** |
|                                |       | CONSOLIDATED  BALANCE SHEETS |   |
|                                |       |   |   |
|                                |       | CONSOLIDATED  STATEMENTS OF OPERATIONS |   |
|                                |       |   |   |
|                                |       | CONSOLIDATED  STATEMENTS OF CASH FLOWS |   |
|                                |       |   |   |
|                                |       | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS |   |
|                                |       |   |   |
|                                | ITEM 2.    | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION | ** ** |
|                                |       |   |   |
|                                | ITEM 3.    | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |   |
|                                |       |   |   |
|                                | ITEM 4.    | CONTROLS AND PROCEDURES |   |
|                                |       |   |   |
| **PART  II. OTHER INFORMATION**     | ** ** |
|                                |       |   |   |
|                                | ITEM 4.    | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS |   |
|                                |       |   |   |
|                                | ITEM  6.   | EXHIBITS |   |
|                                |       |   |
|                                | SIGNATURES |   |

 

2

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**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**FORM 10-Q

# PART I.  FINANCIAL INFORMATION

## ITEM 1.  FINANCIAL STATEMENTS

## CONSOLIDATED BALANCE SHEETS

(In thousands,except share and per share data)

(Unaudited)
| ** **                                                                                            | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| **Assets**                                                                                            |       |             |       |                  |       |
| Current assets                                                                                        |       |             |       |                  |       |
| Cash and cash  equivalents                                                                            |       | $                | 1,425      |                  | $          | 77 |   |
| Accounts  receivable, less allowance for doubtful accounts of $127 and $148,  respectively            |       | 2,315            |       | 1,661                 |       |
| Inventories                                                                                           |       | 2,608            |       | 2,194                 |       |
| Other                                                                                                 |       | 216              |       | 169                   |       |
| Total current  assets                                                                                 |       | 6,564            |       | 4,101                 |       |
|                                                                                                  |       |             |       |                  |       |
| Property, plant and  equipment, net                                                                   |       | 115              |       | 148                   |       |
|                                                                                                  |       |             |       |                  |       |
| Debt issuance costs,  net of accumulated amortization of $1,297 and $1,005, respectively              |       | 332              |       | 276                   |       |
| Other assets                                                                                          |       | 16               |       | 21                    |       |
|                                                                                                  |       |             |       |                  |       |
| Total assets                                                                                          |       | $                | 7,027      |                  | $          | 4,546 |   |
|                                                                                                  |       |             |       |                  |       |
| **Liabilities and Stockholders’  Deficit**                                                       |       |             |       |                  |       |
| Current liabilities:                                                                                  |       |             |       |                  |       |
| Current portion  of long-term debt, net of discounts of $68 and $0, respectively                      |       | $                | 4,017      |                  | $          | 133 |   |
| Bank line of  credit, net of discounts of $0 and $42, respectively                                    |       | 3,590            |       | 2,630                 |       |
| Accounts payable                                                                                      |       | 829              |       | 425                   |       |
| Accrued  compensation                                                                                 |       | 376              |       | 382                   |       |
| Accrued interest                                                                                      |       | 253              |       | 234                   |       |
| Accrued warranty                                                                                      |       | 108              |       | 153                   |       |
| Customer  prepayments and unearned service revenue                                                    |       | 610              |       | 152                   |       |
| Other accrued liabilities                                                                             |       | 203              |       | 180                   |       |
| Total current  liabilities                                                                            |       | 9,986            |       | 4,289                 |       |
|                                                                                                  |       |             |       |                  |       |
| Long-term debt, net of  discounts of $956 and 545, respectively                                       |       | 4,053            |       | 3,683                 |       |
| 10% senior subordinated  convertible debt                                                             |       | —           |       | 3,630                 |       |
| Total liabilities                                                                                     |       | 14,039           |       | 11,602                |       |
|                                                                                                  |       |             |       |                  |       |
| Stockholders’ deficit:                                                                           |       |             |       |                  |       |
| Preferred stock,  $.01 par value, 1,000,000 authorized, none issued and outstanding                   |       | —           |       | —                |       |
| Common stock,  $.01 par value, 55,000,000 authorized, 27,550,638 and 26,215,388 issued,  respectively |       | 276              |       | 262                   |       |
| Additional  paid-in capital                                                                           |       | 98,776           |       | 97,670                |       |
| Accumulated  deficit                                                                                  |       | (106,064         | )          | (104,988              | )          |
| Total  stockholders’ deficit                                                                     |       | (7,012           | )          | (7,056                | )          |
| Total liabilities and stockholders’ deficit                                                      |       | $                | 7,027      |                  | $          | 4,546 |   |

 

See notes tounaudited condensed consolidated financial statements

3

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**MICROCOMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands,except per share data)

(Unaudited)
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | **July 1,** | ** ** | **June 25,** | ** ** |
| ** **                                                  | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net sales                                                   |       | $                                | 3,676      |                           | $          | 1,322 |   | $ | 6,051 |   | $ | 3,282 |   |
| Cost of sales                                               |       | 1,619                            |       | 869                            |       | 2,799 |   | 1,926 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                                |       | 2,057                            |       | 453                            |       | 3,252 |   | 1,356 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                                         |       |                             |       |                           |       |   |   |   |   |
| Selling, general  and administrative                        |       | 1,038                            |       | 1,145                          |       | 1,985 |   | 2,276 |   |
| Research and  development                                   |       | 525                              |       | 491                            |       | 1,043 |   | 1,079 |   |
| Restructuring  charge                                       |       | —                           |       | 66                             |       | — |   | 66 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Total operating  expenses                                   |       | 1,563                            |       | 1,702                          |       | 3,028 |   | 3,421 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Income (loss) from  operations                              |       | 494                              |       | (1,249                         | )          | 224 |   | (2,065 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Interest income                                             |       | 3                                |       | 7                              |       | 5 |   | 8 |   |
| Interest expense  and other, net                            |       | (476                             | )          | (314                           | )          | (1,291 | ) | (552 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Total interest and  other                                   |       | (473                             | )          | (307                           | )          | (1,286 | ) | (544 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)  before income tax                        |       | 21                               |       | (1,556                         | )          | (1,062 | ) | (2,609 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Income tax  expense                                         |       | (14                              | )          | —                         |       | (14 | ) | — |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income (loss)                                           |       | $                                | 7          |                           | $          | (1,556 | ) | $ | (1,076 | ) | $ | (2,609 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income (loss) per  share:                               |       |                             |       |                           |       |   |   |   |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                       |       | $                                | 0.00       |                           | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.10 | ) |
| Diluted                                                     |       | $                                | 0.00       |                           | $          | (0.06 | ) | $ | (0.04 | ) | $ | (0.10 | ) |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average common  and equivalent shares outstanding: |       |                             |       |                           |       |   |   |   |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic                                                       |       | 27,490                           |       | 25,567                         |       | 27,357 |   | 25,567 |   |
| Diluted                                                     |       | 27,490                           |       | 25,567                         |       | 27,357 |   | 25,567 |   |

 

See notes to unaudited condensed consolidatedfinancial statements

4

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**MICRO COMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **July 1,**               | ** ** | **June 25,** | ** ** |
| ** **                                                                   | ** ** | **2006**                       | ** ** | **2005** | ** ** |
|                                                                         |       |                           |       |   |   |
| Cash flows from  operating activities:                                       |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (1,076     | ) | $ | (2,609 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                               |       | 719                            |       | 317 |   |
| Changes in  assets and liabilities:                                          |       |                           |       |   |   |
| Accounts  receivable                                                         |       | (654                           | )          | 883 |   |
| Inventories                                                                  |       | (414                           | )          | 147 |   |
| Other assets                                                                 |       | (42                            | )          | 6 |   |
| Accounts payable                                                             |       | 404                            |       | (299 | ) |
| Other accrued  liabilities                                                   |       | 598                            |       | 6 |   |
| Net cash used in  operating activities                                       |       | (465                           | )          | (1,549 | ) |
|                                                                         |       |                           |       |   |   |
| Cash flows from  investing activities:                                       |       |                           |       |   |   |
| Purchases of  property, plant, and equipment                                 |       | (11                            | )          | (12 | ) |
|                                                                         |       |                           |       |   |   |
| Net cash used in  investing activities                                       |       | (11                            | )          | (12 | ) |
|                                                                         |       |                           |       |   |   |
| Cash flows from  financing activities:                                       |       |                           |       |   |   |
| Repayment of  long term note                                                 |       | (4000                          | )          | (67 | ) |
| Proceeds on long  term note, net of discounts                                |       | 4,924                          |       | — |   |
| Proceeds on  institutional line of credit, net of discounts                  |       | 850                            |       | 398 |   |
| Issuance of  long-term convertible note, net of debt issue costs             |       | —                         |       | 2,396 |   |
| Proceeds from issuance  of stock, net of issuance costs                      |       | 50                             |       | (16 | ) |
|                                                                         |       |                           |       |   |   |
| Net cash provided by  financing activities                                   |       | 1,824                          |       | 2,711 |   |
|                                                                         |       |                           |       |   |   |
| Net increase in cash  and cash equivalents                                   |       | 1,348                          |       | 1,150 |   |
|                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 77                             |       | 166 |   |
|                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                              | 1,425      |   | $ | 1,316 |   |
|                                                                         |       |                           |       |   |   |
| Supplemental cash flow  information:                                         |       |                           |       |   |   |
|                                                                         |       |                           |       |   |   |
| Non-cash  financing activities:                                              |       |                           |       |   |   |
| Stock issued in  lieu of interest                                            |       | $                              | 149        |   | $ | — |   |
| Stock issued in  conversion of 10% senior subordinated convertible debt      |       | 100                            |       | — |   |
| Cash paid for interest                                                       |       | $                              | 492        |   | $ | 93 |   |

 

See notes to unauditedcondensed consolidated financial statements

5

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**MICRO COMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

**1.****         INTERIMFINANCIAL STATEMENTS**

*Basis of Presentation*

The consolidated financial statements include theaccounts of the parent company and our subsidiaries after elimination of allsignificant intercompany balances and transactions.  All significant subsidiaries are 100% owned.

The unaudited consolidated financial statementsincluded herein have been prepared in accordance with accounting principlesgenerally accepted in the United States (generally accepted accountingprinciples) for interim financial information and with the instructions forForm 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  In the opinion ofmanagement all adjustments, including normal recurring adjustments, necessaryfor a fair presentation of the interim periods presented have beenincluded.  The interim results are notnecessarily indicative of the operating results expected for the full fiscalyear ending on December 31, 2006.

Our consolidated financial statements have beenprepared on the assumption that we will continue as a going concern, whichcontemplates the realization of assets and liquidation of liabilities in thenormal course of business. The Report of the Independent Registered PublicAccounting Firm on the financial statements of the Company as of and for thefiscal year ended December 31, 2005 included in Form 10-K contained anexplanatory paragraph that expresses substantial doubt about our ability tocontinue as a going concern.   The financialstatements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the outcome of thisuncertainty.

As ofJuly 1, 2006, the Company had an accumulated deficit of $106.1 million andincurred a net loss of $1.1 million for the six-month period ended July 1,2006.  As of July 1, 2006, the Companyhad cash and cash equivalents of $1.4 million, working capital of negative $3.4million, a current ratio of negative 0.59, total assets of $7.0 million andtotal liabilities of $14.0 million.  Ourability to generate cash and operating income is dependent on increasing ourcustomer base to expand the penetration of our product technology and therealization of our lower operating expense targets.

Asdiscussed in Note 4, on February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million from $7.0 million.  The restructured financing now includesa $5.25 million term note.  Interest is payable

6

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monthly on the term note at the prime rate plus 2.5%. Beginning 360 days after closing, we are required to make monthly paymentsequal to 1/60th of the principal amount until three years after the closing, atwhich time the entire remaining principal and accrued interest is due andpayable in full.  The note is non-convertible.  In addition to the$5.25 million note, the working capital line of credit was increased from $3.0million to $4.0 million, and made non-convertible.  The note is payable infull on March 8, 2008.  Interest is payable monthly on the note at theprime rate plus 2.5%.  The existing $1.2 million over-advance in excess ofthe borrowing base on the working capital line of credit was extended untilApril 30, 2007.  However, commencing on December 1, 2006, the over-advanceis to be reduced by $200,000 each month.  The Company also issued Laurus a10-year option to purchase 2,500,000 shares at an exercise price of $.01 pershare.  The shares issuable upon exercise of the option have standardregistration rights.  As a result of the newfinancing with Laurus, the conversion price for all of the Noteholders whoaccepted the prior restructuring agreements has been reduced to $0.56 pershare.

Interim unauditedfinancial results should be read in conjunction with the audited financialstatements included in the SEC Report on Form 10-K, for the period endedDecember 31, 2005.

**2.****         EARNINGSPER SHARE**

Basic earnings per shareare computed using the weighted average number of common shares outstandingduring each period.  Diluted earnings pershare include the dilutive effect of common shares potentially issuable uponthe exercise of stock options, warrants and the 10% Senior SubordinatedConvertible Notes outstanding.  Thefollowing table reconciles the denominators used in computing basic and dilutedearnings per share:
|                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | **July 1,** | ** ** | **June 25,** | ** ** |
| **(in thousands)**                        | ** ** | **2006**                         | ** ** | **2005 (1)**              | ** ** | **2006 (1)** | ** ** | **2005 (1)** | ** ** |
| Weighted average  common shares outstanding    |       | 27,490                           |       | 25,567                         |       | 27,357 |   | 25,567 |   |
| Effect of  dilutive stock options and warrants |       | —                           |       | —                         |       | — |   | — |   |
|                                           |       | 27,490                           |       | 25,567                         |       | 27,357 |   | 25,567 |   |

 

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(1)           We reported a loss forthe period indicated.  No adjustmentswere made for the effect of stock options and warrants, which represented7,159,898 and 5,391,898 shares at July 1, 2006 and June 25, 2005, respectively,as the effect is antidilutive.

**3.****         BALANCESHEET INFORMATION**

Major components ofinventories were as follows (in thousands):
|                 | ** ** | **July 1,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**         | ** ** | **2005**              | ** ** |
| Raw materials   |       | $                | 1,932      |                  | $          | 1,783 |   |
| Work-in-process |       | 654              |       | 394                   |       |
| Finished goods  |       | 22               |       | 17                    |       |
|            |       | $                | 2,608      |                  | $          | 2,194 |   |

 

7

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In accordance with accounting principles generallyaccepted in the United States of America, we value our inventories at the lowerof cost or market.

The following table provides the inventory reserves for thequarter ended July 1, 2006.
| Inventory reserve balance at  December 31, 2005 |   | $      | 7,401  |   |
|-------------------------------------------------|--------|--------|--------|--------|
| Release of  inventory reserve on sale of goods  |   | — |   |
| Release of  inventory reserve on scrap of goods |   | (101   | )      |
| Additional  inventory reserve                   |   | — |   |
| Inventory reserve  balance at July 1, 2006      |   | $      | 7,300  |   |

 

Weprovide a standard thirteen month warranty program for our equipment products.We record provisions for warranty claims for these products based uponhistorical claim performance.  Thefollowing table provides the expense recorded and charges against our reservesfor the quarter ended July 1, 2006.
| Accrued warranty balance at  December 31, 2005 |   | $   | 153    |   |
|------------------------------------------------|--------|-----|--------|--------|
| Provision                                      |   | 7   |   |
| Warranty claims                                |   | (52 | )      |
| Accrued warranty  balance at July 1, 2006      |   | $   | 108    |   |

 

**4.**         **FINANCING TRANSACTIONS**

On March 9, 2004, we completeda $5.0 million financing transaction with an institutional lender, LaurusMaster Fund, Ltd. (“Laurus”), secured by all of the assets of the Company. Thefinancing included a $3.0 million working capital line of credit and a $2.0million long-term note. The notes were partially convertible into shares of ourcommon stock. In connection with the transaction, we issued to Laurus aseven-year warrant to purchase 400,000 shares of common stock at exerciseprices ranging from $2.30 to $2.88 per share. The secured loan in existence atthat time with a prior lender was terminated.

On January 28, 2005, wecompleted an amendment to the financing agreement with Laurus to defer paymentson the long-term convertible note. As part of this amendment, the conversionprices on both notes were reduced. We also issued Laurus at that time aseven-year warrant to purchase 150,000 shares of common stock at $.67 pershare.

On April 29, 2005, wecompleted another financing transaction with Laurus in which we borrowed anadditional $2.5 million, and which was convertible into shares of common stock.We also issued Laurus at that time an option to purchase 2,556,651 shares ofcommon stock at an exercise price of $.01 per share. We received net proceedsof approximately $2.4 million at the closing.

On February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million. The restructured financing now includes a $5.25 million termnote. Interest is payable monthly on the term note at the prime rate plus 2.5%.Beginning 360 days after closing, we are required to make monthly paymentsequal to 1/60th of the principal amount until three years after the closing, atwhich time the entire

8

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remaining principal and accrued interest is due and payable infull. The note is non-convertible. In addition to the $5.25 million note, theworking capital line of credit was increased from $3.0 million to $4.0 million,and made non-convertible. The note is payable in full on March 8, 2008.Interest is payable monthly on the note at the prime rate plus 2.5%. Theexisting $1.2 million over-advance in excess of the borrowing base on theworking capital line of credit was extended until April 30, 2007. However,commencing on December 1, 2006, the over-advance is to be reduced by $200,000each month. The Company also issued Laurus a 10-year option to purchase2,500,000 shares at an exercise price of $.01 per share. The shares issuableupon exercise of the option have standard registration rights.  As a result of the new financing with Laurus,the conversion price for all of the Noteholders who accepted the priorrestructuring agreements has been reduced to $0.56 per share.

**5.**         **STOCK BASED COMPENSATION**

The Company adopted Statement of Financial AccountingStandards (SFAS) No. 123R “Share-Based Payment”, on January 1, 2006.  This statement requires us to recognize thecost of employee and director services received in exchange for the stockoptions it has awarded.  Under SFAS 123R,we are required to recognize compensation expense over an award’s vestingperiod based on the award’s fair value at the date of grant.  We have elected to adopt SFAS 123R on amodified prospective basis; accordingly the financial statements for periodsprior to January 1, 2006 do not include stock-based compensation costscalculated under the fair value method. As a result of the adoption of SFAS 123R, we incurred a compensationexpense of $4,000 for the three months and six months ended July 1, 2006.

If compensation cost for our stock option and employeestock purchase plans had been accounted for in accordance with SFAS 123R, thethree and six month periods ended June 25, 2005 would have been as follows:
|                                                        | ** ** | **Three**                   | ** ** | **Six**                     | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **Months Ended**       | ** ** | **Months Ended**       | ** ** |
| ** **                                             | ** ** | **June 25, 2005** | ** ** | **June 25, 2005** | ** ** |
| Net income  (loss):                                    |       |                        |       |                        |       |
| As reported                                            |       | $                           | (1,556     | )                           | $          | (2,609 | ) |
| Fair value compensation expense                        |       | (8                          | )          | (164                        | )          |
| Pro forma                                              |       | $                           | (1,564     | )                           | $          | (2,773 | ) |
|                                                   |       |                        |       |                        |       |
| Net income  (loss) per share – basic and diluted: |       |                        |       |                        |       |
| As reported                                            |       | $                           | (0.06      | )                           | $          | (0.10 | ) |
| Fair value compensation expense                        |       | —                      |       | (0.01                       | )          |
| Pro forma                                              |       | $                           | (0.06      | )                           | $          | (0.11 | ) |
|                                                   |       |                        |       |                        |       |
| Stock based  compensation:                             |       |                        |       |                        |       |
| As reported                                            |       | $                           | —     |                        | $          | — |   |
| Fair value compensation expense                        |       | (8                          | )          | (164                        | )          |
| Pro forma                                              |       | $                           | (8         | )                           | $          | (164 | ) |

 

9

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The fair value of options granted under the stockoptions for the three months and six months ended July 1, 2006 and June 25,2005 was estimated on the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions.
|                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **July 1,**                 | ** ** | **June 25,**              | ** ** | **July1,** | ** ** | **June 25,** | ** ** |
| ** **                               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                     |       |                             |       |                           |       |   |   |   |   |
| Dividend yield                           |       | 0.00                             | %          | 0.00                           | %          | 0.00 | % | 0.00 | % |
| Expected  volatility                     |       | 91.89                            | %          | 111.15                         | %          | 91.89 | % | 89.70 | % |
| Risk-free  interest rate                 |       | 4.99                             | %          | 3.75                           | %          | 4.99 | % | 3.88 | % |
| Expected life of  options                |       | 3.5 years                        |       | 3.5 years                      |       | 3.5 years |   | 3.5 years |   |
| Fair value per share of  options granted |       | $                                | 0.32       |                           | $          | 0.20 |   | $ | 0.32 |   | $ | 0.22 |   |
|                                          |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

**6.**         **RECENT ACCOUNTING PRONOUNCEMENTS**

***SFAS No. 154, Accounting Changes and Error Corrections. *** In June 2005, FASB issued SFAS No. 154, “*Accounting Changes and Error Corrections*”,a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statementapplies to all voluntary changes in accounting principle, and changes therequirements for accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.  Earlier application ispermitted for accounting changes and corrections of errors made occurring infiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofthe effective date of this statement. The Company does not expect the adoption of SFAS No. 154 to have amaterial effect on its financial statements.

***SFAS No. 123(revised 2004), Share-Based Payment***.  In December 2004, FASB issued SFAS No.123 (revised 2004), *Share-Based Payment*,that focuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions.  This statementreplaces SFAS No. 123, *Accounting forStock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*.  As discussed in Note 5, we implemented SFASNo. 123R on January 1, 2006.  We do notexpect the adoption of SFAS No. 123R to have a material effect on our financialstatements.

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## ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITION

*This Report on Form 10-Q containsforward-looking statements that have been made pursuant to the provisions ofthe Private Securities Litigation Reform Act of 1995.  These forward-looking statements are nothistorical facts, but rather are based on our current expectations, estimatesand projections about the semiconductor capital equipment industry, and ourbeliefs and assumptions.   We intendwords such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”“estimates” and similar expressions to identify forward-looking statements.  These statements are not guarantees of futureperformance and are subject to certain risks, uncertainties and other factors,some of which are beyond our control and are difficult to predict.  These factors could cause actual results todiffer materially from those expressed or forecasted in the forward-lookingstatements.  These risks anduncertainties are described elsewhere in this report on Form 10-Q and ourreport on Form 10-K for the year ended December 31, 2005.  We caution you not to place undue reliance onthese forward-looking statements, which reflect our management’s view only asof the date of this Report on Form 10-Q. We are not obligated to update these statements or publicly release theresult of any revisions to them to reflect events or circumstances after thedate of this Report on Form 10-Q or to reflect the occurrence of unanticipatedevents.*

*Overview*

We supply equipment automation solutions for the globalsemiconductor test and assembly manufacturing market.  Our solutions include automated test handlers,factory automation software and our new integrated Smart Solutions equipmentproduct line.  We believe that ourproducts can significantly improve the productivity, yield and throughput ofthe back-end, or to the post-wafer manufacturing process, including assembling,packaging, testing and singulating semiconductor devices.

Beginning in 1999 and continuing into 2000, we broadened our strategyfrom that of a test handler manufacturer to becoming a provider ofcomprehensive equipment automation solutions for the back-end of the semiconductormanufacturing process.  First, wedeveloped and introduced in February 1999 our Tapestry strip handler.  Tapestry combines strip handling capabilitywith robotics, machine vision technology and critical software, enabling thetesting and tracking of semiconductor devices in strip form and the generationof critical process data throughout the test process.  Second, in June 1999 we acquired the InfinitySystems division of Fico.  InfinitySystems has been involved in the development of factory automation software forthe semiconductor manufacturing industry. Infinity Systems’ software expertise was integral to the development ofour integrated Smart Solutions equipment product line, introduced in May2000.  Together with a third partytester, our Smart Solutions equipment products including our Tapestry handlerenable complete automation of the test, laser mark, mark inspect and other processesof the back end.

The demand for our products and services is dependent upongrowth in the semiconductor industry and the increasing automation needs ofsemiconductor manufacturers and independent test and assembly facilities.  In the fourth quarter of 2000, thesemiconductor industry went into a sharp downturn, which continued through2005, and began to improve in 2006. However, the level of improvement and the ability for the market tosustain an improvement continues to be uncertain.  Therefore, we will continue to monitor themarket and if

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required, examine opportunities to further reduce our coststhrough further consolidation of operations, limiting capital expenditures, monitoringinventory purchases and additional strategic restructuring initiatives.  Certain of these types of actions have thepotential for further charges in future periods.  The impact of a renewed contraction of thesemiconductor capital equipment market has the potential to have a materialadverse effect on our financial condition, results of operations, and cashflows.

**Critical Accounting Policies**

*Revenue Recognition*

Under SAB 101, we recognize revenue upon shipment, as our terms are FOBshipping point, for established equipment products that have previouslysatisfied existing customer performance specifications and that provide forfull payment tied to shipment.  Revenuefor products that have not previously satisfied customer performancespecifications or from sales where all or a portion of customer payment isbased upon acceptance are only recognized upon customer acceptance.  As such, in periods of increasing shipments,revenues will be deferred if the shipments are for new customers, new productsor the payment terms are tied to acceptance criteria.  Consequently, if these conditions exist, wemay report revenue levels that are not reflective of actual shipment growthrates.  Conversely, in periods ofdecreasing shipments, we potentially could recognize revenues related toshipments made in prior periods. Consequently, if these conditions exist, we may report revenue levelsthat are greater than actual shipments. During the quarter ended July 1, 2006, we have $437,000 deferred revenuein excess of costs under the SAB 101 revenue recognition rule.

*Allowance forDoubtful Accounts*

We record a provision for doubtful accounts based on specificidentification of our accounts receivable. This involves a degree of judgmentbased on discussion with our internal sales and marketing groups, our customerbase and the examination of the financial stability of our customers.  There can be no assurance that our estimateswill match actual amounts ultimately written off.  During periods of downturn in the market forsemiconductor capital equipment  oreconomic recession, a greater degree of risk exists concerning the ultimatecollectability of our accounts receivable due to the impact that theseconditions might have on our customer base. No provisions were recorded for the quarter ended July 1, 2006.

*Valuation of Inventories*

Our inventoriesare stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”)method.  We maintain a standard costingsystem for our inventories.  Assumptions withrespect to direct labor utilization, standard direct and indirect cost rates,vendor pricing and utilization of factory capacities are formulated in thedevelopment of our standard costing system. Sudden or continuing changes in the semiconductor capital equipmentmarket affecting our shipments can result in significant production variancesfrom our standard rates. These variances directly impact our gross profitperformance and may cause variability in gross profits results from reportingperiod-to-reporting period.  Our laborand overhead rates are set for production rates that match typical marketconditions.  Production variances arecharged to cost of sales each quarter as incurred. Material standards are basedupon normal purchase volumes.  Purchaseprice variances are charged to costs of sales each quarter as incurred.

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Provisions to reduce inventories to the lower of cost ormarket are made based on a review of excess and obsolete inventories through anexamination of historical component consumption, current market demands andshifting product technology.  Significantassumptions with respect to market trends and customer product acceptance areutilized to formulate our provision methods. Sudden or continuing downward changes in the semiconductor capitalequipment market may cause us to record additional inventory revaluationcharges in future periods.  No write-downof our inventories occurred for the quarter ended July 1, 2006.

*Accrued Warranty*

We provide astandard thirteen month warranty program for our equipment products. We recordprovisions for warranty claims for these products based upon historical claimperformance.  This approach has beenapplied since the inception of the warranty program and involves a degree ofsubjectivity in that historical performance is used to estimate future warrantyclaims. There can be no assurance that our estimates will match the actualamount of future warranty claims.

###### **Results of Operations for the Three MonthsEnded July 1, 2006 and June 25, 2005**

Net sales for thethree months ended July 1, 2006 increased by $2.4 million or 178% to $3.7million compared to $1.3 million for the three months ended June 25, 2005.  Sales have steadily increased over the lastfive quarters due to a recent upturn in the capital equipment market.  The Strip Test and Mark product line enjoyedthe largest percentage increase.

Gross margin forthe three months ended July 1, 2006 increased by $1.6 million to $2.1 millionor 56% of net sales from $0.5 million or 34% of net sales for the comparableperiod in the prior year.  The increasein gross margin in the current year period is directly attributable to theincrease in sales resulting in fixed costs being spread over a larger salesvolume.

Total operatingexpense declined by $139,000 or 8% from $1.7 million to $1.6 million.  Selling, general and administrative expensesfor the three months ended July 1, 2006 were $1.0 million or 28% of net salescompared to $1.1 million or 87% of net sales for the three months ended June25, 2005.  Research and developmentexpenses for the second quarter of 2006 were $525,000 or 14% of net salescompared to $491,000 or 37% of net sales in the second quarter of 2005.  The decrease in operating expense is a directresult from the restructuring that occurred in prior year period.

The net income forthe three months ended July 1, 2006 was $7,000 or $0.0 per basic andfully-diluted share compared to net loss for the three months ended June 25,2005 of $1.6 million or $0.06 per basic and fully-diluted share.

###### **Results of Operations for the Six MonthsEnded July 1, 2006 and June 25, 2005**

Net sales for thesix months ended July 1, 2005 increased $2.8 million or 84% to $6.0 millioncompared to $3.3 million for the six months ended June 25, 2005.  This increase is a result of an upturn in thecapital equipment market.  Salesincreases were experienced across all of our product lines.

Gross margins forthe first six months of 2006 increased by $1.9 million to $3.3 million, or 54%of net sales, from $1.4 million, or 41% of net sales, for the comparable periodin the prior year.

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This increase is directlyattributable to the increase in the net sales resulting in fixed cost beingspread over higher volumes.

Total operatingexpense for the first six months of 2006 declined by $393,000 or 11% from $3.4million to $3.0 million.  Selling,general and administrative expense for the first six months of 2006 was $2.0million or 33% of net sales, compared to $2.3 million, or 69% of net sales forthe first six months of 2005.  Researchand development expense for the first six months of 2006 was $1.0 million, or17% of net sales compared to $1.1 million, or 33% of net sales for the firstsix months of 2005.   The decrease inexpense as a percentage of sales is a result of the increase in net sales.  In addition, we are benefiting from therestructuring charge that occurred in prior year period.

The net loss forthe first six months of 2006 was $1.1 million or $0.04 per share compared tonet loss of $2.6 million or $0.10 per share in the comparable prior yearperiod.  Included in the first six months’net loss are write-offs of $414,000 that relate to prior year’s debt issuancecost and FAS 123 discounts from the Laurus refinancing that occurred in thefirst quarter of this year.

**Liquidityand Capital Resources**

Cash used inoperations was $465,000 in the six months ended July 1, 2006 as compared to$1,549,000 in the six months ended June 25, 2005.  Accounts receivables increased from year-endto $2.3 million from $1.7 million. Inventory finished at $2.6 million, which consists of $9.9 million ofgross inventories and $7.3 million of reserves. Capital expenditures were $11,000 for the six months ended of 2006compared to $12,000 in the six months ended of 2005.

We ended thequarter with $1,425,000 in cash and cash equivalents up from $77,000 at the endof 2005 year and cash availability from our credit line of $400,000.  Working capital finished at a negative $3.4million compared to a negative $188,000 at the end of 2005 year.  The negative working capital position is dueto the Laurus $5.25 million term note, the over-advance of $1.2 million in thecredit facility, and the 10% senior subordinated convertible debt coming intoclassification from long term to short term, as this debt is due within theupcoming 12 months.

On February 17, 2006, werestructured the financing with Laurus, and increased the total maximum securedindebtedness with Laurus to $9.25 million. The restructured financing nowincludes a $5.25 million term note. Interest is payable monthly on the termnote at the prime rate plus 2.5%. Beginning 360 days after closing, we arerequired to make monthly payments equal to 1/60th of the principal amount untilthree years after the closing, at which time the entire remaining principal andaccrued interest is due and payable in full. The note is non-convertible. Inaddition to the $5.25 million note, the working capital line of credit wasincreased from $3.0 million to $4.0 million, and made non-convertible. The noteis payable in full on March 8, 2008. Interest is payable monthly on the note atthe prime rate plus 2.5%. The existing $1.2 million over-advance in excess ofthe borrowing base on the working capital line of credit was extended untilApril 30, 2007. However, commencing on December 1, 2006, the over-advance is tobe reduced by $200,000 each month. The Company also issued Laurus a 10-yearoption to purchase 2,500,000 shares at an exercise price of $.01 per share. Theshares issuable upon exercise of the option have standard registrationrights.  As a result of the new financingwith Laurus, the conversion price for all of the Noteholders who accepted theprior restructuring agreements has been reduced to $0.56 per share.

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**IMPACT OF ACCOUNTING STANDARDS**

***SFAS No. 154, Accounting Changes and ErrorCorrections. *** In June 2005, FASB issued SFAS No. 154, “*Accounting Changes and Error Corrections*”,a replacement of APB Opinion No. 20 and FASB Statement No. 3. The statementapplies to all voluntary changes in accounting principle, and changes therequirements for accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 requiresretrospective application to prior periods’ financial statements of a voluntarychange in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accountingchanges and corrections of errors made in fiscal years beginning after December15, 2005.  Earlier application ispermitted for accounting changes and corrections of errors made occurring infiscal years beginning after June 1, 2005. The statement does not change the transition provisions of any existingaccounting pronouncements, including those that are in a transition phase as ofthe effective date of this statement. The Company does not expect the adoption of SFAS No. 154 to have amaterial effect on its financial statements.

***SFAS No. 123 (revised 2004), Share-BasedPayment***. In December 2004, FASB issued SFAS No. 123 (revised 2004), *Share-Based Payment*, that focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions.  This statement replacesSFAS No. 123, *Accounting for Stock-Based**Compensation*, and supersedes APBOpinion No. 25, *Accounting for Stock Issuedto Employees*.   On January 1, 2006, we implemented SFAS No.123R.  We do not expect the adoption ofSFAS No. 123R to have a material effect on our financial statements.

**ITEM 3.****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The vast majorityof our transactions are denominated in U.S. dollars; as such, fluctuations inforeign currency exchange rates have historically had little impact on us.  Inflation has not been a significant factorin our operations in any of the periods presented, and it is not expected toaffect operations in the future.  At July1, 2006, our 10% senior subordinated convertible debt carries interest at afixed rate of 10%. Our debt associated with both our line of credit andlong-term convertible note carries interest at prime plus 2.5% or 10.75% at July1, 2006. There is no material market risk relating to our long-term debt.

**ITEM4. CONTROLS AND PROCEDURES**

(a)                Evaluation of disclosure controls andprocedures.

Under the supervision and with the participation of our management,including the Company’s Chief Executive Officer and Chief Financial Officer, weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the Exchange Act)as of the end of the period covered by this report.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of theevaluation date, our disclosure controls and procedures were effective toensure that the information required to be disclosed by us in our periodic SECfilings is recorded, processed, summarized, and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

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(b)         Changes in internal controls over financial reporting.

During the course of the audit of our consolidated financial statementsfor December 31, 2005, our independent registered public accounting firm,Virchow, Krause & Company, LLP (Virchow Krause), advised management and theAudit Committee that our internal controls had allowed an error in theinventory reserve calculation due to inconsistent treatment of work in processitems from 2004 to 2005.  Based onVirchow Krause’s recommendation, management decided that an increase in theinventory reserve of approximately $525,000 was required as of December 31,2005, to reflect a revaluation of excess inventory and adjustments to inventoryconsumption rates.  The inventory reserveerror had no effect on reported results for any of the individual quarters in2005.  As a result of this experience, duringthe first quarter, we revised and expanded our procedures for valuations ofexcess inventory and estimates of inventory consumption rates, and the relatedinternal controls, to involve greater analysis of historical and projectedusage of inventory as well as other data.

In addition, Virchow Krause recommended changes to certain other of theCompany’s controls and procedures, none of which had any impact on the auditedfinancial statements for 2005 or prior years. As of the end of second quarter of 2006, management implemented changesto these controls and procedures.

There have been no additional changes in our internal control overfinancial reporting during the second quarter of 2006 that have materiallyaffected, or are reasonably likely to affect, our internal control overfinancial reporting.

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# PARTII.  OTHER INFORMATION

### **Item 4. Submission Of Matters To A Vote OfSecurity Holders**

On June 22, 2006, the Companyheld its annual meeting of shareholders. At the meeting, the following actions were taken:

Election of Directors

The following persons were elected directors ofthe Company to serve for a term of one year:
| Roger Gower         |   | Donald Kramer     |   | David M. Sugishita |
|---------------------|--------|-------------------|--------|--------------------|
| Donald R VanLuvanee |   | Patrick Verderico |   |               |

 

The vote summaries are as follows:
| Director Name   | ** ** | **Affirmed** | ** ** | **Withheld** | ** ** |
|----------------------|------------|--------------|------------|--------------|------------|
| Roger E. Gower       |       | 25,971,292   |       | 531,387      |       |
| Donald J. Kramer     |       | 25,972,272   |       | 530,407      |       |
| David M. Sugishita   |       | 25,971,292   |       | 531,387      |       |
| Donald R. VanLuvanee |       | 25,972,292   |       | 530,387      |       |
| Patrick  Verderico   |       | 25,969,395   |       | 533,284      |       |

 

Approval of Amendment to Stock Option Plan for Outside Directors

To amend the StockOption Plan for Outside Directors by extending the duration of the Plan fromFebruary 15, 2006 to February 15, 2016.
| For     |   | 8,597,408 |
|---------|--------|-----------|
| Against |   | 1,087,530 |
| Abstain |   | 150,416   |

###  

### **Item 6. Exhibits**

31.1                            Certificationof Chief Executive Officer (filed herewith).

31.2                            Certificationof Chief Financial Officer (filed herewith).

32                                     Section1350 Certification (filed herewith).

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SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                                               | Micro Component Technology, Inc.      |               |
|-----------------------------------------------|---------------------------------------|--------------------|
|                                          | Registrant                            |
|                                          |                                  |
|                                          |                                  |
| Dated:    August 10, 2006 | By:                                   | /s/ Roger E. Gower |   |
|                                          | Roger E. Gower                        |
|                                          | President and Chief Executive Officer |
|                                          |                                  |
|                                          |                                  |
|                                          | And                                   |
|                                          |                                  |
|                                          |                                  |
| Dated:    August 10, 2006 | By:                                   | /s/ BachThuy T. Vo |   |
|                                          | BachThuy T. Vo                        |
|                                          | Interim Chief Financial Officer       |
|                                               |                                       |                    |  |  |

 

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