**SECURITIES AND 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 September 29, 2007** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition 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  West County 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 largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer o       AcceleratedFiler o       Non-AcceleratedFiler 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 November 9, 2007 was37,876,889.

 

 

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**MICROCOMPONENT 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 1A.RISK FACTORS                                                                      |   |
|                                |                                                                                      |   |
|                                | ITEM  6. EXHIBITS                                                                         | ** ** |
| ** **                          | ** **                                                                                | ** ** |
|                                | SIGNATURES                                                                                | ** ** |

 

2

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**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

FORM 10-Q

# PARTI. FINANCIAL INFORMATION

## ITEM 1. FINANCIALSTATEMENTS

## CONSOLIDATED BALANCESHEETS

(In thousands,except share and per share data)

(Unaudited)

 
| ** **                                                                                             | ** ** | **September 29,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                             | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| **Assets**                                                                                             |       |                   |       |                  |       |
| Current assets                                                                                         |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                             |       | $                      | 209        |                  | $          | 200 |   |
| Accounts  receivable, less allowance for doubtful accounts of $121 and $126,  respectively             |       | 2,644                  |       | 2,816                 |       |
| Inventories                                                                                            |       | 2,562                  |       | 2,016                 |       |
| Other                                                                                                  |       | 244                    |       | 169                   |       |
| Total current  assets                                                                                  |       | 5,659                  |       | 5,201                 |       |
|                                                                                                   |       |                   |       |                  |       |
| Property, plant  and equipment, net                                                                    |       | 115                    |       | 91                    |       |
|                                                                                                   |       |                   |       |                  |       |
| Debt issuance costs,  net of accumulated amortization of $1,485 and $1,383, respectively               |       | 199                    |       | 246                   |       |
| Other assets                                                                                           |       | 32                     |       | 18                    |       |
|                                                                                                   |       |                   |       |                  |       |
| Total assets                                                                                           |       | $                      | 6,005      |                  | $          | 5,556 |   |
|                                                                                                   |       |                   |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                        |       |                   |       |                  |       |
| Current  liabilities:                                                                                  |       |                   |       |                  |       |
| Current portion  of long-term debt, net of discounts of $169 and $0, respectively                      |       | $                      | 2,347      |                  | $          | 228 |   |
| Bank line of  credit                                                                                   |       | 3,964                  |       | 3,906                 |       |
| Accounts payable                                                                                       |       | 635                    |       | 440                   |       |
| Accrued  compensation                                                                                  |       | 428                    |       | 413                   |       |
| Accrued interest                                                                                       |       | 160                    |       | 144                   |       |
| Accrued warranty                                                                                       |       | 126                    |       | 101                   |       |
| Customer  prepayments and unearned service revenue                                                     |       | 357                    |       | 382                   |       |
| Other accrued  liabilities                                                                             |       | 135                    |       | 251                   |       |
| Total current  liabilities                                                                             |       | 8,152                  |       | 5,865                 |       |
|                                                                                                   |       |                   |       |                  |       |
| Long-term debt,  net of discounts of $1,281 and $974, respectively                                     |       | 3,357                  |       | 5,506                 |       |
|                                                                                                   |       |                   |       |                  |       |
| Total  liabilities                                                                                     |       | 11,509                 |       | 11,371                |       |
|                                                                                                   |       |                   |       |                  |       |
| Stockholders’  deficit:                                                                           |       |                   |       |                  |       |
| Preferred stock,  $.01 par value, 1,000,000 authorized, none issued and outstanding                    |       | —                 |       | —                |       |
| Common stock,  $.01 par value, 100,000,000 authorized, 37,876,889 and 36,665,322 issued,  respectively |       | 379                    |       | 367                   |       |
| Additional  paid-in capital                                                                            |       | 103,587                |       | 102,459               |       |
| Accumulated  deficit                                                                                   |       | (109,470               | )          | (108,641              | )          |
| Total  stockholders’ deficit                                                                      |       | (5,504                 | )          | (5,815                | )          |
| Total  liabilities and stockholders’ deficit                                                      |       | $                      | 6,005      |                  | $          | 5,556 |   |

 

See notes tounaudited condensed consolidated financial statements

 

3

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**MICROCOMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTSOF OPERATIONS

(In thousands,except per share data)

(Unaudited)

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **Sep 29,**                 | ** ** | **Sep 30,**                | ** ** | **Sep 29,** | ** ** | **Sep 30,** | ** ** |
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Net sales                                                   |       | $                                | 3,567      |                            | $          | 3,279 |   | $ | 10,904 |   | $ | 9,330 |   |
| Cost of sales                                               |       | 1,858                            |       | 1,770                           |       | 5,337 |   | 4,570 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                |       | 1,709                            |       | 1,509                           |       | 5,567 |   | 4,760 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Operating  expenses:                                        |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative                        |       | 1,079                            |       | 1,074                           |       | 3,305 |   | 3,058 |   |
| Research and  development                                   |       | 437                              |       | 487                             |       | 1,421 |   | 1,530 |   |
| Restructuring  charge                                       |       | —                           |       | —                          |       | 137 |   | — |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Total operating  expenses                                   |       | 1,516                            |       | 1,561                           |       | 4,863 |   | 4,588 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Income (loss)  from operations                              |       | 193                              |       | (52                             | )          | 704 |   | 172 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Interest income                                             |       | 1                                |       | 3                               |       | 6 |   | 8 |   |
| Interest  expense.                                          |       | (297                             | )          | (316                            | )          | (860 | ) | (914 | ) |
| Amortization of  Warrant Discounts and other, net           |       | (287                             | )          | (1,514                          | )          | (662 | ) | (2,207 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Total interest  and other                                   |       | (583                             | )          | (1,827                          | )          | (1,516 | ) | (3,113 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss) before income tax                        |       | (390                             | )          | (1,879                          | )          | (812 | ) | (2,941 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Income tax  expense                                         |       | —                           |       | —                          |       | (17 | ) | (14 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Net income  (loss)                                          |       | $                                | (390       | )                               | $          | (1,879 | ) | $ | (829 | ) | $ | (2,955 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Net loss per  share:                                        |       |                             |       |                            |       |   |   |   |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Basic                                                       |       | $                                | (0.01      | )                               | $          | (0.06 | ) | $ | (0.02 | ) | $ | (0.10 | ) |
| Diluted                                                     |       | $                                | (0.01      | )                               | $          | (0.06 | ) | $ | (0.02 | ) | $ | (0.10 | ) |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Weighted average  common and equivalent shares outstanding: |       |                             |       |                            |       |   |   |   |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Basic                                                       |       | 37,290                           |       | 31,141                          |       | 36,874 |   | 28,619 |   |
| Diluted                                                     |       | 37,290                           |       | 31,141                          |       | 36,874 |   | 28,619 |   |

 

See notes to unauditedcondensed consolidated financial statements

 

4

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**MICROCOMPONENT TECHNOLOGY, INC.**

## CONSOLIDATED STATEMENTSOF CASH FLOWS

(In thousands)

(Unaudited)

 
| ** **                                                                                        | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                        | ** ** | **Sep 29,**                | ** ** | **Sep 30,** | ** ** |
| ** **                                                                                        | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                                                              |       |                            |       |   |   |
| Cash flows from  operating activities:                                                            |       |                            |       |   |   |
| Net loss                                                                                          |       | $                               | (829       | ) | $ | (2,955 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                      |       |                            |       |   |   |
| Depreciation and  amortization                                                                    |       | 824                             |       | 892 |   |
| Share-based  compensation expense                                                                 |       | 10                              |       | 4 |   |
| Changes in  assets and liabilities:                                                               |       |                            |       |   |   |
| Accounts  receivable                                                                              |       | 172                             |       | (833 | ) |
| Inventories                                                                                       |       | (546                            | )          | (191 | ) |
| Other assets                                                                                      |       | (89                             | )          | (37 | ) |
| Accounts payable                                                                                  |       | 195                             |       | (75 | ) |
| Other accrued  liabilities                                                                        |       | (85                             | )          | 364 |   |
| Net cash used in  operating activities                                                            |       | (348                            | )          | (2,831 | ) |
|                                                                                              |       |                            |       |   |   |
| Cash flows from  investing activities:                                                            |       |                            |       |   |   |
| Purchases of  property, plant, and equipment                                                      |       | (90                             | )          | (27 | ) |
|                                                                                              |       |                            |       |   |   |
| Net cash used in  investing activities                                                            |       | (90                             | )          | (27 | ) |
|                                                                                              |       |                            |       |   |   |
| Cash flows from  financing activities:                                                            |       |                            |       |   |   |
| Proceeds from  long term note, net of debt issue costs                                            |       | 602                             |       | 4,903 |   |
| Payments on long  term note, net of stock issued in conversion of 10% senior subordinated debt  . |       | (211                            | )          | (4,089 | ) |
| Proceeds on  institutional line of credit                                                         |       | 58                              |       | 721 |   |
| Discounted 10%  senior subordinated debt conversion expense                                       |       | —                          |       | 1,363 |   |
| Proceeds from  issuance of stock                                                                  |       | 12                              |       | 54 |   |
| Stock issuance  costs                                                                             |       | (14                             | )          | — |   |
|                                                                                              |       |                            |       |   |   |
| Net cash  provided by financing activities                                                        |       | 447                             |       | 2,952 |   |
|                                                                                              |       |                            |       |   |   |
| Net increase in  cash and cash equivalents                                                        |       | 9                               |       | 94 |   |
|                                                                                              |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                                 |       | 200                             |       | 77 |   |
|                                                                                              |       |                            |       |   |   |
| Cash and cash  equivalents at end of period                                                       |       | $                               | 209        |   | $ | 171 |   |
|                                                                                              |       |                            |       |   |   |
| Supplemental  cash flow information:                                                              |       |                            |       |   |   |
|                                                                                              |       |                            |       |   |   |
| Non-cash  financing activities:                                                                   |       |                            |       |   |   |
| Stock issued in  lieu of interest                                                                 |       | $                               | —     |   | $ | 314 |   |
| Stock issued in  conversion of 10% senior subordinated convertible debt                           |       | $                               | —     |   | $ | 2,335 |   |
| Cash paid for  interest                                                                           |       | $                               | 844        |   | $ | 721 |   |

 

See notes tounaudited condensed consolidated financial statements

 

5

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**MICROCOMPONENT TECHNOLOGY, INC.**

FORM 10-Q

## NOTES TO UNAUDITEDCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

*Basis ofPresentation*

 

The consolidatedfinancial statements include the accounts of the parent company and oursubsidiaries after elimination of all significant intercompany balances andtransactions. All significant subsidiaries are 100% owned.

 

The unauditedconsolidated financial statements included herein have been prepared inaccordance with accounting principles generally accepted in the United States(generally accepted accounting principles) for interim financial informationand with the instructions for Form 10-Q and Article 10 of Regulation S-X. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with generally accepted accounting principles have beencondensed or omitted pursuant to such rules and regulations. In the opinion ofmanagement all adjustments, including normal recurring adjustments, necessaryfor a fair presentation of the interim periods presented have been included. Theinterim results are not necessarily indicative of the operating resultsexpected for the full fiscal year ending on December 31, 2007.

 

Our consolidatedfinancial statements have been prepared on the assumption that we will continueas a going concern, which contemplates the realization of assets andliquidation of liabilities in the normal course of business. The Report of theIndependent Registered Public Accounting Firm on the financial statements ofthe Company as of and for the fiscal year ended December 31, 2006 included inForm 10-K contained an explanatory paragraph that expresses substantial doubtabout our ability to continue as a going concern. The financial statements donot include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that may result from the outcome of this uncertainty.

 

As ofSeptember 29, 2007, the Company had an accumulated deficit of $109.5 millionand incurred a net loss of $829,000 for the nine-month period ended September29, 2007. As of September 29, 2007, the Company had cash and cash equivalentsof $209,000, working capital of negative $2.5 million, a current ratio of 0.69,total assets of $6.0 million and total liabilities of $11.5 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.

 

6

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As discussed in Note 4, On March 29, 2007, we againrestructured the financing with Laurus Master Fund, Ltd. (“Laurus”), andincreased the total secured indebtedness to $10.25 million. $56,000 of debtissue costs were associated with the restructuring. The restructured financingincludes a $5.25 million term note.  Interest is payable monthly on theterm note at the prime rate plus 2.5%.  The note is non-convertible. BeginningMarch 1, 2008, we are required to make monthly payments equal to 1/60th of theprincipal amount until February 17, 2009, at which time the entire remainingprincipal and accrued interest is due and payable in full.  In addition tothe $5.25 million note, there is a $4.0 million working capital line of credit,which is payable in full on March 8, 2008.  Interest is payable monthly onthe line at the prime rate plus 2.5%.  The restructured financing alsoincludes an additional $1.0 million term note. The proceeds from the $1 millionterm note, net of fees and expenses from the 2007 refinancing, are required tobe held in a restricted account at a bank, and will only be released by thebank to the Company, upon approval of Laurus in its discretion, for themanufacture of demo equipment. Interest is payable monthly at the prime rateplus 2.0% and the principal is payable in full on March 31, 2008. As ofSeptember 29, 2007 there was $657,000 released. As part of the 2007 restructuring,the Company also issued Laurus a 10-year option to purchase 5,000,000 shares atan exercise price of $0.01 per share. The shares issuable upon exercise of theoption have standard registration rights. The table below details the optionsissued to Laurus.

 
| **Grant Date**                      | ** ** | **3/29/2007** | ** ** | **2/17/2006** | ** ** | **4/29/2005** | ** ** | **1/28/2005** | ** ** |
|------------------------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Number of shares                         |       | 5,000,000     |       | 2,500,000     |       | 2,556,651     |       | 150,000       |       |
| Exercise Price                           |       | $0.01         |       | $0.01         |       | $0.01         |       | $0.67         |       |
| Dividend yield                           |       | 0.00          | %          | 0.00          | %          | 0.00          | %          | 0.00          | %          |
| Expected  volatility                     |       | 88.63         | %          | 122.09        | %          | 95.33         | %          | 93.13         | %          |
| Risk-free  interest rate                 |       | 4.54          | %          | 4.62          | %          | 3.90          | %          | 3.71          | %          |
| Expected life of  options                |       | 10.0 years    |       | 10.0 years    |       | 7.0 years     |       | 3.5 years     |       |
| Fair value per  share of options granted |       | 5,000,000     |       | 2,500,000     |       | 2,556,651     |       | 150,000       |       |
| Discount on  long-term debt              |       | $1,131,000    |       | $821,000      |       | $473,000      |       | $51,000       |       |

 

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, 2006.

 

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

 

Basicearnings per share are computed using the weighted average number of commonshares outstanding during each period. Diluted earnings per share include thedilutive effect of common shares potentially issuable upon the exercise of stockoptions, warrants and the convertible term note outstanding. The followingtable reconciles the denominators used in computing basic and diluted earningsper share:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **Sep 29,**                      | ** ** | **Sep 30,**                     | ** ** | **Sep 29,** | ** ** | **Sep 30,** | ** ** |
| **(in thousands)**                        | ** ** | **2007 (1)**                     | ** ** | **2006 (1)**                    | ** ** | **2007 (1)** | ** ** | **2006 (1)** | ** ** |
| Weighted average  common shares outstanding    |       | 37,290                           |       | 31,141                          |       | 36,874 |   | 28,619 |   |
| Effect of  dilutive stock options and warrants |       | —                           |       | —                          |       | — |   | — |   |
|                                           |       | 37,290                           |       | 31,141                          |       | 36,874 |   | 28,619 |   |

 

----

(1)        We reported aloss for the periods indicated. No adjustments were made for the effect ofstock options and warrants, which represented 11,518,831 and 5,959,898 sharesat September 29, 2007 and September 30, 2006, respectively, as the effect isantidilutive.

 

7

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

 

Major componentsof inventories were as follows (in thousands):

 
| ** **      | ** ** | **September 29,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|            |       |                   |       |                  |       |
| Raw materials   |       | $                      | 1,817      |                  | $          | 1,314 |   |
| Work-in-process |       | 393                    |       | 377                   |       |
| Finished goods  |       | 352                    |       | 325                   |       |
|            |       | $                      | 2,562      |                  | $          | 2,016 |   |

 

In accordance withaccounting principles generally accepted in the United States of America, wevalue our inventories at the lower of cost or market.

 

The following tableprovides the inventory reserves for the quarter ended September 29, 2007.

 
| Inventory  reserve balance at December 31, 2006  |   | $    | 5,613 |   |
|--------------------------------------------------|--------|------|-------|--------|
| Release of  inventory reserve on sale of goods   |   | (286 | )     |
| Release of  inventory reserve on scrap of goods  |   | (822 | )     |
| Inventory  reserve balance at September 29, 2007 |   | $    | 4,505 |   |

 

We provide a standard thirteen-month warranty program for ourequipment products. We record provisions for warranty claims for these productsbased upon historical claim performance. The following table provides theexpense recorded and charges against our reserves for the quarter endedSeptember 29, 2007.

 
| Accrued warranty  balance at December 31, 2006  |   | $   | 101    |   |
|-------------------------------------------------|--------|-----|--------|--------|
| Provision                                       |   | 88  |   |
| Warranty claims                                 |   | (63 | )      |
| Accrued warranty  balance at September 29, 2007 |   | $   | 126    |   |

 

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

 

OnMarch 9, 2004, we completed a $5.0 million financing transaction with aninstitutional lender, Laurus Master Fund, Ltd. (“Laurus”), secured by all ofthe assets of the Company.  The financing included a $3.0 million workingcapital line of credit and a $2.0 million long-term note.  The notes werepartially convertible into shares of our common stock.  In connection withthe transaction, we issued to Laurus a seven-year warrant to purchase 400,000shares of common stock at exercise prices ranging from $2.30 to $2.88 pershare.  The secured loan in existence at that time with a prior lender wasterminated.

 

OnJanuary 28, 2005, we completed an amendment to the financing agreement withLaurus to defer payments on the long-term convertible note.  As part ofthis amendment, the conversion prices on both notes were reduced.  We alsoissued Laurus at that time a seven-year warrant to purchase 150,000 shares ofcommon stock at $.67 per share.

 

8

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OnApril 29, 2005, we completed another financing transaction with Laurus in whichwe borrowed an additional $2.5 million, and which was convertible into sharesof common stock.  We also issued Laurus at that time an option to purchase2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing. $104,000of debt issue costs were associated with the 2005 restructuring.

 

On February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million as well as extended the principal debt payments.  TheCompany also issued Laurus a 10-year option to purchase 2,500,000 shares at anexercise price of $.01 per share.  The shares issuable upon exercise ofthe option have standard registration rights. Associated with the 2006restructuring, we recognized debt issue costs of $347,000 and are amortizingthese costs over the term of the note. $205,000 of remaining unamortized debtissue costs were expensed as a result of the 2006 restructuring.

 

On March 29, 2007, we again restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million as wellas extended the principal debt payments. The restructured financing includes a$5.25 million term note.  Interest is payable monthly on the term note atthe prime rate plus 2.5%.  The note is non-convertible. Beginning March 1,2008, we are required to make monthly payments equal to 1/60th of the principalamount until February 17, 2009, at which time the entire remaining principaland accrued interest is due and payable in full.  In addition to the $5.25million note, there is a $4.0 million working capital line of credit, which ispayable in full on March 8, 2008.  Interest is payable monthly on the lineat the prime rate plus 2.5%.  The restructured financing also includes anadditional $1.0 million term note. The proceeds from the $1 million term note,net of fees and expenses from the 2007 refinancing, are required to be held ina restricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment. As of September 29, 2007 there was $657,000 released. Interest ispayable monthly at the prime rate plus 2.0% and the principal is payable infull on March 31, 2008. As part of the 2007 restructuring, the Company alsoissued Laurus a 10-year option to purchase 5,000,000 shares at an exerciseprice of $0.01 per share. The shares issuable upon exercise of the option havestandard registration rights. Associated with the 2007 restructuring, werecognized debt issue costs of $56,000 and are amortizing these costs over theterm of the $5.25 million term note.

 

There iscurrently $1.2 million in principal amount of the 10% Senior SubordinatedConvertible Notes outstanding, represented by one Note now held by Laurus. TheNote has a conversion price of $.50 per share. Interest is payable monthly atthe rate of 10% and the principal is payable in full on March 31, 2008.

 

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

 

The Companyadopted Statement of Financial Accounting Standards (SFAS) No. 123R “Share-BasedPayment”, on January 1, 2006. This statement requires us to recognize the costof employee and director services received in exchange for the stock options ithas awarded. Under SFAS 123R, we are required to recognize compensation expenseover an award’s vesting period based on the award’s fair value at the date ofgrant. We have elected to adopt SFAS 123R on a modified prospective basis;accordingly the financial statements for periods prior to January 1, 2006 donot include stock-based compensation costs calculated under the fair valuemethod. As a result of the adoption of SFAS 123R, we incurred a compensationexpense of $0 and $4,000 for the three months and nine months ended September30, 2006. Compensation expense for the three months and nine months endedSeptember 29, 2007 was $0 and $10,000.

 

9

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The fair value of optionsgranted under the stock options for the three months and nine months endedSeptember 29, 2007 and September 30, 2006 was estimated on the date of grantusing the Black-Scholes option pricing model with the following weightedaverage assumptions.

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Sep 29,**                 | ** ** | **Sep 30,**                | ** ** | **Sep 29,** | ** ** | **Sep 30,** | ** ** |
| ** **                               | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                     |       |                             |       |                            |       |   |   |   |   |
| Dividend yield                           |       | 0.00                             | %          | 0.00                            | %          | 0.00 | % | 0.00 | % |
| Expected  volatility                     |       | 94.82                            | %          | 91.89                           | %          | 91.28 | % | 91.89 | % |
| Risk-free  interest rate                 |       | 4.06                             | %          | 4.99                            | %          | 4.33 | % | 4.99 | % |
| Expected life of  options                |       | 3.5 years                        |       | 3.5 years                       |       | 3.5 years |   | 3.5 years |   |
| Fair value per  share of options granted |       | $                                | 0.16       |                            | $          | 0.32 |   | $ | 0.16 |   | $ | 0.32 |   |
|                                          |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

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

 

InJune 2006, the Financial Accounting Standards Board issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109,*or FIN 48. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. Thispronouncement also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition. FIN 48is effective for fiscal years beginning after December 15, 2006; therefore, theCompany will adopt the new requirements for fiscal 2007. We do not expect theadoption of this pronouncement to have a material impact on our financialposition or results of operations.

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements*” (“SFAS No. 157”), which is effective for interim andannual reporting periods beginning after November 15, 2007. This statementprovides a definition of fair value, establishes a framework for measuring fairvalue, and expands disclosures about fair value measurements for futuretransactions. The Company has not yet assessed the impact of this Statement onthe Company’s financial statements.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159, “*The Fair Value Option for Financial Assets andFinancial Liabilities*” (“SFAS 159”). The Statement permits entitiesto choose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. The objectiveis to improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. SFAS 159 will be effective for the first fiscal year that beginsafter November 15, 2007. The company has not yet assessed the impact of thisStatement on the Company’s financial statements.

 

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## ITEM 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION

##  

*ThisReport on Form 10-Q contains forward-looking statements that have been madepursuant to the provisions of the Private Securities Litigation Reform Act of 1995.These forward-looking statements are not historical facts, but rather are basedon our current expectations, estimates and projections about the semiconductorcapital equipment industry, and our beliefs and assumptions. We intend wordssuch as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates”and similar expressions to identify forward-looking statements. Thesestatements are not guarantees of future performance and are subject to certainrisks, uncertainties and other factors, some of which are beyond our controland are difficult to predict. These factors could cause actual results todiffer materially from those expressed or forecasted in the forward-lookingstatements. These risks and uncertainties are described elsewhere in thisreport on Form 10-Q and our report on Form 10-K for the year ended December 31,2006. We caution you not to place undue reliance on these forward-lookingstatements, which reflect our management’s view only as of the date of thisReport on Form 10-Q. We are not obligated to update these statements orpublicly release the result of any revisions to them to reflect events orcircumstances after the date of this Report on Form 10-Q or to reflect the occurrenceof unanticipated events.*

 

*Overview*

 

We supply equipment automation solutions for the globalsemiconductor test and assembly manufacturing market. Our solutions includeautomated test handlers, factory automation software and our new integratedSmart Solutions equipment product line. We believe that our products cansignificantly improve the productivity, yield and throughput of the back-end,or to the post-wafer manufacturing process, including assembling, packaging,testing and singulating semiconductor devices.

 

Beginningin 1999 and continuing into 2000, we broadened our strategy from that of a testhandler manufacturer to becoming a provider of comprehensive equipmentautomation solutions for the back-end of the semiconductor manufacturingprocess. First, we developed and introduced in February 1999 our Tapestry striphandler. Tapestry combines strip handling capability with robotics, machinevision technology and critical software, enabling the testing and tracking ofsemiconductor devices in strip form and the generation of critical process datathroughout the test process. Second, in June 1999 we acquired the InfinitySystems division of Fico. Infinity Systems has been involved in the developmentof factory automation software for the semiconductor manufacturing industry. InfinitySystems’ software expertise was integral to the development of our integratedSmart Solutions equipment product line, introduced in May 2000. Together with athird party tester, our Smart Solutions equipment products including ourTapestry handler enable complete automation of the test, laser mark, mark inspectand other processes of the back end.

 

The demand for our products and services isdependent upon growth in the semiconductor industry and the increasingautomation needs of semiconductor manufacturers and independent test andassembly facilities. In the fourth quarter of 2000, the semiconductor industrywent into a sharp downturn, which continued through 2005, and began to improvein 2006. However, the level of improvement and the ability for the market tosustain an improvement continues to be uncertain. The impact of a renewedcontraction of the semiconductor capital equipment market has the potential tohave a material adverse effect on our financial condition, results ofoperations, and cash flows. We will continue to monitor the market and ifrequired, examine opportunities to further reduce our costs through furtherconsolidation of operations, limiting capital expenditures, monitoringinventory purchases and additional strategic restructuring initiatives. Certainof these types of actions have the potential for further charges in futureperiods.

 

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**Critical Accounting Policies**

 

*Revenue Recognition*

 

UnderSAB 104, we recognize revenue upon shipment, as our terms are FOB shippingpoint, for established equipment products that have previously satisfiedexisting customer performance specifications and that provide for full paymenttied to shipment. Revenue for products that have not previously satisfiedcustomer performance specifications or from sales where all or a portion ofcustomer payment is based upon acceptance are only recognized upon customeracceptance. As such, in periods of increasing shipments, revenues will be deferredif the shipments are for new customers; new products or the payment terms aretied to acceptance criteria. Consequently, if these conditions exist, we mayreport revenue levels that are not reflective of actual shipment growth rates. Conversely,in periods of decreasing shipments, we potentially could recognize revenuesrelated to shipments made in prior periods. Consequently, if these conditionsexist, we may report revenue levels that are greater than actual shipments. Duringthe quarter ended September 29, 2007, we had $0 of deferred revenue in excessof costs under the SAB 104 revenue recognition rule.

 

*Allowance forDoubtful Accounts*

 

Werecord a provision for doubtful accounts based on specific identification ofour accounts receivable. This involves a degree of judgment based on discussionwith our internal sales and marketing groups, our customer base and theexamination of the financial stability of our customers. There can be noassurance that our estimates will match actual amounts ultimately written off. Duringperiods of downturn in the market for semiconductor capital equipment  or economic recession, a greater degree ofrisk exists concerning the ultimate collectability of our accounts receivabledue to the impact that these conditions might have on our customer base. No provisionswere recorded for the quarter ended September 29, 2007.

 

*Valuation of Inventories*

 

Our inventories arestated at the lower of cost or market. Cost is determined by the first-in,first-out (“FIFO”) method. We maintain a standard costing system for ourinventories. Assumptions with respect to direct labor utilization, standarddirect and indirect cost rates, vendor pricing and utilization of factorycapacities are formulated in the development of our standard costing system. Suddenor continuing changes in the semiconductor capital equipment market affectingour shipments can result in significant production variances from our standardrates. These variances directly impact our gross profit performance and maycause variability in gross profits results from reporting period-to-reportingperiod. Our labor and overhead rates are set for production rates that matchtypical market conditions. Production variances are charged to cost of saleseach quarter as incurred. Material standards are based upon normal purchasevolumes. Purchase price variances are charged to costs of sales each quarter asincurred.

 

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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. Significant assumptions with respect to markettrends and customer product acceptance are utilized to formulate our provisionmethods. Sudden or continuing downward changes in the semiconductor capitalequipment market may cause us to record additional inventory revaluationcharges in future periods. No write-down of our inventories occurred for thequarter ended September 29, 2007.

 

*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 been applied since the inception of the warrantyprogram and involves a degree of subjectivity in that historical performance isused to estimate future warranty claims. There can be no assurance that ourestimates will match the actual amount of future warranty claims.

 

###### **Resultsof Operations for the Three Months Ended September 29, 2007 and September 30,2006**

###### ** **

Netsales for the three months ended September 29, 2007 increased by $288,000 or 9%to $3.6 million compared to $3.3 million for the three months ended September30, 2006. The Strip Test and Mark product line enjoyed the largest percentageincrease.

 

Grossmargin for the three months ended September 29, 2007 increased by $200,000 to$1.7 million or 48% of net sales from $1.5 million or 46% of net sales for thecomparable period in the prior year.

 

Totaloperating expense decreased by $45,000 or 3% from $1.6 million to $1.5 millionover the prior year. Selling, general and administrative expenses for the threemonths ended September 29, 2007 were $1.1 million or 30% of net sales comparedto $1.1 million or 33% of net sales for the three months ended September 30,2006. Research and development expenses for the third quarter of 2007 were$437,000 or 12% of net sales compared to $487,000 or 15% of net sales in thethird quarter of 2006. The research and development expenses for the quarterdecreased due to a reduced need for outside contractors.

 

Thenet loss for the three months ended September 29, 2007 was $390,000 or $0.01per basic and fully diluted share compared to net loss for the three monthsended September 30, 2006 of $1.9 million or $0.06 per basic and fully-dilutedshare. Included in the 2006 quarter’s net loss was a non-cash debt conversionexpense of $1.4 million associated with the conversion to stock of over $2.1million of convertible debt from our 10% note holders.

 

###### **Resultsof Operations for the Nine Months Ended September 29, 2007 and September 30,2006**

###### ** **

Net sales for the ninemonths ended September 29, 2007 increased $1.6 million or 17% to $10.9 million compared to $9.3 millionfor the nine months ended September 30, 2006. This increase is a result of amodest improvement in the capital equipment market. Sales increases wereexperienced primarily in products introduced within the past 18 months.

 

13

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Grossmargins for the nine months ended September 29, 2007 increased by $807,000 to$5.6 million, or 51% of net sales, from $4.8 million, or 51% of net sales, forthe comparable period in the prior year.

 

Totaloperating expense for the nine months ended September 29, 2007 increased by$275,000 or 6% from $4.6 million to $4.9 million. Selling, general andadministrative expense for the nine months of 2007 was $3.3 million or 30% ofnet sales, compared to $3.1 million, or 33% of net sales for the nine months of2006. Substantially all of this increase was planned, and included $131,000 ofincreased selling and marketing expenses over the prior year’s period dueprimarily to additional commissions and travel expenses, and $116,000 ofincreased general and administrative expenses over the prior year’s period dueprimarily to additional consulting and legal fees for corporate developmentprojects and refinancing of the Laurus debt. Research and developmentexpense for the nine months of 2007 was $1.4 million, or 13% of net salescompared to $1.5 million, or 16% of net sales for the nine months of 2006. Thedecrease in expense as a percentage of sales is a result of the increase in netsales.

 

OnJune 29, 2007, we restructured our Penang, Malaysia manufacturing operation.The restructuring plan included the reduction of our lease facility from 54,000square feet to 10,000 square feet, a workforce reduction of approximately 28positions in our Malaysian manufacturing operation, and outsourcingmanufacturing of certain fabricated parts. We recorded a restructuring chargeof $137,000 in the second quarter of 2007, primarily for cash expenditures fortermination benefits and related costs.

 

Thenet loss for the nine months ended September 29, 2007 was $829,000 or $0.02 pershare compared to net loss of $3.0 million or $0.10 per share in the comparableprior year period. Included in the 2006 net loss are non-cash expenses of $1.8million of which $0.4 million relates to the debt issuance expense from theLaurus refinancing in February 2006, and $1.4 million of conversion expenserelating to conversion from debt to equity of $2.1 million. Without theseexpenses, net loss for the nine months ended of 2006 would be $1.2 million or$0.04 per share.

 

**Liquidity and Capital Resources**

 

Cashused in operations was $348,000 in the nine months ended September 29, 2007 ascompared to $2.8 million in the nine months ended September 30, 2006. Accounts receivables decreased from year-endto $2.6 million from $2.8 million. Inventory finished at $2.6 million, whichconsists of $7.1 million of gross inventories and $4.5 million of reserves. Capitalexpenditures were $90,000 for the nine months ended September 29, 2007 comparedto $27,000 in the nine months ended of September 30, 2006.

 

Weended the quarter with $209,000 in cash and cash equivalents up from $200,000at the end of 2006. Working capital finished at a negative $2.5 millioncompared to a negative $664,000 at the end of 2006. The negative workingcapital position is primarily due to the $4.0 million line of credit and the$2.3 million short-term classification of long-term debt.

 

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On March 29, 2007, we againrestructured the financing with Laurus, and increased the total securedindebtedness to $10.25 million. The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible. Beginning March 1, 2008,we are required to make monthly payments equal to 1/60th of the principalamount until February 17, 2009, at which time the entire remaining principaland accrued interest is due and payable in full.  In addition to the $5.25million note, there is a $4.0 million working capital line of credit, which ispayable in full on March 8, 2008.  Interest is payable monthly on the lineat the prime rate plus 2.5%.  The restructured financing also includes anadditional $1.0 million term note. The proceeds from the $1 million term note,net of fees and expenses from the 2007 refinancing, are required to be held ina restricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment. As of September 29, 2007 there was $657,000 released. Interest ispayable monthly at the prime rate plus 2.0% and the principal is payable infull on March 31, 2008. As part of the 2007 restructuring, the Company alsoissued Laurus a 10-year option to purchase 5,000,000 shares at an exerciseprice of $0.01 per share. The shares issuable upon exercise of the option havestandard registration rights.

 

There is currently $1.2 millionin principal amount of the 10% Senior Subordinated Convertible Notesoutstanding, represented by one Note now held by Laurus. The Note has aconversion price of $.50 per share. Interest is payable monthly at the rate of10% and the principal is payable in full on March 31, 2008.

 

A material portion of the principal and interest due from the Company to Laurus on the existing financing agreements becomes due and payable in March of 2008. In the event that we are unable to repay or refinance our debt in March of 2008, Laurus could potentially take a number of actions as secured creditor which would have a material negative impact on the Company and its shareholders, including foreclosure, a forced sale of all or part of the Company, and/or liquidation. Further, if future financing requirements are satisfied through the issuance of equity or debt instruments, shareholders may experience additional dilution in terms of their percentage of ownership of our securities.

 

In the nine months ending September 29, 2007 there was $0 of stock issued in lieu of interest payments. In the nine months ending September 30, 2006, $314,000 of stock was issued in lieu of interest payments. The table below details the stock issued in payment of interest in 2006.

 
| ** ** | ** ** | **Stock Issued in** | ** ** | ** **                | ** ** | ** **           | ** ** |
|------------|------------|-------------------------------|------------|---------------------------|------------|----------------------|------------|
| ** ** | ** ** | **payment of**           | ** ** | **# of Shares** | ** ** | **Stock Price** | ** ** |
| ** ** | ** ** | **interest**                  | ** ** | **issued**                | ** ** | **average**          | ** ** |
| 2006       |       | $                             | 314,000    |                      | 1,358,542  |                 | $          | 0.23 |   |
|            |            |                               |            |                           |            |                      |            |  |  |

 

**IMPACT OF ACCOUNTING STANDARDS**

 

In June 2006, the Financial Accounting Standards Board issuedFASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109,*or FIN48. FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB Statement No.109, *Accounting for Income Taxes*. FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This pronouncement also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006; therefore, the Company will adopt the newrequirements for fiscal 2007. We do not expect the adoption of thispronouncement to have a material impact on our financial position or results ofoperations.

 

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In September 2006, the FASBissued SFAS No. 157, “*Fair Value Measurements*”(“SFAS No. 157”), which is effective for interim and annual reporting periodsbeginning after November 15, 2007. This statement provides a definition of fairvalue, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements for future transactions. The Companyhas not yet assessed the impact of this Statement on the Company’s financialstatements.

 

In February 2007, the FASBissued Statement of Financial Accounting Standards No. 159, “*The Fair Value Option for Financial Assets and Financial Liabilities*”(“SFAS 159”). The Statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. The objective is to improvefinancial reporting by providing entities with the opportunity to mitigatevolatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. SFAS 159 will be effective for the first fiscal year that beginsafter November 15, 2007. The company has not yet assessed the impact of thisStatement on the Company’s financial statements.

 

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

 

The vast majority of our transactions are denominated in U.S. dollars;as such, fluctuations in foreign currency exchange rates have historically hadlittle impact on us. Inflation has not been a significant factor in ouroperations in any of the periods presented, and it is not expected to affectoperations in the future. A 1% increase in interest rates would increase ourinterest expense by $100,000 per year. Our short term revolving line of creditand long-term convertible debt carried interest at the prime rate plus 2.5%. Thereis no material market risk relating to our long-term debt.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

(a)     Evaluationof disclosure controls and procedures.

 

Underthe supervision and with the participation of our management, including theCompany’s Chief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of the design and operation of our disclosure controls and procedures(as defined in Rule 13a-15(e) under the Exchange Act) as of the end of theperiod covered by this report. Based upon that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the evaluation date,our disclosure controls and procedures were effective to ensure that the informationrequired to be disclosed by us in our periodic SEC filings is recorded,processed, summarized, and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

(b)   Changes ininternal controls over financial reporting.

 

Nochanges in the Company’s internal control over financial reporting occurredduring the third quarter of 2007 that have materially affected, or arereasonably likely to affect, our internal control over financial reporting.

 

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# PARTII. OTHER INFORMATION

#  

### **Item1A. Risk Factors**

### ** **

Set forth below is adiscussion of the significant risk factors applicable to the Company. Additionalrisk factors may develop in the future.

 

**Ourability to continue as a “going concern” is uncertain.**

 

Our consolidatedfinancial statements have been prepared on the assumption that we will continueas a going concern, which contemplates the realization of assets andliquidation of liabilities in the normal course of business. The Company has suffered recurring lossesfrom operations and has a stockholders’ deficit. These factors raisesubstantial doubt about the Company’s ability to continue as a going concern.

 

As of September 29, 2007,we had cash and cash equivalents of $209,000, assets totaling $6.0 million,liabilities totaling $11.5 million, and incurred losses from continuingoperations of $829,000 for the first nine months of 2007. We expect to continueto expend cash and incur operating losses at the current net sales levels, butto a lesser extent than the twelve months ended December 31, 2006 as certainoperating expenses are expected to decline from 2006 levels. Our ability togenerate cash and operating income is dependent on increasing our customer baseto expand the penetration of our product technology and the realization of ourlower operating expense targets.

 

A material portion of theprincipal and interest due from the Company to Laurus on the existing financingagreements becomes due and payable in March of 2008. In the event that we are unableto repay or refinance our debt in March of 2008, Laurus could potentially takea number of actions as secured creditor which would have a material negativeimpact on the Company and its shareholders, including foreclosure, a forcedsale of all or part of the Company, and/or liquidation. Further, if futurefinancing requirements are satisfied through the issuance of equity or debtinstruments, shareholders may experience additional dilution in terms of theirpercentage of ownership of our securities.

 

**The success of our new productsdepends upon customer acceptance of both the testing of semiconductor devicesin strip form and the automation of the back-end of the semiconductormanufacturing process.**

 

Several of our newproducts, including our Tapestry strip handler and other Smart Solutionsproducts, are used to test and process semiconductor devices in strip form. Assemblyof semiconductor devices in strip form is the standard industry practice. However,we cannot assure you that testing of semiconductor devices in strip form willbecome widely accepted by the industry. Until recently, most semiconductormanufacturers believed it was necessary to test semiconductors after they werecut from the strips because they believed the act of cutting the strips containingthe semiconductor devices, referred to as singulation, could result in damageor contamination to the semiconductor devices and, as a consequence, make theprior test results unreliable.

 

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We introduced ourTapestry handling system in February 1999. In May 2000, we introduced otherSmart Solutions products, which provide additional process capability forhandling and testing semiconductor devices in strip form. In July of 2003, weintroduced our Tapestry SC, a second-generation system. In July of 2004, we introducedour Tapestry SC SmartMark, a second-generation system. Our new products areattractive to customers only if the customers can see the value of automatingthe test and assembly portions of their semiconductor manufacturing operations.Although semiconductor manufacturers have automated the wafer fabricationportion of their operation, or the front-end of the semiconductor manufacturingprocess, very few semiconductor manufacturers have invested a significantamount of capital to automate the test and assembly portions of theiroperations. We are introducing new products for technologies, which may not beaccepted on a wide-scale basis by the industry. If either the testing ofsemiconductor devices in strip form or wide-scale automation of the back-end isnot accepted by the industry, our net sales likely will suffer.

 

**Downturns in semiconductorindustry business cycles could have a negative impact on our operating results.**

 

Our business dependsheavily upon capital expenditures by semiconductor manufacturers. The semiconductorindustry is highly cyclical, with periods of capacity shortage and periods ofexcess capacity. In periods of excess capacity, the industry sharply cutspurchases of capital equipment, such as our products. Thus, a semiconductorindustry downturn or slowdown substantially reduces our revenues and operatingresults and could hurt our financial condition. In the fourth quarter of 2000,the semiconductor capital equipment industry went into a severe downturn andcontinued through 2005. In 2006, there was a slight upturn in the market, butthe depressed market over the prior six years has negatively affected ouroperations and financial condition.

 

**We have offered automationsolutions and, unless we effectively market our company as a provider ofautomation solutions, our expected financial results will suffer.**

 

We offer equipmentautomation solutions and software development services. These solutions and servicesrequire different marketing techniques and involve a more extensive decision-makingprocess by customers than for our traditional handler products. We need tosuccessfully market our automation products using different sales methods thanwe have previously used.

 

We acquired an automationsoftware business in June 1999 and introduced our first suite of products toprovide an automation solution for the testing portion of semiconductor manufacturingin May 2000. The sales from these operations make up less than 1%, 1% and 3% ofnet sales for the years ended December 31, 2006, 2005 and 2004, respectively. Ourfuture success is dependent upon being able to successfully market our automationproducts. If we are not successful in effectively marketing ourselves as an equipmentautomation solutions provider to the semiconductor industry, our results ofoperations and financial condition will suffer.

 

**We invest heavily in research anddevelopment efforts and our financial results depend upon the success of theseefforts.**

 

We have spent, and expectto continue to spend, a significant amount of time and resources developing newproducts and refining existing products and systems. In light of the longproduct development cycles inherent in our industry, these expenditures will bemade well in advance of the prospect of deriving revenue from the sale of newsystems.

 

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Our ability to introduceand market new products successfully is subject to a wide variety of challengesduring this development cycle, such as design defects or changing marketrequirements that could delay introduction of these systems. In addition, sinceour customers are not obligated by long-term contracts to purchase ourproducts, our anticipated product orders may not materialize, or orders that domaterialize may be canceled. As a result, if we do not achieve marketacceptance of new products, we may not be able to realize sufficient salesneeded to recoup our research and development expenditures.

 

**Our operating results often havelarge changes from period to period, which may result in a decrease in ourstock price.**

 

Our quarterly and annualoperating results are affected by a wide variety of factors that couldadversely affect sales or operating results or lead to significant variabilityin our operating results. A variety of factors could cause this variability,including the following:

 

•              the cyclical natureof the semiconductor industry;

•              delays in, orcancellation of, significant system purchases by customers;

•              delays in thedevelopment, introduction and production of our products;

•              changes in the mixof our products and their gross margins;

•              new productintroductions by competitors and competitive pricing pressures;

•              thetime required for us to adjust our operating expenses to respond to changes insales and market conditions;

•              the timing of anyfuture acquisitions and their effect on our financial results;

•              component shortagesresulting in manufacturing delays; and

•              pressure bycustomers to reduce prices, shorten delivery times and extend payment terms.

 

We cannot predict theimpact of these and other factors on our sales or operating results in anyfuture period. Results of operations in any period, therefore, should not beconsidered indicative of the results to be expected for any future period. Becauseof this difficulty in predicting future performance, our operating results mayfall below expectations of security analysts or investors in some futureperiods. Our failure to meet these expectations would likely adversely affectthe market price of our common stock.

 

**Our stock price is volatile andit may drop unexpectedly.**

 

Stock prices of companiesin the semiconductor equipment industry, including ours, can swing dramaticallywith little relationship to operating performance. Factors, which could causeour stock price to change, include:

 

•              changes in themarket’s view of the semiconductor industry in general;

•              changesin our quarterly operating results for the reasons set out in the previous riskfactors for other reasons;

•              changes in ourreported financial results based on accounting pronouncements;

 

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•              changesin research analysts’ expectations for us or our industry or failure to meetresearch analysts’ estimates;

•              changesin the general economic conditions or developments in the semiconductorindustry which affect investor’s confidence;

•              announcementsby us or our competitors of technological innovations or new or enhancedproducts and;

 

Additional factors, whichmay impact our results, include:

 

•              wedepend upon a few customers for the majority of our revenues and a reduction intheir orders could adversely affect us;

•              ouroperating results would be harmed if one of our key suppliers fails to delivercomponents for our products;

•              the loss of any ofour key personnel could harm our business;

•              ourmarkets are very competitive and demand for our products may decrease ifadditional competitors enter our markets;

•              our dependence uponinternational sales involves significant risk;

•              the possible adverseimpact of economic or political changes in the market we serve;

•              our inability toobtain financing to fund continuing or expanding operations

 

Fluctuations or decreasesin the trading price of our common stock may adversely affect the ability totrade our shares. In addition, these fluctuations could adversely affect ourability to raise capital through future equity financing.

 

### **Item6.  Exhibits**

### ** **

| 31.1   | Certification  of Chief Executive Officer (filed herewith). |
|--------|-------------------------------------------------------------|
|   |                                                        |
| 31.2   | Certification  of Chief Financial Officer (filed herewith). |
|   |                                                        |
| 32     | Section  1350 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: November 13,  2007 | By:                                    | /s/ Roger E. Gower |   |
|                      | Roger E. Gower                         |
|                      | President and Chief  Executive Officer |
|                      |                                   |
|                      |                                   |
|                      | And                                    |   |
|                      |                                   |
|                      |                                   |
| Dated: November 13,  2007 | By:                                    | /s/ Bruce R. Ficks |   |
|                      | Bruce R. Ficks                         |
|                      | Chief Financial Officer                |
|                           |                                        |  |  |  |

 

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### **ExhibitIndex**

### ** **

| 31.1   | Certification  of Chief Executive Officer (filed herewith). |
|--------|-------------------------------------------------------------|
|   |                                                        |
| 31.2   | Certification  of Chief Financial Officer (filed herewith). |
|   |                                                        |
| 32     | Section  1350 Certification (filed herewith).               |

 

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