SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C.
                              ---------------------
                                   FORM 10-KSB
  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                           ACT OF 1934 (FEE REQUIRED)

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2002

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD
                     FROM _______________ TO _______________

                           COMMISSION FILE NO. 1-6635

                        INNOVATIVE MICRO TECHNOLOGY, INC.
                         (Name of small business issuer)

                        Innovative Micro Technology, Inc.
             (Exact name of registrant as specified in its charter)

                 Delaware                                  95-1950506
     (State or other jurisdiction of                    (I.R.S. Employer
     incorporation or organization)                     Identification No.)

          75 Robin Hill Road, Goleta, California              93117
         (Address of principal executive office)           (Zip Code)

       Registrant's telephone number, including area code: (805) 681-2800

        Securities registered pursuant to Section 12 (b) of the Act: None

                    Name of each exchange on which registered
                               Title of each class

          Securities registered pursuant to Section 12 (g) of the Act:

                         Common Stock, $.0001 par value

                                (Title of Class)

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
Yes  [_]    No [X]

      Check if there is no disclosure of delinquent  filers pursuant to Item 405
or  Regulation  S-B  contained  in this form  herein and no  disclosure  will be
contained,  to the best of the  registrant's  knowledge,  in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or in any amendment to this Form 10-KSB. [_]

                      (ISSUERS INVOLVED IN BANKRUPTCY
                     PROCEEDINGS DURING THE PAST FIVE YEARS)

      Check whether the registrant has filed all documents and reports  required
to be  filed  by  Sections  12,  13 or  15(d)  of the  Exchange  Act  after  the
distribution of securities under a plan confirmed by a court. Yes [__] No [X*]

      The aggregate market value of the Common Stock held by  non-affiliates  of
registrant  was $0.00 as of December 15, 2002.

      * Securities to be distributed  under the Company's Plan of Reorganization
have not been distributed as of the filing date.

                           DOCUMENTS INCORPORATED BY REFERENCE
None.
<page>


        IN THIS ANNUAL REPORT ON FORM 10-KSB, THE WORDS  "BELIEVE,"  "ESTIMATE,"
"ANTICIPATE,"  "EXPECT,"  "INTEND,"  "PLAN"  AND  SIMILAR  EXPRESSIONS  IDENTIFY
FORWARD-LOOKING  STATEMENTS  WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.  THESE FORWARD-LOOKING  STATEMENTS SPEAK ONLY AS OF THE DATE HEREOF.
ALL OF THE  FORWARD-LOOKING  STATEMENTS  ARE BASED ON ESTIMATES AND  ASSUMPTIONS
MADE BY MANAGEMENT OF THE COMPANY,  WHICH,  ALTHOUGH  BELIEVED TO BE REASONABLE,
ARE  INHERENTLY  UNCERTAIN AND DIFFICULT TO PREDICT.  THEREFORE,  UNDUE RELIANCE
SHOULD NOT BE PLACED UPON SUCH ESTIMATES. SUCH STATEMENTS ARE SUBJECT TO CERTAIN
RISKS AND  UNCERTAINTIES  INHERENT IN THE  COMPANY'S  BUSINESS  THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE FACTORS INCLUDE,
BUT ARE NOT  LIMITED  TO,  THE  FOLLOWING:  THE  COMPANY'S  ABILITY  TO MAKE THE
TRANSITION TO VOLUME  PRODUCTION  OF MEMS  PRODUCTS;  THE  COMPANY'S  HISTORY OF
LOSSES AND  BANKRUPTCY;  THE COMPANY'S  NEED FOR  ADDITIONAL  CAPITAL;  CHANGING
TECHNOLOGY; COMPETITION; THE COMPANY'S ABILITY TO PROTECT INTELLECTUAL PROPERTY;
FLUCTUATIONS IN THE COMPANY'S QUARTERLY AND ANNUAL OPERATING RESULTS; LACK OF AN
ACTIVE   TRADING   MARKET;   RISKS   RELATED  TO   INTERNATIONAL   TRANSACTIONS;
ENVIRONMENTAL  LAWS AND  REGULATIONS,  SUPPLIES OF RAW MATERIALS;  ANTI-TAKEOVER
PROVISIONS OF THE COMPANY'S  CHARTER AND DELAWARE LAW; AND GENERAL  ECONOMIC AND
POLITICAL UNCERTAINTY.




































                                       2
<PAGE>

ITEM 1. BUSINESS

      Innovative  Micro  Technology,  Inc  ("the  Company")  is  engaged  in the
business of the design and  manufacture of MEMS devices.  MEMS is an acronym for
micro-electro-mechanical  system,  and MEMS devices are sometimes referred to as
"micromachines."  MEMS devices were first  developed in the late 1970s and early
1980s. Generally speaking,  MEMS devices are made using modern  wafer-processing
technology,  similar  to that  used in  making  silicon  electronic  devices  or
thin-film   recording  heads  for  magnetic  storage  devices.   However,   what
distinguishes  MEMS devices is that they are designed to include  moving  parts,
hence the  "mechanical"  part of the name.  By using  modern  wafer  techniques,
device complexity and performance is enhanced,  and cost is lowered owing to the
large number of devices that can be made on a single wafer. Common uses for MEMS
devices are automotive  air-bag sensors  (accelerometers),  pressure and airflow
sensors,  and inkjet printer heads. Future uses for MEMS devices are expected to
be  numerous,  in that many  mechanical  systems  which  today  are built  using
conventional techniques could be made using MEMS.


HISTORY

      The Company was incorporated in California in 1957 and was  reincorporated
in Delaware in 1987 under the name "Applied Magnetics  Corporation." The Company
was an  independent  manufacturer  of head gimbal  assemblies  ("HGAs") and head
stack assemblies  (which consist of multiple HGAs assembled  together with other
components)  to the disk  drive  industry.  The  Company  filed for  Chapter  11
Reorganization   on  January  7,  2000.   The  Company  exited  its  Chapter  11
Reorganization  on November  16, 2001 and changed its name to  Innovative  Micro
Technology, Inc.


THE COMPANY'S MEMS BUSINESS

      The  Company  used  the  Chapter  11   Reorganization  to  reposition  its
operations into the MEMS business. MEMS devices were first developed in the late
1970s and early 1980s.  Generally  speaking,  MEMS devices are made using modern
wafer-processing  technology,  similar to that used in making silicon electronic
devices or thin-film recording heads for magnetic storage devices. However, what
distinguishes  MEMS devices is that they are designed to include  moving  parts,
hence the  "mechanical"  part of the name.  By using  modern  wafer  techniques,
device complexity and performance is enhanced,  and cost is lowered owing to the
large number of devices that can be made on a single wafer.

      Common   uses  for   MEMS   devices   are   automotive   air-bag   sensors
(accelerometers), pressure and airflow sensors, and inkjet printer heads. Future
uses for MEMS  devices are  expected  to be  numerous,  in that many  mechanical
systems which today are built using conventional  techniques could be made using
MEMS.  Examples  of this  include  electromagnetic  relays.  In  addition,  many
electrical  systems may be replaced by MEMS. An example of this is optical fiber
switching,  used in telecommunications.  MEMS versions of these switches are now
beginning to find their way into the marketplace.  Another example is components

                                       3
<PAGE>


for wireless  communication  technology.  High performance  inductors,  variable
capacitors  and  transmit/receive  switches could be replaced by MEMS devices at
lower  cost,  using less space and  providing  higher  performance.  The Company
fabricates MEMS products on a six-inch  silicon wafer,  which depending upon the
size of the individual part, is cut into multiple  finished parts referred to as
dies.

      The Company's three  additional lines of business are: "Santa Barbara Tool
and Die," "Insight Analytical" and leasing of excess space in its owned facility
under long-term lease contracts. Santa Barbara Tool and Die's technology permits
high  precision   manufacturing  of  tooling,  and  the  organization   features
electron-discharge   machining   (EDM)  which   includes   metals  and  ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal
properties.  Santa  Barbara Tool and Die and Insight  Analytical  are  strategic
parts of the  core  company  in that  their  services  are used to make the core
business more  competitive,  and both provide service to outside customers using
the portion of their  capacity  that is excess to that  required by the Company.
The Company has approximately  51,000 square feet of building space available to
lease.  As of September  28, 2002,  approximately  34,000 square feet were under
long term lease  arrangements  with annual future rental income of approximately
$0.5 million.

      The Company has multiple customers for MEMS products.  A major goal of the
Company  is to spread  business  risk by  generating  products  in more than one
industry.  To this  end,  MEMS  and  non-MEMS  wafer  applications  afford  much
opportunity.  The  Company is  proceeding  in the  telecommunications,  inertial
navigation,  bio-technical,  microfluidics  and  biomedical  industries  and  is
looking forward to broadening into the wireless  communication  industry.  These
initiatives are in an early stage, and the Company can give no assurance that it
will be successful in penetrating  these businesses and diversifying its product
lines and customer base.


EMPLOYEES

      Highly  trained  engineers  and  technicians   maintain  and  operate  the
sophisticated equipment that is used in the fabrication of MEMS devices. Most of
these individuals play a dual role of operations as well as process development.
The employees cover the following technical areas:

      1.   photolithography,  including resist application,  resist development,
           and patterned exposure;

      2.   deposition, including sputtering, ion beam deposition, plating;

      3.   etching, including wet-etching and dry (vacuum) processing;

      4.   planarization, including chemical-mechanical polishing;

      5.   wafer slicing, including gang-saw processing;

                                       4
<PAGE>

      6.   assembly,   including  die  bonding,  electrical  bonding,  precision
           alignment; and

      7.   testing, including mechanical and electrical testing.

      The Santa  Barbara  Tool and Die  employees  have  extensive  tool and die
experience  and  the  Insight  Analytical   employees  are  trained  to  operate
sophisticated analytical tools.

      As of September 28, 2002, the Company had 48 employees at its headquarters
in Santa Barbara, California.

TECHNOLOGY

      The Company has three main forms of technology:  manufacturing technology,
design technology, and service technology.

      The  manufacturing  technology  encompasses   photolithography,   material
deposition,  and material removal,  which are the essential methods of producing
integrated wafers.  Additional  manufacturing technology includes wafer bonding,
assembly and testing  procedures,  including  precision  alignment and assembly,
ceramic bonding, wire attachment, and testing algorithms.

      Design technology the Company possesses comes from years of recording head
experience,  which  afforded  the  Company  special  skills in the art of making
magnetic  materials,  and  finding  uses  for  them.  To that  end,  some of the
Company's  intended products surround magnetic MEMS devices.  Specifically,  the
Company  has  skill  and  experience   with   generating  high  magnetic  fields
efficiently  using thin-film  coils coupled with high  saturation  magnetization
materials  capable of carrying magnetic flux.  Coupled with MEMS concepts,  this
should  allow the Company to design and  manufacture  magnetic  actuators of all
types.

      The Company's service technology comes in the form of the business offered
by Santa Barbara Tool & Die and Insight Analytical.

INTELLECTUAL PROPERTY

      The Company  regards  elements  of its  manufacturing  processes,  product
designs  and  equipment  as   proprietary  and seeks to protect its  proprietary
rights  through  a  combination  of  employee  and  third  party   nondisclosure
agreements,  internal  procedures and patent  protection.  The Company has filed
eight patent  applications  with the United  States  Patent Office since January
2000,  and more  are in  preparation  for the MEMS  business.  The  Company  has
received notification from the U.S. Patent office that its first patent has been
issued.

      The Company believes that its success depends on the innovative skills and
technological  competence  of its  employees  and upon proper  protection of its
intellectual  properties.  The Company has, from time to time,  been notified of
claims  that  it may be  infringing  patents  owned  by  others.  If it  appears
necessary or desirable,  the Company may seek licenses  under patents that it is

                                       5
<PAGE>

allegedly  infringing.  Although patent holders commonly offer such licenses, no
assurance  can be given that  licenses  will be offered or that the terms of any
offered licenses will be acceptable to the Company.  The failure to obtain a key
patent  license from a third party could cause the Company to incur  substantial
liabilities or to suspend the manufacture of the products utilizing the patented
invention.

VENDORS

      The  Company  purchases  from a variety  of  vendors  in the course of its
business including  providers of manufacturing  supplies,  office supplies,  and
direct materials. There are no extraordinary dependencies on any vendors, and in
most  all  cases  there is a  general  market  for the  required  products.  One
exception is the  procurement  of  silicon-on-insulator  wafers ("SOI  wafers"),
which can at times be in short supply.


CUSTOMERS

      The  Company's  customers  are in four  categories  representing  its four
business  segments:  MEMS  and  wafer  customers,  machine  shop  tool  and  die
customers,   tenants  of  excess  building  space  and  analytical  lab  service
customers.

      The MEMS business customers are in the  telecommunication,  biotechnology,
microfluidics,  inertial  navigation,  biomedical,  and  the  personal  security
businesses.   Inertial   navigation   MEMS   refers  to  MEMS   gyroscopes   and
accelerometers. The Company is a subcontractor to L-3 Communications Corporation
("L-3")  for  a  long -term  government   contract  to  produce  gyroscopes  and
accelerometers for use in inertial  navigation.  The Company completed an equity
financing  transaction  with L-3 on August 2, 2002 for $5.0 million in cash (see
footnote 8 - Financing  Transaction). The personal  security  company,  Fidelica
Microsystems,  Inc.  ("Fidelica"),  which  specializes  in hardware for personal
identification,  represented  a significant  portion of the  Company's  sales in
fiscal 2002, as shown in the table below.  In the second fiscal quarter of 2002,
Fidelica  cancelled  their  existing  order with the Company  for  product  cost
reasons. Biomedical MEMS includes manufacturing filters. Biotechnology refers to
a  variety  of gene  chips.  Microfluidics  includes  print  heads  for  ink-jet
printing.  The Company also leases  approximately  34,000  square feet of excess
space  within its owned  facility to tenants  under long-term  contracts.  OCCAM
Networks,  Inc. leases  approximately 31,000 square feet of the Company's excess
building space.

      The results of operations and cash flows for the two months ended November
24, 2001 include  operations  prior to the Company's  emergence  from Chapter 11
proceedings   (referred  to  as  "Predecessor   Company")  and  the  effects  of
Fresh-Start Reporting. The Company's monthly fiscal calendar ended with November
24,  2001.  There  were  no  significant  accounting  transactions  between  the
Company's exit from the Chapter 11 proceedings on November 16, 2001 and November
24, 2001 and therefore it believes this reporting to be appropriate. The results
of operations and cash flows for the ten months ended September 28, 2002 include
operations subsequent to the Company's emergence from Chapter 11 proceedings and
reflect  the  effects  of  Fresh-Start  Reporting  (referred  to  as  "Successor
Company"). In order to allow comparison of the Company's two years of results of
operations,  a  "Proforma  Combined"  column  has been  provided  that  sums the
Company's financial information for the fiscal

                                       6
<PAGE>

2002 periods. The Company's sales by business segment for fiscal 2002 and fiscal
2001 are displayed below.

Sales by customer
                                                     For the Years Ended:
                                          --------------------------------------
                                              Proforma
                                              Combined
                                             September 28,     September 29,
(As a percentage of sales)                      2002                2001
                                          --------------------------------------
Fidelica Micro Systems, Inc.                          14%               34%
Coventor, Inc.                                        14%                0%
OCCAM Networks, Inc.                                  13%                0%
All Others                                            59%               66%
                                          --------------------------------------
Total                                                100%              100%
                                          ======================================


Sales by Segment                                    For the Years Ended:
                                          --------------------------------------
                                              Proforma
                                              Combined
                                             September 28,     September 29,
(As a percentage of sales)                      2002                2001
                                          --------------------------------------
MEMS                                                  67%               59%
Santa Barbara Tool & Die                              15%               24%
Insight Analytical                                     4%                7%
Rental Income                                         14%               10%
                                          --------------------------------------
Total                                                100%              100%
                                          ======================================

         The Company's products are sold in the United States, Japan, Canada and
Europe by its direct sales personnel.


COMPETITION

      The Company competes with other independent MEMS  manufacturers.  They are
generally  private  entities and  information  about their  financial  status is
unavailable  to the Company.  The names of some of these firms are Applied MEMS,
Tronics and Issys. Some of these companies operate wafer fabrication  facilities
using a four-inch  diameter  wafer  compared to the six-inch  format used by the
Company.  The  larger  wafer used by the  Company  has  approximately  twice the
physical useable area, which provides approximately twice as many die per wafer.
This feature provides the Company with cost advantages.

      The Company also competes with large Integrated Circuit manufacturers with
six-inch wafer fabrication  ("wafer fab") facilities.  These firms include Sony,
Analog  Devices,   Texas   Instruments   and  Motorola.   These  firms  are  all
significantly  larger than the Company with  greater  financial,  technical  and

                                       7
<PAGE>

marketing  resources  than  the  Company.  They  operate  wafer  fabs  based  on
Complimentary Metal Oxide  Semiconductor  ("CMOS") technology which limits their
use compared to the Company's equipment capabilities.

      The Company  also  competes  with captive  wafer fabs owned by  vertically
integrated MEMS users. These include: Intellisense,  owned by Corning, Inc.; and
Cronos,  which was recently sold by JDS Uniphase to Memscap S. A. The parents of
these  firms  are  all  significantly  larger  than  the  Company  with  greater
financial,  technical and marketing resources than the Company.  These firms are
focused on producing products for their parents,  but they also service external
customers.

      The principal competitive factors in the markets the Company addresses are
price, product performance,  quality,  product  availability,  responsiveness to
customers  and  technological   sophistication.   See  "Customers"  for  further
discussion.

ENVIRONMENTAL REGULATIONS

      The Company uses hazardous  chemicals in its  manufacturing and is subject
to a variety of  environmental  and land use  regulations  related to their use,
storage  and  disposal.  If the Company  fails to comply with  present or future
regulations,   liability,  production  suspension  or  delay  could  result.  In
addition,  environmental  or land use  regulations  could restrict the Company's
ability to expand its current  production  facilities  or  establish  additional
facilities in other  locations,  or could require the Company to acquire  costly
equipment,   or  to  incur  other  significant   expenses  for  compliance  with
environmental regulations or to clean up prior discharges.

      The Company has been subject to regulatory and legal  proceedings  related
to past  environmental  contamination,  and other proceedings could arise in the
future.  In  fiscal  2002 the  Company  was  advised  by the U.S.  Environmental
Protection  Agency that it may be required to pay for part of the remediation of
a solvent and refrigerant  recycling and treatment facility formerly operated by
the Omega Chemical Company in Whittier,  California,  and may be required to pay
an additional  amount which  management does not expect to be material.  The EPA
alleges that the Company provided solvent and refrigerant waste to this facility
for recycling  and  disposal.  The Company is still  exploring  legal  defenses,
including defenses arising out of the bankruptcy proceedings.  At this time, the
Company  intends  to  defend  this  matter  vigorously.   The  Company  is  also
remediating  and  monitoring  ground water  contaminated  with volatile  organic
compounds ("VOCs") at a former Company site in Goleta, California under an order
of  the  California  Regional  Water  Quality  Control  Board  ("CRWQCB").   VOC
contamination  at the site has been  reduced  and the  Company  does not  expect
further expenditures at the site to be material.

      The  Company  is in the  process  of  selling  its  unneeded  facility  in
California.  The  environmental  testing  performed by the Company in support of
this sale determined that the soil showed no metal or volatile  organic compound
("VOC")   contamination.   Ground  water  samples   showed  low  levels  of  VOC

                                       8
<PAGE>


contamination.  The CRWQCB required the Company to install one monitoring  well,
and test  results  confirmed  the low  level  VOC  concentration.  The  property
adjacent to the Company is conducting a remediation project on its site for this
same VOC and the CRWQCB has requested  this property to place  monitoring  wells
between the two properties to make a  determination  of possible  intrusion from
the adjacent site. The results of their testing showed the daughter  products of
the  pertinent  VOC. They have been asked to conduct  bi-annual  sampling of the
wells.  The Company  believes it conducts its business in a manner that complies
with environmental laws and regulations. While the Company's known environmental
liabilities have largely been resolved and are not, either individually or taken
together,  material to its business  and  financial  condition,  there can be no
assurance that material  environmental  claims will not arise in the future.  If
such claims arise, they could be extremely expensive to contest or to resolve if
the  Company  is  found  responsible  and does  not  have  applicable  insurance
coverage, which would result in material harm to its business.


EXECUTIVE OFFICERS OF THE REGISTRANT

      The  following  table  sets forth  information  as to the name,  age,  and
office(s) held by each executive officer of the Company as of January 6, 2003:

      Name                 Age Position or Office
      ----                 ----------------------

      Dr. John S. Foster   44  Chief Executive Officer and Chairman of the Board
      Peter T. Altavilla   49  Chief Financial Officer, Corporate Controller and
                               Secretary

      Dr.  John S.  Foster has over 15 years of  experience  in  technology  and
operations  management.  He joined the Company in 1993. He has held a variety of
senior  management  positions  including  two  years as the  Company's  Managing
Director of its former  operation in Penang,  Malaysia and as the Vice President
of Worldwide  Operations.  Dr. Foster holds a doctorate in Applied  Physics from
Stanford  University.  He was elected to the position of Chief Executive Officer
of the Company on November 16, 2001 and to the position of Chairman of the Board
on November 19, 2001.

      Peter T.  Altavilla has been employed by the Company since 1987. He served
as  Assistant  Controller  until  August 1,  1994,  when he was  elected  to the
position  of  Corporate  Controller.  Mr.  Altavilla  was elected  Secretary  on
February 9, 1996. He was elected to the position of Chief  Financial  Officer of
the Company on November 16, 2001.













                                       9
<PAGE>

ITEM 2.  PROPERTIES

      Certain  information  concerning  the  Company's  principal  properties at
September 28, 2002 is set forth below:
<table>
<caption>
Location                             Type             Principal Use                   Footage      Ownership
------------------------------------------------------------------------------------------------------------------

<S>                          <C>                      <C>                             <C>            <C>
Goleta (Santa Barbara),CA    Headquarters, Office,    Marketing and manufacturing     130,000        Owned
                             plant and warehouse        research and engineering
Goleta (Santa Barbara),CA    Vacant plant                                             103,000        Owned (1)
</table>
(1) The Company plans to sell this facility

      The Company believes its existing manufacturing facilities are adequate to
support customer requirements during fiscal 2003.


ITEM 3.  LEGAL PROCEEDINGS

      The  Company  is not a  party,  nor are its  properties  subject  to,  any
material  pending  legal  proceedings  other than  ordinary  routine  litigation
incidental  to the  Company's  business and the matters  described  above.  (See
Environmental Regulations)

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

      The  Company's  Common  Stock is not traded on any  exchange  or quoted on
NASDAQ.


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

      The following  selected  financial data should be read in conjunction with
the  Financial  Statements  provided  in  this  Report  and  with  "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

      The results of operations and cash flows for the two months ended November
24, 2001 include  operations  prior to the Company's  emergence  from Chapter 11
proceedings  (referred to as  "Predecessor  Company")  and the effects of Fresh-
Start Reporting.  The Company's  monthly fiscal calendar ended with November 24,

                                       10
<PAGE>

2001. There were no significant  accounting  transactions  between the Company's
exit from the Chapter 11  proceedings on November 16, 2001 and November 24, 2001
and  therefore  it believes  this  reporting to be  appropriate.  The results of
operations  and cash flows for the ten months ended  September  28, 2002 include
operations subsequent to the Company's emergence from Chapter 11 proceedings and
reflect  the  effects  of  Fresh-Start  Reporting  (referred  to  as  "Successor
Company"). As a result, the net loss for the ten months ended September 28, 2002
is not  comparable  with prior periods.  In addition,  certain line items of the
liabilities  and  shareholders'  equity  portion  of  the  balance  sheet  as of
September 28, 2002 are not comparable to prior periods for the reasons discussed
above.  In order to allow  comparison  of the  Company's two years of results of
operations,  a  "Proforma  Combined"  column  has been  provided  that  sums the
Company's financial information for the fiscal 2002 periods.
<table>
<caption>
(In thousands, except per share and employment amounts)

                                 Proforma Combined       Successor Co.    Predecesor Co.      Predecessor Co.     Predecessor Co.

                                                                                                    Year              Year
                                    Year Ended         Ten Months Ended    Two Months Ended        Ended              Ended
                                 September 28, 2002   September 28, 2002   November 24, 2001  September 29, 2001  September 30, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                  <C>                  <C>                <C>                 <C>
OPERATIONS

Net sales                        $   3,578            $      2,886         $        692       $      2,773        $        456
                                 ------------------   ------------------   -----------------  ------------------  ------------------
Net loss                            (8,979)                 (7,745)              (1,234)           (11,828)            (33,764)

Net loss per share:
Loss from continuing
  operations per common share        (1.94)                 (1.67)                (0.02)              (0.17)             (0.16)

Discontinued operations, net             -                       -                    -                  -               (0.33)
                                 ------------------   ------------------   -----------------  ------------------  ------------------
Loss per common share - basic
     and diluted                     (1.94)                  (1.67)               (0.02)             (0.17)              (0.49)
Weighted average number of
     common sharesoutstanding-
     basic and diluted               4,629                   4,645               70,444             70,444              69,598
BALANCE SHEET

Working capital                  $  (2,204)           $     (2,204)        $     (5,142)      $     (4,314)                477
Total assets                        31,009                  31,009               28,808             29,355              32,912
Long term debt                      15,645                  15,645                    -                  -                   -
Total liabilities subject to
    compromise                           -                       -              315,941            315,709             313,966

Shareholders' equity                 7,564                   7,564             (295,259)          (294,025)           (283,397)

OTHER DATA

Period-end employment                   48                      48                   43                 39                  32
</table>

                                       11
<PAGE>

BUSINESS

      The following Management's  Discussion and Analysis of Financial Condition
and Results of Operations should be read together with the financial  statements
and related notes included  elsewhere in this Annual Report on Form 10-KSB. This
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  Actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including those
described  under " - Risk Factors  Affecting Our Business" and elsewhere in this
report.

      The Company exited its Chapter 11  Reorganization  process on November 16,
2001. The Company adopted the fresh start reporting requirements of Statement of
Position  90-7,  "Financial  Reporting by Entities in  Reorganization  under the
Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the
fresh start reporting requirements,  the reorganization value of the Company was
allocated to the Company's assets in conformity with the procedures specified by
SFAS No. 142,  "Goodwill and Other  Intangible  Assets." SFAS 142 applies to all
acquired  intangible assets whether acquired singly, as part of a group, or in a
business  combination.  SFAS 142 specifies  that goodwill and  indefinite  lived
intangible  assets will no longer be  amortized  but instead  will be subject to
periodic impairment testing. As provided for under the Company's  reorganization
plan, the Company converted approximately $12 million of its secured liabilities
to debt and $304 million of unsecured  liabilities to equity in the  reorganized
entity.

      The  Company  has  reorganized  itself  from a  manufacturer  of magnetic
recording  heads for the disk drive industry to a manufacturer  of micro electro
mechanical  systems ("MEMS")  operating in a number of industry  segments.  MEMS
devices are sometimes  referred to as  "micromachines."  MEMS devices were first
developed in the late 1970s and early 1980s.  Generally  speaking,  MEMS devices
are made  using  modern  wafer-processing  technology,  similar  to that used in
making  silicon  electronic  devices or thin-film  recording  heads for magnetic
storage  devices.  However,  what  distinguishes  MEMS  devices is that they are
designed to include moving parts,  hence the  "mechanical"  part of the name. By
using modern wafer  techniques,  device  complexity and performance is enhanced,
and cost is lowered  owing to the large  number of devices that can be made on a
single wafer.

      Common   uses  for   MEMS   devices   are   automotive   air-bag   sensors
(accelerometers), pressure and airflow sensors, and inkjet printer heads. Future
uses for MEMS  devices are  expected  to be  numerous,  in that many  mechanical
systems which today are built using conventional  techniques could be made using
MEMS.  Examples  of this  include  electromagnetic  relays.  In  addition,  many
electrical  systems may be replaced by MEMS. An example of this is optical fiber
switching, used in telecommunications. In the future, it is possible that it can
be done  mechanically  using MEMS.  Another  example is components  for wireless
communication   technology.    High-Q   inductors,   variable   capacitors   and
transmit/receive switches could be replaced by MEMS devices at lower cost, using
less  space and  providing  higher  performance.  The  Company  fabricates  MEMS
products on a six-inch  silicon  wafer,  which,  depending  upon the size of the
individual part, is cut into multiple finished parts referred to as dies.

                                       12
<PAGE>


      The Company's three  additional lines of business are: "Santa Barbara Tool
and Die," "Insight Analytical" and leasing of excess space in its owned facility
under long term lease contracts. Santa Barbara Tool and Die's technology permits
high  precision   manufacturing  of  tooling,  and  the  organization   features
electron-discharge   machining   (EDM)  which   includes   metals  and  ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal
properties.  Santa  Barbara Tool and Die and Insight  Analytical  are  strategic
parts of the  core  company  in that  their  services  are used to make the core
business more  competitive,  and both provide service to outside customers using
the portion of their  capacity  that is excess to that  required by the Company.
The Company has approximately  51,000 square feet of building space available to
lease.  As of September  28, 2002  approximately  34,000  square feet were under
long-term lease  arrangements  with annual rental income of  approximately  $0.5
million.

      The results of operations and cash flows for the two months ended November
24, 2001 include  operations  prior to the Company's  emergence  from Chapter 11
proceedings   (referred  to  as  "Predecessor   Company")  and  the  effects  of
Fresh-Start Reporting. The Company's monthly fiscal calendar ended with November
24,  2001.  There  were  no  significant  accounting  transactions  between  the
Company's exit from the Chapter 11 proceedings on November 16, 2001 and November
24, 2001 and therefore it believes this reporting to be appropriate. The results
of operations and cash flows for the ten months ended September 28, 2002 include
operations subsequent to the Company's emergence from Chapter 11 proceedings and
reflect  the  effects  of  Fresh-Start  Reporting  (referred  to  as  "Successor
Company"). As a result, the net loss for the ten months ended September 28, 2002
is not  comparable  with prior periods.  In addition,  certain line items of the
liabilities  and  shareholders'  equity  portion  of  the  balance  sheet  as of
September 28, 2002 are not comparable to prior periods for the reasons discussed
above.  In order to allow  comparison  of the  Company's two years of results of
operations,  a  "Proforma  Combined"  column  has been  provided  that  sums the
Company's financial information for the fiscal 2002 periods.
























                                       13
<PAGE>


ANNUAL RESULTS OF OPERATIONS

      The following table sets forth certain financial data for the Company as a
percentage of net sales for the last two fiscal years.
<table>
<caption>
                                           Proforma         Successor          Predecessor         Predecessor
                                           Combined             Co.                 Co.                Co.
                                             Year           Ten months          Two months
                                             Ended            Ended               Ended            Year Ended
                                           September        September            November          September
                                            28, 2002         28, 2002            24, 2001           29, 2001
                                    -------------------------------------------------------------------------
<S>                                          <C>               <C>                <C>                 <C>
Net sales
  MEMS and Other                              85.7%             85.2%              87.6%               90.1%
  Rental income                               14.3%             14.8%              12.4%                9.9%
  Subtotal                                   100.0%            100.0%             100.0%              100.0%
Cost of sales
  MEMS and Other                             175.1%            179.5%             156.9%              227.3%
  Rental income                                3.3%              3.8%               0.9%                7.0%
  Subtotal                                   178.4%            183.3%             157.8%              234.3%
Gross loss                                   -78.4%            -83.3%             -57.8%             -134.3%
Research and development                      25.3%             28.2%              13.0%               12.5%
Selling, general and
administrative                                61.3%             67.5%              35.4%               57.5%
Impairment of long lived assets                0.0%              0.0%               0.0%               88.9%
Loss from operations                        -165.0%           -179.0%            -106.2%             -293.2%
Interest income                                0.6%              0.7%               0.3%                1.2%
Interest expense                             -68.4%            -77.9%             -29.5%              -53.1%
Other income, net                              7.7%              3.5%              25.6%                0.0%
Reorganization Costs                         -25.0%            -14.6%             -68.5%              -81.3%
Loss from operations before
income taxes                                -250.1%           -267.3%            -178.3%             -426.4%
Provision for income taxes                     0.9%              1.1%               0.0%                0.1%
 Net loss                                   -251.0%           -268.4%            -178.3%             -426.5%
</table>

      NET SALES:  Net sales increased to $3.6 million in fiscal 2002 as compared
to net sales of $2.8  million  in fiscal  2001.  The sales  increase  was due to
growth in sales for the MEMS  portion of the  business  and an increase in sales
for leasing of excess space.  The MEMS portion of the business had sales of $2.4
million and $1.6 million for fiscal 2002 and 2001, respectively. The Company has

                                       14
<PAGE>


added new  customers  through its  marketing  efforts and is  beginning to see a
resulting  growth in sales.  Santa Barbara Tool and Die sales  decreased to $0.5
million  in fiscal  2002,  compared  to $0.7  million  in fiscal  2001.  Insight
Analytical  had sales of $0.2 million in both fiscal 2002 and fiscal  2001.  The
leasing of excess space  increased  to $0.5 million in fiscal 2002,  compared to
$0.3  million in fiscal  2001.  The  increase is  explained by the fact that the
lease with the Company's  largest  tenant started in the third fiscal quarter of
2001.

      GROSS LOSS: The gross loss was $2.8 million or a negative 78.4% for fiscal
2002  compared to a negative  134.3% or $3.7 million for fiscal  2001.  The MEMS
portion of the business had a gross loss of $3.3 million or a negative 138.8% in
fiscal 2002 and a $4.0 million  gross loss or a negative  243.8% in fiscal 2001.
The fiscal  2002 MEMS gross  loss  includes  $0.3  million  in  amortization  of
employee  stock  incentives  that became  effective  with the Company's  Plan of
Reorganization  on November 16, 2001.  Santa  Barbara Tool and Die had a minimal
gross loss in fiscal 2002 as compared to a minimal  gross profit in fiscal 2001.
Insight  Analytical  generated a profit of $0.1  million in fiscal 2002 and $0.2
million in fiscal  2001.  The leasing of space to our  tenants  provided a gross
profit of $0.4  million in fiscal 2002 or 77.1% as  compared to $0.1  million or
29% for its first year of  business in fiscal  2001.  The  improvement  in gross
profit is explained by the fact that the lease with the Company's largest tenant
started in the third fiscal  quarter of 2001 and therefore  fiscal 2002 received
benefit  of a full year of  income.  The  Company  had  thirty-eight  production
employees  at the end of fiscal  2002,  compared  to  twenty-nine  at the end of
fiscal 2001.

      RESEARCH AND DEVELOPMENT:  Research and development  expenses ("R&D") were
$0.9  million in fiscal  2002,  compared to $0.3  million for fiscal  2001.  The
fiscal 2002 amount  includes  $0.3  million in  amortization  of employee  stock
incentives that became  effective with the Company's Plan of  Reorganization  on
November 16, 2001.  The R&D expenses  represented  25.3% and 12.5% of net sales,
respectively, for such periods.

      R&D  expenditures for the Company focus on development of new MEMS devices
and the  associated  production  processes for the  telecommunication,  computer
electronics,  inertial navigation,  wireless  communication,  and the biomedical
product areas. R&D expenditures are expected to grow as the Company continues to
diversify  into new product  areas.  The Company  currently  has four  employees
focused on the development of new products and manufacturing processes.

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES:   Selling,  general  and
administrative  ("SG&A")  expenses  were $2.2 million and $1.6 million in fiscal
2002 and 2001,  respectively.  These amounts include $0.2 million in fiscal 2002
and $0.5 million in fiscal 2001 of property tax,  insurance and utility  expense
related to a  California  property  that the Company is  planning  to sell.  The
fiscal 2002 amount  includes  $0.5  million in  amortization  of employee  stock
incentives that became  effective with the Company's Plan of  Reorganization  on
November 16, 2001. The increased customer activity has resulted in the increased
expenses.  The total selling,  general and administrative  expenses  represented
61.3%  and 57.5% of net  sales,  respectively,  for such  periods.  The  Company
currently has six employees providing the services reported as SG&A.

                                       15
<PAGE>


      REORGANIZATION   COSTS:   Reorganization   costs   consist   primarily  of
professional  fees  directly  related to the Chapter 11 filing and the emergence
from bankruptcy.

      INTEREST  EXPENSE:  Interest  expense was $2.5 million and $1.5 million in
fiscal 2002 and 2001,  respectively.  The Company increased a mortgage on one of
its  properties  in fiscal  2002,  which  accounts  for the increase in interest
expense.

      OTHER INCOME.  The Company recognized $0.2 million in other income for the
first fiscal quarter of 2002 from the sale of a minority  ownership  position in
Magnetic  Data  Technologies,  LLC,  a  former  subsidiary  of the  Company.

      PROVISION FOR INCOME TAXES:  The fiscal 2002 and 2001 provision for income
taxes included minimum state income taxes.

      Under the terms of the bankruptcy,  the Company may not be able to receive
any benefit from previously  accumulated net operating loss carryforwards  prior
to the bankruptcy.  Portions of the Company's  pre-bankruptcy  tax losses may be
eligible for use in future periods.  The Company is currently  evaluating  these
amounts.  Since January 7, 2000, the Company has  accumulated net operating loss
carryforwards of approximately  $25.1 million for federal tax purposes and $12.6
million for state tax  purposes as of September  28, 2002.  Once the Company has
utilized these remaining net operating loss carry forwards, future U.S. earnings
will be taxed at the U.S. statutory rates less available tax credits, if any. To
the extent not used, the net operating loss  carryforwards for federal and state
purposes expire in varying amounts beginning in 2021 and 2011, respectively.  At
September  28,  2002,  all  identified  deferred  tax  assets  are  reduced by a
valuation allowance  therefore,  any additional operating loss carryforwards not
recognized  would not result in a benefit in the  provision for income taxes due
to the  uncertainty  of future  realization of those  additional  operating loss
carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's cash balance increased to $2.9 million at September 28, 2002
from $1.7 million at September 29, 2001.  The increase in cash was primarily due
to the  following  sources  of  cash:  $5.0  million  from an  equity  financing
transaction  completed  in August of 2002 and a net $3.0 million from a mortgage
secured by the real property owned by the Company.  These sources were primarily
offset by the net use of cash by operations of $6.1 million plus the purchase of
new equipment of $0.5 million.

      The MEMS  industry is capital  intensive  and  requires  expenditures  for
manufacturing  equipment  and research and  development  in order to develop and
take advantage of  technological  improvements and new  technologies.  In fiscal
2003,  the Company  plans  approximately  $0.2  million in capital  expenditures
primarily to continue  development and production of new MEMS  technologies  and

                                       16
<PAGE>


products and to increase overall production capacity. Capital equipment purchase
commitments were minimal at September 28, 2002.

      The  Company's  liquidity  and  ability  to  fund  operating  and  capital
expenditure  requirements  during  fiscal 2003 depend  heavily on its ability to
achieve  volume  production  of its MEMS  products on a timely  basis and obtain
additional financing.  Although the Company is devoting substantial  engineering
and manufacturing  resources to its production goals, there can be no assurances
that the Company will achieve planned  production  levels on a timely basis. The
Company completed an equity financing  transaction with a strategic  investor on
August 2, 2002 for $5 million in cash. The Company  issued the investor  935,000
shares of common stock along with two warrants.  The first warrant has a term of
eighteen  months  and the  value was  determined  to be $0.3  million  using the
Black-Scholes  option pricing model. The second warrant has a term of thirty-six
months and the value was  determined to be $1.4 million using the  Black-Scholes
option pricing model. The  value  of the  warrants  is not  reflected  in the
accompanying  financial  statements as it was recorded within common stock.

      The Company expects the $5 million investment to provide the cash required
to fund the Company's working capital needs through the second quarter of fiscal
2003.  The Company is  currently  investigating  accounts  receivable  financing
opportunities, but cannot give assurance that accounts receivable financing will
be available or, if available,  that its terms will be favorable to the Company.
If the Company is unable to achieve its  production  goals or obtain  additional
financing  on  acceptable  terms,  on a timely  basis,  there will be a material
adverse effect on the Company's  financial  condition and competitive  position.
Because of the Company's recurring losses from operations and negative cash flow
the Company's  accountants have expressed substantial doubt about its ability to
continue as a going concern.

      The Company has  incurred net losses and losses from  operations  for each
quarter since 1999. The Company filed for reorganization under Chapter 11 of the
U.S.  Bankruptcy Code in January 2000 and, on emergence from bankruptcy,  all of
the  previously  issued  and  outstanding  common  stock  was  canceled  without
consideration  to the holders.  The Company  incurred net losses of $9.0 million
for the fiscal year ended  September  28, 2002.  It expects to continue to incur
substantial  operating losses for the foreseeable  future, and it cannot predict
the extent of the future losses or when it may become profitable. If the Company
does  achieve  profitability,  it  may  not  be  able  to  sustain  or  increase
profitability  even in the future. The Company expects to incur increasing sales
and marketing, research and development and general and administrative expenses.
As a result,  it will need to  significantly  increase  its  revenues to achieve
profitability.  Although the Company's  revenues have increased,  the growth may
not continue at the current  rate or at all.  The above items raise  substantial
doubt about the Company's ability to continue as a going concern.

                                       17
<PAGE>


COMMITMENTS AND CONTINGENCIES

      The Company uses hazardous  chemicals in its  manufacturing and is subject
to a variety of  environmental  and land use  regulations  related to their use,
storage  and  disposal.  If the Company  fails to comply with  present or future
regulations,   liability,  production  suspension  or  delay  could  result.  In
addition,  environmental  or land use  regulations  could restrict the Company's
ability to expand its current  production  facilities  or  establish  additional
facilities in other  locations,  or could require the Company to acquire  costly
equipment,   or  to  incur  other  significant   expenses  for  compliance  with
environmental regulations or to clean up prior discharges.

      The Company has been subject to regulatory and legal  proceedings  related
to past  environmental  contamination,  and other proceedings could arise in the
future.  The  Company  has  recently  been  advised  by the  U.S.  Environmental
Protection  Agency that it may be required to pay for part of the remediation of
a solvent and refrigerant  recycling and treatment facility formerly operated by
the Omega Chemical Company in Whittier,  California,  and may be required to pay
an additional  amount which  management does not expect to be material.  The EPA
alleges that the Company provided solvent and refrigerant waste to this facility
for recycling  and  disposal.  The Company is still  exploring  legal  defenses,
including defenses arising out of the bankruptcy proceedings.  At this time, the
Company  intends  to  defend  this  matter  vigorously.   The  Company  is  also
remediating  and  monitoring  ground water  contaminated  with volatile  organic
compounds ("VOCs") at a former Company site in Goleta, California under an order
of  the  California  Regional  Water  Quality  Control  Board  ("CRWQCB").   VOC
contamination  at the site has been  reduced  and the  Company  does not  expect
further expenditures at the site to be material.

      The  Company  is in  the  process  of  selling  an  unneeded  facility  in
California,  the Hollister property.  The environmental testing performed by the
Company  in  support of this sale  determined  that the soil  showed no metal or
volatile organic compound ("VOC") contamination. Ground water samples showed low
levels of VOC  contamination.  The CRWQCB  required  the  Company to install one
monitoring well and test results confirmed the low level VOC concentration.  The
property adjacent to the Hollister property is conducting a remediation  project
on its site for this same VOC and the  CRWQCB has  requested  this  property  to
place  monitoring  wells between the two properties to make a  determination  of
possible  intrusion  from the adjacent site. The results of their testing showed
the  daughter  products of the  pertinent  VOC.  They have been asked to conduct
bi-annual sampling of the wells.

      The Company  believes it conducts its  business in a manner that  complies
with environmental laws and regulations. While the Company's known environmental
liabilities have largely been resolved and are not, either individually or taken
together,  material to its business  and  financial  condition,  there can be no
assurance that material  environmental  claims will not arise in the future.  If
such claims arise, they could be extremely expensive to contest or to resolve if

                                       18
<PAGE>

the  Company  is  found  responsible  and does  not  have  applicable  insurance
coverage, which would result in material harm to its business.

      Purchase commitments  associated with capital expenditures were minimal at
September 28, 2002

      The Company has no leases for which it is the lessee.

      The  aggregate  principal  payments  of  long  term  debt  for  the  years
subsequent to September 28, 2002 are:  2003 - $4.3 million, 2004 - $0.2 million,
2005 - $5.6 million, 2006 - $9.8 million and 2007 - $0.1 million.  These amounts
relate to convertible  notes owed to the  professionals  used in the bankruptcy,
property  taxes and two  property  mortgages,  which are all  secured by the two
California properties owned by the Company.


CRITICAL ACCOUNTING POLICIES

      Application of the Company's  accounting  policies requires  management to
make  judgments  and  estimates  about the amounts  reflected  in the  financial
statements.  Management uses historical experience and all available information
to make these  estimates  and  judgments,  although  differing  amounts would be
reported if the assumptions and estimates  changed.  Estimates are used for, but
not  limited  to,  the  accounting  for the  allowance  for  doubtful  accounts,
inventory allowances,  impairment costs and other special charges,  depreciation
and amortization,  warranty costs and  contingencies.  Management has identified
the  following  accounting  policies  as  critical  to an  understanding  of its
financial  statements and as areas most dependent on  management's  judgment and
estimates.

      GOING CONCERN  ASSUMPTION:  The Company has incurred net losses and losses
from   operations   for  each  quarter   since  1999.   The  Company  filed  for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 2000 and,
on emergence  from  bankruptcy,  all of the  previously  issued and  outstanding
common  stock was canceled  without  consideration  to the holders.  The Company
incurred net losses of $9.0  million for fiscal 2002.  It expects to continue to
incur  substantial  operating losses for the foreseeable  future,  and it cannot
predict the extent of the future losses or when it may become  profitable.  Even
if the  Company  does  achieve  profitability,  it may not be able to sustain or
increase  profitability  in the future.  The Company expects to incur increasing
sales and marketing,  research and  development  and general and  administrative
expenses.  As a result,  it will need to significantly  increase its revenues to
achieve  profitability.  Although the  Company's  revenues have  increased,  the
growth may not  continue  at the current  rate or at all.  The above items raise
substantial doubt about the Company's ability to continue as a going concern.

      STATEMENT OF POSITION 90-7 AND FRESH START ACCOUNTING:  The Company exited
its Chapter 11 Reorganization  process on November 16, 2001 ("Effective  Date").
The Company  adopted the fresh start  reporting  requirements  of  Statement  of
Position  90-7,  "Financial  Reporting by Entities in  Reorganization  under the

                                       19
<PAGE>


Bankruptcy Code" during the first quarter of fiscal 2002. In accordance with the
fresh start reporting requirements,  the reorganization value of the Company was
allocated to the Company's assets in conformity with the procedures specified by
SFAS No. 142, "Goodwill and Other Intangible  Assets". As provided for under the
Company's  reorganization plan (the "Plan"), the Company converted approximately
$12 million of its secured  liabilities  to debt and $304  million of  unsecured
liabilities to equity in the reorganized entity.

      The Company has initiated the process for issuance of the common stock and
warrants  pursuant  to  the  Plan,  however  it  will  not  perform  the  actual
distribution  until  the  Company  is  current  with all of its  Securities  and
Exchange  Commission  filings.  The Company anticipates that the filings will be
current by the end of January 2003.

      REVENUE RECOGNITION AND WARRANTY POLICIES:  The Company uses the completed
contract  method of accounting for its product  development  projects due to the
inability to accurately  estimate percentage of completion during performance of
the  contract.  Costs are  capitalized  during the  project as  inventories  and
expensed at its completion along with the recognition of revenue.  Santa Barbara
Tool and Die  delivers  a  finished  product  to the  customer  and  revenue  is
recognized  at the time  the  product  is  shipped  and  title  passes.  Insight
Analytical  has service  related  revenue and this  revenue is  recognized  upon
completion  of the service for the  customer.  The  Company's  MEMS  development
contracts  do not have any  rights of  return.  Santa  Barbara  Tool and Die and
Insight  Analytical  did not have any sales returns in fiscal 2002 or 2001.  The
Company's  warranty  policy provides for the replacement of defective parts when
the  customer's  return  request is approved  within thirty days of the original
shipment date. To date, warranty costs have not been significant.

      LONG-LIVED  ASSETS:  The Company reviews  long-lived assets for impairment
whenever events or changes in  circumstances  indicate that an asset's  carrying
value may exceed the undiscounted  expected future cash flows to be derived from
that asset.  Whenever  undiscounted expected future cash flows are less than the
carrying value,  the asset will be reduced to an amount equal to the net present
value  of the  expected  future  cash  flows  and an  impairment  loss  will  be
recognized.

      The Company  adjusted its  machinery  and equipment to market value in the
fourth  fiscal  quarter of 2001.  An orderly  liquidation  value  appraisal  was
performed  by a third party at the  request of the  Company,  and the  valuation
indicated   that  the   equipment,   similar  to  that  used  by   semiconductor
manufacturers, required a reduction in value of approximately $2.5 million.

      FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS:  The  carrying  amounts  of cash,
customer  receivables,  trade  accounts  payable and other  accrued  liabilities
approximate  their fair value because of the short  maturity of these  financial
instruments.  The  carrying  amounts  of  approximately  $19.1  million  of  the
Company's  debt  approximates  fair  market  value as the debt is with  multiple
lenders and it had been negotiated at the same rate which appears to represent a
market rate of interest. The carrying amounts of $0.9 million of the debt due on
delinquent  property  taxes is at rates below  market and its fair market  value
would be $0.6 million.

                                       20
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

      Statement of Financial  Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative  Instruments  and Hedging  Activities,"  as amended,  establishes
accounting and reporting standards for derivative instruments, including certain
derivative  instruments  embedded in other contracts and for hedging activities.
The Company adopted SFAS 133 effective October 1, 2000. The adoption of SFAS 133
did  not  have a  significant  impact  on the  financial  position,  results  of
operations, or cash flows of the Company.

      During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued by the Financial Accounting Standards Board ("FASB"). SFAS 142 applies to
all acquired  intangible  assets whether acquired singly, as part of a group, or
in a business combination. SFAS 142 specifies that goodwill and indefinite lived
intangible  assets will no longer be  amortized  but instead  will be subject to
periodic impairment  testing.  Intangible assets with a determinable useful life
will continue to be amortized over their  expected  lives.  The Company  adopted
SFAS  142  early,  beginning  in its  fiscal  year  2002,  and it did not have a
significant impact on its financial position or results of operations.

      In August 2001,  SFAS No. 144,  "Accounting for the Impairment or Disposal
of Long-Lived  Assets," was issued by the FASB. SFAS 144 addresses the financial
accounting  and  reporting  issues for the  impairment or disposal of long-lived
assets.  This  statement   supersedes  SFAS  121  but  retains  the  fundamental
provisions for (a) recognition/measurement of impairment of long-lived assets to
be held and used and (b)  measurement of long-lived  assets to be disposed of by
sales.  It is effective for fiscal years  beginning after December 15, 2001, and
interim  periods  within those fiscal years.  The Company early adopted SFAS 144
beginning  in its fiscal year 2002 and it did not have a  significant  impact on
its financial  position or results of operations as the Company had consistently
applied the impairment provisions of SFAS 121.

      In May of 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical  Corrections,"  was issued
by the FASB. The statement rescinds FASB No. 4, "Reporting Gains and Losses from
extinguishment  of Debt,"  and an  amendment  of that  statement,  FASB No.  64,
"Extinguishments  of Debt  Made to  Satisfy  Sinking  Fund  Requirements."  As a
result,  gains  and  losses  from  extinguishment  of  debt  will no  longer  be
aggregated  and classified as an  extraordinary  item, net of related income tax
effect, in the statement of operations.  Instead,  such gains and losses will be
classified as  extraordinary  items only if they meet the criteria of unusual or
infrequently  occurring items.  SFAS No. 145 also requires that gains and losses
from debt extinguishments, which were classified as extraordinary items in prior
periods,  be  reclassified  to  continuing  operations  if they do not  meet the
criteria for extraordinary  items. The provisions related to this portion of the
statement  are  required to be applied in fiscal years  beginning  after May 15,
2002, with earlier application  encouraged.  The Company is currently evaluating
the provisions of SFAS 145 and it has not  determined  the impact,  if any, that
this statement will have on its financial position or results of operations.

                                       21
<PAGE>


      In June of 2002, SFAS 146,  "Accounting for Costs  Associated with Exit or
Disposal  Activities,"  which nullifies EITF issue 94-3, was issued by the FASB.
SFAS 146 is effective for exit and disposal  activities that are initiated after
December 31, 2002 and requires  that a liability for a cost  associated  with an
exit or disposal  activity be  recognized  when the  liability is  incurred,  in
contrast to the date of an entity's  commitment  to an exit plan, as required by
EITF issue 94-3. The Company is currently evaluating the provisions of SFAS 146,
but does not expect a material  impact on its financials  position or results of
operations.


RISK FACTORS AFFECTING THE COMPANY'S BUSINESS

      IN  ADDITION  TO THE  FACTORS  DISCUSSED  ELSEWHERE  IN THIS  REPORT,  THE
FOLLOWING ARE IMPORTANT  FACTORS THAT COULD CAUSE A MATERIAL  ADVERSE  EFFECT ON
THE COMPANY'S FINANCIAL CONDITION,  COMPETITIVE POSITION AND ABILITY TO CONTINUE
AS A GOING  CONCERN AND TO CAUSE ACTUAL  RESULTS OR EVENTS TO DIFFER  MATERIALLY
FROM THOSE CONTAINED IN ANY FORWARD  LOOKING  STATEMENTS MADE BY OR ON BEHALF OF
THE COMPANY.

      THE COMPANY HAS  INCURRED  LOSSES  SINCE 1999;  IT RECENTLY  EMERGED  FROM
BANKRUPTCY, AND EXPECTS TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.

      The Company has  incurred net losses and losses from  operations  for each
quarter since 1999. The Company filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy,  all of
the  previously  issued  and  outstanding  common  stock  was  canceled  without
consideration  to the holders.  The Company  incurred net losses of $9.0 million
for the fiscal year ended  September  28, 2002.  It expects to continue to incur
substantial  operating losses for the foreseeable  future, and it cannot predict
the extent of the future losses or when it may become profitable. If the Company
does  achieve  profitability,  it  may  not  be  able  to  sustain  or  increase
profitability  even in the future. The Company expects to incur increasing sales
and marketing, research and development and general and administrative expenses.
As a result,  it will need to  significantly  increase  its  revenues to achieve
profitability.  Although the Company's  revenues have increased,  the growth may
not continue at the current  rate or at all.  The above items raise  substantial
doubt about the Company's ability to continue as a going concern.

      CAPITAL NEEDS.

      The MEMS  industry is capital  intensive  and  requires  expenditures  for
facilities, equipment and research and development to develop and keep pace with
technological improvements. The Company believes that to achieve its objectives,
it will need  additional  resources  over the next  several  years  for  capital
expenditures,   working  capital  and  research  and  development.  The  Company
purchased  property,  plant and  equipment in fiscal 2002 totaling $0.5 million.
During fiscal 2003, the Company plans to purchase or enter into lease  financing
for  approximately  $0.2 million of property,  plant and equipment.  The Company
believes that it will be able to fund future  expenditures from a combination of
new capital infusion,  existing cash balances and cash flow from operations. The

                                       22
<PAGE>


Company will need additional  sources of capital to meet  requirements in future
years.  There is no  assurance  that  additional  funds will be available to the
Company or, if available,  that the terms and  conditions  will be acceptable to
the Company.  If the Company cannot obtain sufficient  capital, it would need to
curtail its operating and capital expenditures, which would adversely affect the
Company's future operating  results and could prevent the Company from competing
successfully in the MEMS industry.

      THE COMPANY HAS HIGH FIXED  COSTS AND EXCESS  CAPACITY  DUE TO ITS CURRENT
LOW PRODUCTION VOLUMES.

      The  fixed  costs  of  operating  and   maintaining  the  Company's  wafer
fabrication  facility and other  elements of its  production  capacity are high.
Most  of  its  current  production   consists  of  prototypes  and  new  product
development. These are low-volume projects, which leave the Company's facilities
underutilized  and  cannot  absorb  the fixed  costs.  As a result  the  Company
experiences  operating  losses.  The  company  plans  to shift  from  low-volume
prototype and development orders to high-volume  production for its customers as
their  development  programs mature into production  contracts,  which will make
fuller use of its excess  capacity.  However,  making this shift  depends on the
success  of  the  Company's  engineers  in  developing   efficient   high-volume
production  technology,  the success of its customers in  developing  marketable
uses for its MEMS  technology,  and the general  growth and  acceptance  of MEMS
technology.   If  the  Company  cannot   successfully  make  the  transition  to
high-volume  production,  it will  continue  to  experience  losses  and  suffer
material harm to its operating results and liquidity.

      TECHNOLOGICAL CHANGES.

      The MEMS business has been  characterized by rapidly changing  technology.
The demand for greater  capability  will cause  competitors to continue to build
greater  performance into their respective  products.  There can be no assurance
that the  Company's  products  will  achieve such  performance.  There can be no
assurance that the Company will not experience manufacturing and product quality
problems in the future.  The Company's  future success  depends in large part on
its  ability  to develop  and  qualify  new  products  on a timely  basis and to
manufacture them in sufficient quantities to compete effectively on the basis of
price and performance.

      COMPETITION.

      The Company competes with other independent MEMS manufacturers, with large
integrated  circuit  manufacturers,   and  with  captive  Wafer  Fabs  owned  by
vertically  integrated MEMS users. Many of these competitors are larger than the
Company and have greater financial resources.  If the Company is unable to equal
or  surpass  its  competitors  in the area of  price,  performance,  quality  or
customer responsiveness, then the business will be unsuccessful.

                                       23
<PAGE>


      THE  COMPANY'S  SUCCESS  DEPENDS IN PART UPON THE  ABILITY TO PROTECT  ITS
INTELLECTUAL PROPERTY.

      The  Company's   success  depends  in  large  part  upon  its  proprietary
technology.  The  Company  relies on a  combination  of  patents,  trade  secret
protection,   confidentiality   and   nondisclosure   agreements  and  licensing
arrangements  to establish and protect its  intellectual  property  rights.  The
Company's patents may be successfully  challenged or may not provide it with the
intended competitive  advantages.  Important technology developed by the Company
may not be patentable.  Despite the Company's efforts to protect its proprietary
rights,  unauthorized  parties may attempt to copy aspects of its products or to
obtain  and  use  information   that  is  regarded  as   proprietary.   Policing
unauthorized  use of the  Company's  proprietary  technology  is  difficult.  In
addition,  the laws of some foreign  countries do not protect these  proprietary
rights to as great an extent as do the laws of the United States.  The Company's
means  of  protecting  its  proprietary  rights  may  not be  adequate  and  its
competitors  may  independently   develop  similar  technology,   duplicate  its
products, or design around its proprietary intellectual property.

      The Company may face costly  damages or litigation  costs if a third party
claims  that  the  Company  infringed  on its  intellectual  property.  Advanced
technology   products  such  as  the  Company's  are  increasingly   subject  to
third-party infringement claims. In addition,  former employers of the Company's
current  and future  employees  may assert  that its  employees  have  disclosed
confidential or proprietary information to the Company. Any of these claims even
if they are without merit, could be expensive and time consuming to defend.

      In addition,  intellectual  property  claims against the Company,  with or
without merit,  could require it to enter into royalty or licensing  agreements.
These  royalty or licensing  agreements,  if  required,  may not be available on
terms  acceptable  to the  Company or at all,  which  could  seriously  harm its
business.  A successful claim of infringement against the Company or its failure
or inability  to license the  infringed or similar  technology  could  adversely
affect its business  because the Company  would not be able to sell the affected
product without redeveloping the product or its manufacturing process, incurring
significant additional expenses.


      FLUCTUATIONS  IN  QUARTERLY  AND ANNUAL  OPERATING  RESULTS MAY  ADVERSELY
AFFECT THE COMPANY'S BUSINESS.

      The  Company's  operating  results  have  fluctuated  and may  continue to
fluctuate  from  quarter to quarter and year to year.  The  Company's  sales are
generally  made  pursuant  to  individual  purchase  orders  and  production  is
scheduled  on the basis of such  purchase  orders.  Because  the market for MEMS
products is new, and the Company is constantly  introducing  new designs ordered
by customers,  the sales cycles are long and unpredictable.  The sales cycle for
the Company's products typically ranges from three to six months.  Moreover,  as
customer  programs  mature,  the Company may have to  write-down  inventory  and
equipment.  In addition, the Company must qualify on future programs to sell its
products.  Cancellation,  rescheduling  and  reductions  of orders in the future
could result in inventory losses,  under-utilization  of production capacity and

                                       24
<PAGE>


write-downs of tooling and equipment which would have a material  adverse effect
on the  Company's  future  operating  results.  In  particular,  in the past the
Company's  operating  results  have  been  adversely  affected  when  production
capacity is underutilized, and will likely be so affected in the future.

      PLANT EXCESS CAPACITY.

      The Company has a 6-inch wafer fabrication facility that has 30,000 square
feet of fully facilitized  manufacturing space. At the current level of customer
orders this  facility  is  underutilized  and the  associated  depreciation  and
utilities expenses are  underabsorbed.  The Company is working with customers on
development  programs  that are  expected to mature into  production  contracts,
which will more fully utilize its plant capacity.  However,  these contracts may
never  materialize  and the plant  underutilization  could  continue to cause an
adverse affect on the Company's operating results.

      THE  COMPANY'S  COMMON  STOCK  MAY  BE  ILLIQUID  AND  SUFFER  FROM  PRICE
VOLATILITY BECAUSE IT HAS NOT BEEN PUBLICLY TRADED.

      There has not been a public  market for the  Company's  common stock since
January,  2000. The Company's  outstanding  common stock, which was issued after
the emergence of the Company from  bankruptcy,  is not listed for trading on any
stock  market or  quotation  on the  Nasdaq.  The  company  intends to apply for
listing  of  its  common  stock,  but  there  can be no  assurance  it  will  be
successful. Even if listed, it is likely that the stock will initially be thinly
traded and the  Company  cannot  predict  when or if  investor  interest  in the
Company will lead to the development of an active, liquid trading market. Active
trading markets  generally  result in lower price  volatility and more efficient
execution of buy and sell orders for  investors.  A thin  trading  market in the
Company's  stock will likely depress the trading  price,  make it more difficult
for investors to buy or sell its common stock, and result in price volatility.

      INTERNATIONAL SALES COULD EXPOSE THE COMPANY TO RISK.

      The Company sells its products to foreign customers and expects this to be
an important  part of its future  business.  Accordingly,  the Company will face
risks inherent in conducting business internationally, such as:

           .    difficulties  in  collecting   accounts  receivable  and  longer
                collection periods;

           .    seasonal business activity in certain parts of the world;

           .    potentially adverse tax consequences;

           .    fluctuations in currency exchange rates;

           .    political and economic instability; and

                                       25
<PAGE>

           .    trade barriers.

      Any of these factors  could  seriously  harm the  Company's  international
operations and, consequently, business.

      ENVIRONMENTAL LAWS AND REGULATIONS.

      The Company's  manufacturing processes employ hazardous substances and are
subject to regulation  pursuant to various  federal and state laws governing the
environment.  In the past,  the Company has been subject to claims by government
agencies and individuals related to disposal of hazardous  materials.  See "Item
1.  Business - Legal  Proceedings"  and " -  Environmental  Regulations."  These
matters  have largely  been  resolved  and the Company  believes it conducts its
business in a manner that  complies  with  environmental  laws and  regulations.
Nevertheless,  material  environmental  claims could arise in the future,  which
could have a material adverse effect on the Company.

      INTERRUPTIONS  IN THE COMPANY'S  SUPPLY OF RAW MATERIALS  COULD  ADVERSELY
AFFECT ITS BUSINESS.

      The  Company's   operations  require  raw  materials  that  meet  exacting
standards.  The Company  generally  has  multiple  sources of supply for its raw
materials; however, only a limited number of suppliers are capable of delivering
certain raw materials that meet its standards.  Various factors could reduce the
availability of raw materials such as silicon wafers, photomasks, chemicals, and
gases.  In  addition,  any  transportation  problems  could delay the  Company's
receipt of raw  materials.  Although raw materials  shortages or  transportation
problems have not  interrupted  its operations in the past,  shortages may occur
from  time to  time in the  future.  Also,  lead  times  for the  supply  of raw
materials  have  been  extended  in the  past.  If the  Company's  supply of raw
materials is interrupted or its lead times extended, then its cash flow would be
reduced,  orders may be cancelled or diverted to  competitors,  and its business
would suffer significant harm.

      THE  COMPANY'S  CERTIFICATE  OF  INCORPORATION  AND BYLAWS  COULD DELAY OR
PREVENT AN ACQUISITION OR SALE OF THE COMPANY.

      The Company's Certificate of Incorporation empowers the Board of Directors
to establish and issue a class of preferred  stock, and to determine the rights,
preferences  and  privileges  of the  preferred  stock.  This gives the Board of
Directors the ability to deter,  discourage  or make more  difficult a change in
control  of the  Company,  even if such a  change  in  control  would  be in the
interest  of a  significant  number of our  stockholders  or if such a change in
control would  provide its  stockholders  with a  substantial  premium for their
shares over the then-prevailing market price for the common stock.

      The Company's  Amended and Restated  Bylaws contain other  provisions that
could have an anti-takeover effect, including the following:

           .    only one of the three classes of directors is elected each year;

                                       26
<PAGE>

           .    stockholders have limited ability to remove directors;

           .    stockholders cannot call a special meeting of stockholders; and

           .    stockholders  must give advance notice to nominate  directors or
                submit proposals for consideration at stockholder meetings.

      ANTI-TAKEOVER  PROVISIONS  OF  DELAWARE  LAW  COULD  DELAY OR  PREVENT  AN
ACQUISITION OF THE COMPANY.

      The Company is subject to the  anti-takeover  provisions of Section 203 of
the Delaware General  Corporation Law, which regulates  corporate  acquisitions.
These  provisions  could discourage  potential  acquisition  proposals and could
delay or  prevent a change in  control  transaction.  They  could  also have the
effect of discouraging others from making tender offers for the Company's common
stock or preventing changes in its management.

      CURRENT  ECONOMIC  AND  POLITICAL  UNCERTAINTIES  MAY HARM  THE  COMPANY'S
BUSINESS.

      Deteriorating  global  economic  conditions  and the  effects  of  ongoing
military  actions  against  terrorists  may  cause  significant  disruptions  to
commerce  throughout the world.  To the extent that such  disruptions  result in
delays or  cancellations  of customer  orders,  a general  decrease in corporate
spending on advanced  technology,  or the  Company's  inability  to  effectively
market,  manufacture or ship its products,  its business,  results of operations
and financial  conditions could suffer harm. In addition,  the Company's ability
to raise capital for purposes of research and development,  capital expenditures
and ongoing operations  depends on access to financing.  During times of adverse
global economic and political  conditions,  general  investor  confidence  could
decrease and make it more difficult for the Company to find potential investors.
If the  Company  does not have access to  financing,  it could be unable to fund
operations,  invest in capital expenditures and fully carry out its research and
development  efforts,  which could  adversely  affect the  business,  results of
operations and financial conditions.


ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (See Pages F-3 through F-6)


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

                                       27
<PAGE>


                                    PART III

ITEM 9:  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND
         CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
         THE EXCHANGE ACT

      The following table provides information  concerning each of the Company's
directors and executive officers:

                                  DIRECTOR
              NAME        AGE       SINCE             POSITION OR OFFICE
           ----------    ------   ---------          --------------------
Dr. John S. Foster        44        2001       Chairman, Chief Executive Officer
Peter T. Altavilla        49        n/a        Chief Financial Officer,
                                               Controller and Secretary
Dr. Malcolm Currie        75        2001       Director
Dr. Calvin Quate          79        2001       Director
Scott Avila               42        2001       Director
Daniel E. Armel           58        2001       Director
Dr. William Howard        61        2001       Director
Dr. Jill Wittels          53        2002       Director

      Excluding  traffic  violations  or other minor  offenses,  during the five
years  preceding  the date of this  report,  none of the  directors or executive
officers  named above has been  convicted  in any  criminal  proceeding  or been
subject to a pending  criminal  proceeding.  Dr. Foster and Mr.  Altavilla  were
executive  officers  of the  Company  at the  time  it  filed  its  petition  of
bankruptcy.

      Dr.  Foster  became  an  employee  in 1993.  He has  served in a number of
management positions for the Company,  including Managing Director of operations
in Penang,  Malaysia and Vice President of Worldwide Operations.  Dr. Foster was
appointed Chief  Executive  Officer on November 16, 2001. Dr. Foster has over 15
years of experience in technology and operations  management.  Election for this
board position will be in February 2005.

      The Company has employed Mr.  Altavilla since 1987. He served as Assistant
Controller until August 1, 1994, and as Corporate Controller from August 1, 1994
and on November 16, 2001, he was elected Chief Financial Officer.  Mr. Altavilla
was elected Secretary on February 9, 1996.

      Dr. Currie became a director on November 16, 2001. He currently  serves as
Chairman  and CEO of  Currie  Technologies  Inc.,  a  manufacturer  of  electric
transportation  vehicles.  He  currently  serves on the Boards of the  following

                                       28
<PAGE>


public  companies:  LSI Logic  Corporation,  where he is  chairman  of the Audit
Committee;  Inamed  Corporation,  where he holds the position of Chairman of the
Audit Committee;  Enova Systems,  Inc.; and Regal One Corporation.  He serves on
the Compensation  Committee of LSI Logic Corporation and Enova Systems,  Inc. He
has also served as chairman of Constellation Communications, Chairman and CEO of
Hughes  Electronics  Corporation,  President of Hughes  Missile  Systems Co. and
President of Delco Electronics  Corporation.  He serves on the Board of Trustees
for the  University  of  Southern  California  where  he  previously  served  as
Chairman. Election for this board position will be in February 2005.

      Dr. Calvin Quate became a director on November 16, 2001. He is a professor
of Applied  Physics and  Electrical  Engineering at Stanford  University,  and a
director of Zyomyx,  Inc. a developer of protein  biochips.  In 1995 he received
the Scientist of the Year award from R&D  Magazine,  and in 1992 he received the
National Medal of Science.  Election for this board position will be in February
2005.

      Daniel Armel is the current Chairman of Baymark Strategies and has over 25
years of  experience  in corporate  restructuring.  He has served as a banker at
Morgan  Guaranty  Trust Company of New York, and was a partner at the accounting
firm of Coopers & Lybrand. He serves on the boards of a number of privately held
companies. Election for this board position will be in February 2004.

      Scott Avila is a founding  partner of  Crossroads,  LLC a consulting  firm
specializing  in  restructurings.   Mr.  Avila  specializes  in  developing  and
implementing  corporate  restructuring plans and providing interim management to
operationally and financially distressed organizations.  Election for this board
position will be in February 2004.

      Dr. William Howard is an independent  consulting  engineer with clients in
the microelectronics and technology-based business planning areas. He was Senior
Vice President of Research and  Development at Motorola from 1983 to 1987. He is
a director of Ramtron International  Corporation, a maker of high density memory
chips, VLSI Technology,  Inc., BEI Technologies,  Inc, Xlinix,  Inc. and Creyton
System Co. He serves on the  compensation  committees for Ramtron  International
Corporation  and  Xlinix,  Inc.  Election  for this  board  position  will be in
February 2004.

      Dr. Jill Wittels  became a director on October 31, 2002.  For the past two
years she has held the position of Vice  President of Business  Development  and
chief  technologist for L-3 Communications  Corporation.  From 1997 through 2000
she was the Vice President and General Manager of Infrared  Imaging  Systems,  a
division of BAE Systems,  formerly Lockheed Martin.  Overall she has 24 years of
experience  in business and  technology  management  in the defense  electronics
industry. Election for this board position will be in February 2006.

      SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Under  Section  16(a)  of  the  Exchange  Act,  the  Company's  directors,
executive  officers  and any person  holding  ten  percent or more of the Common
Stock are required to report their  ownership of Common Stock and any changes in
that  ownership  to the SEC and to  furnish  the  Company  with  copies  of such
reports.  Specific  due dates for these  reports have been  established  and the
Company is required to report in this Proxy  Statement  any failure to file on a
timely  basis by such  persons.  Based solely upon a review of copies of reports
filed with the SEC, each person subject to the reporting requirements of Section
16(a) has filed timely all reports  required to be filed in fiscal 2001,  except

                                       29
<PAGE>

(i) the following persons did not timely file a Form 5 regarding the issuance of
stock  options  during  the fiscal  year  ended  September  28,  2002:  Peter T.
Altavilla, Daniel Armel, Scott Avila, John S. Foster,  William Howard and Calvin
Quate and (ii) the following  persons did not timely file a Form 3 upon becoming
an  officer,  director,  or  beneficial  owner of more  than  10% of the  equity
securities of the Company:  Daniel Armel,  Scott Avila,  William Howard,  Calvin
Quate and L-3 Communication  Corporation.  The Company has implemented a program
to ensure timely compliance in the future.


ITEM 10 - EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

      The following table shows, as to our Chief Executive  Officer and our only
other  executive  officer whose salary plus bonus exceeded  $100,000  during the
fiscal year ended September 29, 2001, information  concerning  compensation paid
for services to us in all  capacities  during that fiscal  year,  as well as the
total  compensation  paid to each such  individual  in each of our preceding two
fiscal  years (if such person was the Chief  Executive  Officer or an  executive
officer, as the case may be, during any part of such fiscal year).
<table>
<caption>
                                                         Annual Compensation                 Long-Term Compensation
                                                  ----------------------------------------------------------------------------------
                                                                                            Awards           Payouts
                                                                                    --------------------------------------
                                                                         Other                   Securities
                                                                         Annual     Restricted   underlying               All Other
                                                                         Compen-       Stock       Options/   LTIP        Compen-
                                                   Salary    Bonus (3)   sation (1)  Awards (8)    SARs (3)   Payouts (3) sation (4)
   Name and Principal Position       Year            ($)        ($)         ($)          (#)        ($)       ($)            ($)
 -------------------------------- -------------- ----------- ----------- ---------- -----------  -----------  ----------- ----------
<S>                                    <C>        <C>                                                                        <C>
 John S. Foster                        2002       265,000                           630,385        193,421
 Chief Operating Officer (2)           2001       265,000
                                       2000       164,000                                                                    47,587
------------------------------------------------------------------------------------------------------------------------------------
 Peter T. Altavilla                    2002       135,000                           420,255        108,947
 Controller and Secretary              2001       135,000
                                       2000       135,000                                                                     6,524
------------------------------------------------------------------------------------------------------------------------------------
</table>

(1)   The value of  perquisites,  if any,  fell below $50,000 or 10% of reported
      base salary and bonus for each executive.

(2)   The  restricted  stock  awards  were  issued  under  the 2001 Plan and are
      subject to  restrictions  under the 2001 Plan that,  among  other  things,
      prohibit  the sale or transfer of the common  stock.  The awards vest over
      two years from the date of grant. An aggregate of 126,077 shares of common
      stock were awarded in fiscal 2002 to Mr. Foster,  valued at $630,385,  and
      are subject to  restrictions  under the terms of the 2001 Plan. The awards
      vest over two years from the date of grant.  An aggregate of 84,051 shares
      of common  stock were awarded in fiscal 2002 to Mr.  Altavilla,  valued at
      $420,255,  and are  subject  to  restrictions  under the terms of the 2001
      Plan.

(3)   Includes all stock options granted during the year. No Stock  Appreciation
      Rights  (SARs) were  granted and no stock  options  were granted in tandem
      with SARs.

                                       30
<PAGE>

      The following table sets forth certain information regarding stock options
granted by the Company to the named executive officers during 2002:

                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

                      Number of     Percent of
                      Securities   Total Options/
                      Underlying    SARs Granted
                       Options/     to Employees
                        SARs       In Fiscal Year   Exercise
                       Granted)                       Price      Expiration Date
          Name           (#                          ($/Sh)
--------------------------------------------------------------------------------
John S. Foster         193,421         15.3            5.00       May 10, 2012
--------------------------------------------------------------------------------
Peter T. Altavilla     108,947          8.6            5.00       May 10, 2012
--------------------------------------------------------------------------------

      The following table sets forth certain information regarding stock options
outstanding at September 28, 2002 for the named executive  officers.  No options
were exercised by the following individuals during 2002.

            AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND
                            FY-END OPTION/SAR VALUES
<table>
<caption>
                                                                                   Value of
                                                              Number of           Unexercised
                                                             Securities          In-The Money
                                                             Underlying            Options at
                                                         Unexercised Options      Fiscal Year-
                          Shares                         at Fiscal Year-End           End
                       Acquired on                        (# exercisable/        ($ exercisable/
            Name         Exercise      Value Realized     unexercisable) (2)    unexercisable) (1)
---------------------------------------------------------------------------------------------------
<S>                         <C>               <C>         <C>    <C>              <C>    <C>
John S. Foster              0                 0           64,474/128,947          22,566/45,131
Peter T. Altavilla          0                 0           36,316/72,631           12,711/25,421
</table>

(1)   Assumes a market  value of $5.35  per share on  September  28,  2002.  The
      Company  does not have a market for its stock at this time,  but the Board
      determined  the fair  market  value of the  common  stock to be $5.35  per
      share.

(2)   Includes  64,474  options exercisable within 60 days of September 28, 2002
      for John S. Foster and 36,316 for Peter T. Altavilla.

EMPLOYMENT AGREEMENTS

      The Company has entered into severance  agreements with certain  executive
officers and key employees of the Company, including both of the named executive
officers shown in the Summary Compensation Table.

                                       31
<PAGE>


      These  agreements  are intended to provide for continuity of management in
the event of a change in control of the  Company.  The  agreements  provide that
covered  executive  officers  and key  employees  could be  entitled  to certain
severance benefits following a change in control of the Company. If, following a
change in control,  the  executive  officer or key employee is terminated by the
Company  for any  reason,  other than for  disability  or for cause,  or if such
executive  officer or key employee  terminates  his or her  employment  for good
reason (as this term is defined in the agreements),  then the executive  officer
or key employee is entitled to a severance  payment that will be the executive's
or key employee's  base amount for a period of twelve months,  as defined in the
agreements. The severance payment generally is made in the form of a lump sum.

      "Base  amount"  means  the  sum  of (a)  the  executive  officer's  or key
employee's then monthly base salary;  (b) the executive's or key employee's then
monthly car  allowance,  if any, and (c)  one-twelfth  of an amount equal to any
bonus the executive  officer or key employee received or was entitled to receive
for the fiscal year immediately preceding a change in control.

      If a change in control  occurs,  the agreements are effective for a period
of three years thereafter.  Under the severance agreements,  a change in control
would include any of the following events:  (1) any "person",  as defined in the
Securities Exchange Act of 1934, as amended,  acquires 20 percent or more of the
Company's  voting  securities;  (ii) a majority of the  Company's  directors are
replaced  during a  two-year  period;  or  (iii)  shareholders  approve  certain
mergers, or a liquidation, or sale of the Company's assets.

      Dr.  Foster and Mr.  Altavilla are parties to  indemnification  agreements
with the Company. These agreements provide, among other things, that the Company
shall (i) indemnify them against certain liabilities that may arise by reason of
their status as executive  officers  provided  they acted in good faith and in a
manner reasonably  believed to be in the best interests of the Company and, with
respect to any  criminal  action,  had no cause to  believe  their  conduct  was
unlawful,  (ii) to advance the expenses  actually and  reasonably  incurred as a
result of any proceeding  against them by third parties or by or in right of the
Company,  where the  indemnitee  acted in good faith in a manner the  indemnitee
believed to be in the best  interest of the Company  (subject to repayment if it
is determined that the indemnitee is not entitled to indemnification); and (iii)
to make a good faith attempt to obtain directors' and officers' insurance. There
is no  action  or  proceeding  pending  or,  to the  knowledge  of the  Company,
threatened  which may  result in a claim for  indemnification  by any  director,
officer, employee or agent of the Company.

COMPENSATION OF DIRECTORS

      The Company  pays to each  director  who is not employed by the Company an
annual retainer of $15,000 and $1,250 for each meeting of the Board of Directors
they attend.  Directors  who serve on  committees  of the Board of Directors are
entitled to be paid $1,250 for attendance at meetings of such committees if they
occur on days other than on a regularly  scheduled board meeting day.  Directors
are also  reimbursed  for all expenses  incurred by them in their  capacity as a
director of the Company.  Directors  are not  compensated  for meetings  held by
teleconferencing facilities. The Board of Directors may modify such compensation

                                       32
<PAGE>

in the future.  In addition,  each  director  not employed by the Company,  upon
joining the Board of Directors,  receives an option to purchase 20,000 shares of
the Common Stock of the Company  and,  thereafter,  an option to purchase  7,500
shares of Common  Stock on the date of each annual  meeting at which such person
is  reelected to serve as a director.  Such options will have an exercise  price
equal to the fair  market  value of such  shares  on the date of  grant,  become
exercisable in two equal annual installments commencing on the first anniversary
of the grant thereof, and expire on the tenth anniversary of the date of grant.


ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           SECURITY OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND
                                   MANAGEMENT

      The following  table contains  certain  information  regarding  beneficial
ownership of our common  stock as of September  28, 2002 by (a) each person that
we know owns  beneficially  more than 5% of our  common  stock,  (b) each of our
directors,  (c) our  Chief  Executive  Officer  and our two  other  most  highly
compensated  executive  officers  and (d)  all of our  directors  and  executive
officers as a group:
<table>
<caption>
                                                                        SHARES BENEFICIALLY     PERCENT OF
                             NAME                                               OWNED           CLASS (1)
<S>                                                                         <C>                     <C>
Non-Employee Directors
     Malcolm Currie                                                           10,000 (2)              0.2%
     Dr. Calvin Quate                                                         10,000 (2)              0.2%
     Scott Avila                                                              10,000 (2)              0.2%
     Daniel Armel                                                             10,000 (2)              0.2%
     Dr. William Howard                                                       10,000 (2)              0.2%
Executive Officers:
     John S. Foster                                                          127,513 (3)              2.3%
     Peter T. Altavilla                                                       78,342 (4)              1.4%
All  Directors  and  Named  Executive  Officers  as a  Group
     (seven persons).                                                        255,855 (5)              4.5%
Five Percent Stockholders:
     L-3 Communications Corporation                                        1,802,000 (6)            28.59%
     RHB Bank Berhad                                                         726,101 (7)            13.36%
     Malayan Banking Berhad                                                  798,477 (7)            14.69%
     Ban Hin Lee Bank - SO. BK Berhad                                        369,304 (7)             6.79%
     AMM- Gordon & Rees                                                      663,470 (7)            12.21%
     Kennilworth Partners II LP                                              375,000 (7)             6.90%
------------------------------------------------------
</TABLE>
(1)   Calculation  is based  upon the  number  of  shares  of our  common  stock
      outstanding on September 28, 2002,  treating the 4,500,000 shares issuable
      under  the  Plan  of  Reorganization  as  issued  and  outstanding  shares
      (5,435,000).

                                       33
<PAGE>
(2)   Includes  options,  exercisable  within 60 days, to purchase 10,000 shares
      under our 2001 Stock Incentive Plan.

(3)   Includes  options,  exercisable  within 60 days, to purchase 64,474 shares
      under our 2001 Stock Incentive Plan.

(4)   Includes  options,  exercisable  within 60 days, to purchase 36,316 shares
      under our 2001 Stock Incentive Plan.

(5)   Includes options,  exercisable  within 60 days, to purchase 100,790 shares
      under our 2001 Stock Incentive Plan.

(6)   Includes warrants, exercisable within 60 days, to purchase 867,000 shares.

(7)   Includes shares to be issued under the Plan of Reorganization.

      As of September 28, 2002, our stock is held of record by 966 persons.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      L-3 Communications Corp. ("L-3"), a principal  stockholder of the Company,
is also a customer of the Company's  development  services. In fiscal year 2002,
sales to L-3 accounted for approximately 2.8% of the Company's total revenue. At
September  28, 2002,  L-3  accounted  for  approximately  51.6% of the Company's
deferred revenue.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

          (a)  Exhibits. The following is a list of exhibits filed as a part of
this report.

     Exhibit
     Number                             Description
     ------                             -----------

         2.1     Debtor's Third Amended Plan of Reorganization  Under Chapter 11
                 of  the  Bankruptcy   Code  Dated  as  of  September  24,  2001
                 (incorporated by reference to Exhibit 2.1 the Company's Current
                 Report on Form 8-K filed November 20, 2001).

         3.1     Amended and Restated Certificate of Incorporation (incorporated
                 by reference to Exhibit 3.1 to the  Company's  Annual Report on
                 Form 10-KSB for the fiscal year ended September 29, 2001).

         3.2     Amended and Restated  Bylaws of  Innovative  Micro  Technology,
                 Inc. (incorporated by reference to Exhibit 3.2 to the Company's
                 Annual  Report  on  Form  10-KSB  for  the  fiscal  year  ended
                 September 29, 2001).

         4.1     Form of Warrant  Agreement  between  the  Company  and  Certain
                 Claimants  Under the Plan of  Reorganization  (incorporated  by
                 reference to Exhibit 4.1 to the Company's Annual Report on Form
                 10-KSB for the fiscal year ended September 29, 2001).

                                       34
<PAGE>

         4.2     Warrant  Agreement  between the Company and L-3  Communications
                 Corporation, dated August 1, 2002 (incorporated by reference to
                 Exhibit 4.2 to the Company's  Current  Report on Form 8-K filed
                 August 13, 2002).

         10.1    Change  in  Control  Agreement  between  the  Company  and John
                 Foster,  dated April 15, 2002  (incorporated  by  reference  to
                 Exhibit 10.1 to the Company's  Annual Report on Form 10-KSB for
                 the fiscal year ended September 29, 2001).

         10.2    Change in Control  Agreement  between  the Company and Peter T.
                 Altavilla,  dated April 15, 2002  (incorporated by reference to
                 Exhibit 10.2 to the Company's  Annual Report on Form 10-KSB for
                 the fiscal year ended September 29, 2001).

         10.3    Form of  Indemnification  Agreement  for directors and officers
                 (incorporated  by reference  to Exhibit  10.3 to the  Company's
                 Annual  Report  on  Form  10-KSB  for  the  fiscal  year  ended
                 September 29, 2001).

         10.4    Stock   Purchase   Agreement   between   the  Company  and  L-3
                 Communications Corporation,  dated August 1, 2002 (incorporated
                 by reference to Exhibit 10.4 to the Company's Current Report on
                 Form 8-K filed August 13, 2002).

         10.5    2001 Stock Incentive Plan (incorporated by reference to Exhibit
                 10.5 to the Company's  Current  Report on Form 8-K filed August
                 13, 2002).

         10.6     Form of Stock Option Agreement under 2001 Stock Incentive Plan
                  (incorporated  by reference  to Exhibit 10.6 to the  Company's
                  Annual  Report  on Form  10-KSB  for  the  fiscal  year  ended
                  September 29, 2001).

         10.7    Form of Restricted  Stock  Agreement under 2001 Stock Incentive
                 Plan   (incorporated  by  reference  to  Exhibit  10.7  to  the
                 Company's  Annual  Report on Form  10-KSB for the  fiscal  year
                 ended September 29, 2001).

         10.8    Fixed  Rate Note of the  Company,  payable  to Owens  Financial
                 Group, Inc., dated December 20, 2001 (incorporated by reference
                 to Exhibit 10.8 to the  Company's  Annual Report on Form 10-KSB
                 for the fiscal year ended September 29, 2001).

         10.9    Deed of Trust,  Security Agreement and Assignment of Leases and
                 Rents,  between the Company,  Owens Financial  Group,  Inc. and
                 Investors Yield, Inc., dated December 20, 2001 (incorporated by
                 reference to Exhibit  10.9 to the  Company's  Annual  Report on
                 Form 10-KSB for the fiscal year ended September 29, 2001).

         10.10   Worldwide Cash Profit Sharing Plan  (incorporated  by reference
                 to Exhibit 10 to  Amendment  No. 1 to the  Company's  Report on
                 Form 10-Q filed March 4, 1996).


                                       35
<PAGE>

         10.11   Recapitalization  Agreement,  dated as of March 20, 1999 and as
                 amended by Amendment No. 1 dated as of April 9, 1999, among MDT
                 Holdings, LLC, Applied Magnetics Corporation, DDCI, LLC, Vestro
                 Investments Group Limited,  Milestone  Acquisitions II, LLC and
                 Magnetic Data  Technologies,  LLC (incorporated by reference to
                 Exhibit 2.1 to the Company's  Current  Report on Form 8-K filed
                 April 26, 1999).

         99.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
                 of 2002.*


*Filed herewith.


          (b)  Reports on Form 8-K.

               The  company  filed a Current  Report  on Form 8-K on August  13,
               2002,  reporting  under Item 5 that the Company  had  completed a
               private  sale of 935,000  shares of common  stock and warrants to
               purchase  an  additional  867,000  shares of common  stock to L-3
               Communications Corporation.


ITEM 14. CONTROLS AND PROCEDURES

      Within  the 90 days  prior to the filing  date of this  report,  the Chief
Executive  Officer  and the Chief  Financial  Officer of the  Company,  with the
participation  of the  Company's  management,  carried out an  evaluation of the
effectiveness of the Company's  disclosure  controls and procedures  pursuant to
Exchange  Act Rule  13a-14.  Based  upon that  evaluation,  the Chief  Executive
Officer and the Chief  Financial  Officer  believe  that,  as of the date of the
evaluation,  the Company's  disclosure  controls and procedures are effective in
making known to them material information relating to the Company required to be
included in this report.

      Disclosure  controls  and  procedures,  no matter  how well  designed  and
implemented,  can provide  only  reasonable  assurance  of achieving an entity's
disclosure  objectives.  The likelihood of achieving such objections is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal  control can occur  because of human  failures such as simple errors or
mistakes or intentional circumvention of the established process.

      There were no significant changes in the Company's internal controls or in
other factors that could  significantly  affect internal controls,  known to the
Chief Executive Officer or the Chief Financial  Officer,  subsequent to the date
of the evaluation.










                                       36
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                       INNOVATIVE MICRO TECHNOLOGY, INC.

                                       /s/ John S. Foster
                                       __________________
                                       John S. Foster
                                       Chairman and Chief Executive Officer


         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

/s/ John S. Foster                                              January 13, 2003
-------------------
Chairman, Director and Chief Executive Officer

/s/ Peter T. Altavilla                                          January 13, 2003
-----------------------
Peter T. Altavilla
Chief Financial Officer and Secretary

/s/Daniel Armel                                                 January 13, 2003
----------------
Daniel Armel
Director

/s/ Scott Avila                                                 January 13, 2003
----------------
Scott Avila
Director

/s/Calvin Quate                                                 January 13, 2003
----------------
Dr. Calvin Quate
Director



                                       37
<PAGE>
                                 CERTIFICATIONS

         I, John S. Foster, certify that:

1.       I have reviewed  this annual report on Form 10-KSB of Innovative  Micro
         Technology, Inc.;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent function):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Date:  January 9, 2003                   /s/ John S. Foster
                                         __________________
                                         John S. Foster
                                         Chairman and Chief Executive Officer

                                      38
<PAGE>

         I, Peter T. Altavilla, certify that:

1.       I have reviewed  this annual report on Form 10-KSB of Innovative  Micro
         Technology, Inc.;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent function):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.


Date:  January 9, 2003                   /s/ Peter T. Altavilla
                                         ----------------------
                                         Peter T. Altavilla
                                         Chief Financial Officer and Secretary

                                       39

<PAGE>
                        Innovative Micro Technology, Inc.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Related Information


Financial Statements:

Independent Auditor's Report                                                 F-2

Balance Sheet as of September 28, 2002                                       F-3

Statements of Operations for the ten months ended September 28, 2002,
two months ended November 24, 2001 and the year ended and
September 29, 2001                                                           F-4

Statements of Shareholders' Equity (Deficiency) for the years ended
September 28, 2002 and September 29, 2001                                    F-5

Statements of Cash Flows for the ten months ended September 28, 2002,
two months ended November 24, 2001 and the year ended and
September 29, 2001                                                           F-6

Notes to Financial Statements                                                F-7

































<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Innovative Micro Technology, Inc.
Goleta, California

We have audited the accompanying  balance sheet of Innovative Micro  Technology,
Inc. as of September 28, 2002 (Successor  Company balance sheet) and the related
statements of operations and shareholders' equity (deficiency) and of cash flows
for the ten months ended September 28, 2002 (Successor Company operations),  the
two months  ended  November  24,  2001,  and the year ended  September  29, 2001
(Predecessor   Company   operations).   These   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

As discussed in Note 1 to the financial  statements,  on November 16, 2001,  the
Bankruptcy  Court entered an order confirming the plan of  reorganization  which
became effective after the close of business on November 16, 2001.  Accordingly,
the  accompanying  financial  statements  have been prepared in conformity  with
AICPA  Statement  of  Position  90-7,   "Financial  Reporting  for  Entities  in
Reorganization  Under the Bankruptcy  Code," for the Successor  Company as a new
entity with assets, liabilities,  and a capital structure having carrying values
not comparable with prior periods as described in Note 1.

In our opinion,  the Successor Company financial  statements  present fairly, in
all material  respects,  the financial  position of Innovative Micro Technology,
Inc. as of September 28, 2002,  and the results of its  operations  and its cash
flows for the ten months ended September 28, 2002, in conformity with accounting
principles  generally accepted in the United States of America.  Further, in our
opinion,  the Predecessor Company financial statements referred to above present
fairly,  in all material  respects,  the financial  position of the  Predecessor
Company as of September 29, 2001, and the results of its operations and its cash
flows for the two months ended November 24, 2001,  and the year ended  September
29, 2001, in conformity with  accounting  principles  generally  accepted in the
United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company will continue as a going concern.  As discussed in Note 1, the Company's
recurring  losses from  operations and uncertainty  regarding  future sources of
capital  raise  substantial  doubt  about its  ability  to  continue  as a going
concern.  Management's plans concerning these matters are also discussed in Note
1. The financial  statements do not include  adjustments  that might result from
the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP
-------------------------
Deloitte & Touche LLP
Los Angeles, California
January 8, 2003

                                      F-2
<PAGE>
                        Innovative Micro Technology, Inc
                                  BALANCE SHEET
                 (In Thousands, except share and par value data)

                                     ASSETS
<table>
<caption>
                                                                       Successor Co.
                                                                            As of
                                                                      ---------------
                                                                        September 28,
                                                                            2002
<S>                                             <C>                   <C>
ASSETS
Current assets:
    Cash                                                              $        2,890
    Accounts receivable, net of allowance for doubtful accounts of $29           655
    Accounts receivable- related party                                           156
    Inventories                                                                  615
    Inventories- related party                                                   747
    Prepaid expenses and other                                                   359
                                                                        -------------
Total current assets                                                           5,422
                                                                        -------------
Property, plant and equipment, at cost:
    Land                                                                       8,750
    Buildings                                                                  9,408
    Manufacturing equipment                                                    2,045
    Construction in progress                                                      70
                                                                        -------------
Total property, plant and equipment, at cost                                  20,273
    Less-accumulated depreciation and amortization                              (847)
                                                                        -------------
Total property, plant and equipment                                           19,426
                                                                        -------------

Other assets                                                                   6,161
                                                                        -------------
Total assets                                                          $       31,009
                                                                        =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                 $        4,325
    Accounts payable                                                             668
    Accrued payroll and benefits                                                 286
    Accrued audit and legal                                                       89
    Accrued property taxes                                                        63
    Deferred revenue                                                             676
    Deferred revenue- related party                                              722
    Other current liabilities                                                    797
                                                                        -------------
Total current liabilities                                                      7,626
                                                                        -------------
Long-term debt                                                                15,645
                                                                        -------------
Other long-term liabilities                                                      174
                                                                        -------------
Shareholders' Equity:
    Preferred stock, $.0001 par value, authorized 2,500,000 shares,
           none issued and outstanding                                             -
    Common stock issuable, $.0001 par value, 25,000,000 shares authorized,
          5,435,000 shares issuable at September 28, 2002                          1
    Paid-in capital                                                           16,714
    Accumulated deficit                                                       (7,745)
                                                                        -------------
                                                                               8,970
Unearned restricted stock                                                     (1,406)
                                                                        -------------
Total shareholder's equity                                                     7,564
                                                                        -------------
Total liabilities and shareholder's equity                            $       31,009
                                                                        =============

The accompanying Notes to Financial Statements are an integral part of these statements.
</table>
                                      F-3
<PAGE>
                        Innovative Micro Technology, Inc
                            STATEMENTS OF OPERATIONS
                      (In Thousands, except per share data)
<table>
<caption>
                                                                             Successor Co.     Predecessor Co.
                                                                               Ten Months        Two Months        Predecessor Co.
                                                                                 Ended             Ended            Year Ended
                                                                            -----------------------------------------------------
                                                                              September 28,     November 24,       September 29,
                                                                                  2002              2001               2001
                                                                            ---------------    --------------   -----------------
<S>                                                                         <C>                <C>              <C>
Net sales
  MEMS and Other                                                            $        2,460     $         606    $          2,498
  Rental income                                                                        426                86                 275
                                                                              -------------     -------------      --------------
  Total                                                                              2,886               692               2,773
Cost of sales
  MEMS and Other (including stock-based compensation of $331 for
     the period ending September 28, 2002)                                           5,304               962               6,303
  Rental income                                                                        111                 6                 194
                                                                              -------------     -------------      --------------
  Total                                                                              5,415               968               6,497
                                                                              -------------     -------------      --------------
   Gross loss                                                                       (2,529)             (276)             (3,724)
                                                                              -------------     -------------      --------------
Research and development expenses (including stock-based compensation of $277 for      815                90                 347
     the period ending September 28, 2002)
Selling, general and administrative expenses (including stock-based compensation     1,947               245               1,595
     of $486 for the period ending September 28, 2002)
Impairment of long-lived assets                                                          -                 -               2,465
                                                                              -------------     -------------      --------------
   Loss from Operations                                                             (5,291)             (611)             (8,131)
                                                                              -------------     -------------      --------------

Interest income                                                                         19                 3                  31
Interest expense                                                                    (2,121)             (329)             (1,472)
Other income                                                                           100               177                   -
                                                                              -------------     -------------      --------------
   Other Expense                                                                    (2,002)             (149)             (1,441)

Reorganization Costs                                                                   421               474               2,255
                                                                              -------------     -------------      --------------
  Loss from operations before income taxes                                          (7,714)           (1,234)            (11,827)
Provision for income taxes                                                              31                 -                   1
                                                                              -------------     -------------      --------------

   Net loss                                                                 $       (7,745)    $      (1,234)   $        (11,828)
                                                                              =============     =============      ==============

Net loss per share:
   Loss per common share - basic and diluted                                $        (1.67)    $       (0.02)   $          (0.17)
                                                                              =============     =============      ==============

Weighted average number of common shares outstanding:
   Common shares - basic and diluted                                                 4,645            70,444              70,444
                                                                              =============     =============      ==============

The accompanying Notes to Financial Statements are an integral part of these statements.
</table>

                                      F-4
<PAGE>


                        Innovative Micro Technology, Inc
                 STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
                      (In Thousands, except share amounts)
<table>
<caption>
                                               Predecessor          Successor
                                               Common Stock         Common Stock
                                             -------------------  ---------------

                                                                                  Accumulated
                                              Number of            Number of         Paid-in    Accumulated
                                               Shares     Amount    Shares   Amount  Capital     Deficit
                                               ------     ------    ------   ------  -------     -------

<S>                                          <C>           <C>      <C>          <C> <C>         <C>
Balance, September 30, 2000                   70,574,306   $ 7,057                   $ 345,100   $(632,773)
  Stock Subscription Received
  Net loss                                                                                         (11,828)

                                             ---------------------------------------------------------------
Balance, September 29, 2001                   70,574,306     7,057                     345,100    (644,601)
                                             ---------------------------------------------------------------
  Fresh-start reporting adjustments          (70,574,306)   (7,057)                   (345,100)    644,601
  Shares issuable pursuant to plan of reorganization                4,500,000     1     12,989
  Private equity sale                                                 935,000     -      4,959
  Amortization of restricted stock
  Net loss prior to reorganization                                                      (1,234)          -
  Net loss                                                                                          (7,745)
                                             ---------------------------------------------------------------
Balance, September 28, 2002                            -       $ -  5,435,000   $ 1  $  16,714    $ (7,745)
                                             ===============================================================
</table>


(Table Continued)

      Predecessor
     Treasury Stock
-------------------------------
                                  Stock
           Number of  Restricted  Subscription     Shareholders'
  Shares     Amount    Stock      Receivable   Equity (Deficiency)
  ------     ------    -----      ----------   -------------------


   130,552   $(1,581)             $(1,200)     $(283,397)
                                    1,200          1,200
                                                 (11,828)
------------------------------------------------------------------
   130,552    (1,581)                   -       (294,025)
------------------------------------------------------------------
  (130,552)    1,581                             294,025
                        (2,500)                   10,490
                                                   4,959
                         1,094                     1,094
                                                  (1,234)
                                                  (7,745)
------------------------------------------------------------------
         -       $ -  $ (1,406)       $ -      $   7,564
==================================================================

The accompanying Notes to Financial Statements are an integral part of these
statements.
                                      F-5
<PAGE>
                        Innovative Micro Technology, Inc
                            STATEMENTS OF CASH FLOWS
                                 (In Thousands)
<table>
<caption>
                                                                Successor Co.         Predecessor Co.
                                                                Ten Months            Two Months        Predecessor Co.
                                                                   Ended                Ended             Year Ended
                                                              ----------------      ---------------     ----------------
                                                              September 28,         November 24,         September 29,
                                                                   2002                  2001                2001
                                                              ----------------      ---------------     ----------------
<S>                                                         <C>                  <C>                 <C>
  Cash Flows from Operating Activities:
  Net loss                                                  $          (7,745)   $          (1,234)  $          (11,828)
  Adjustments to reconcile net loss to net cash provided
    by operating activities:
      Depreciation and amortization                                       852                  173                1,804
      Employee restricted stock amortization                            1,094                    -                    -
      Impairment of long-lived assets                                       -                    -                2,465
      Amortization of loan costs                                          112                   39                   24
      Gain on sale of  assets                                               -                    -                  (34)
      Bad debt provision                                                    -                    -                    4
      Non-cash interest                                                     -                  232                1,427
      Non-cash property taxes                                               -                    -                  316
      Changes in assets and liabilities:
          Accounts receivable                                             180                 (258)                (554)
          Inventories                                                    (953)                  45                 (454)
          Prepaid expenses and other                                     (172)                 (12)                 (75)
          Other assets                                                    320                   59                 (380)
          Accounts payable                                               (388)                 146                  294
          Accrued payroll and benefits                                     41                   38                   78
          Accrued property taxes                                         (635)                   -                   63
          Accrued audit and legal                                          79                  378                2,160
          Deferred revenue                                                760                 (175)                 784
          Other current liabilities                                       876                   68                 (125)
          Other long-term liabilities                                       -                    -                  174
------------------------------------------------------------------------------------------------------------------------
      Net cash flows used in operating activities                      (5,579)                (501)              (3,857)
------------------------------------------------------------------------------------------------------------------------
  Cash Flows from Investing Activities:
  Purchases of property, plant and equipment                             (388)                 (97)                (103)
  Proceeds from sale of property, plant and equipment                       -                    -                1,581
------------------------------------------------------------------------------------------------------------------------
      Net cash flows (used in) provided by investing activities          (388)                 (97)               1,478
------------------------------------------------------------------------------------------------------------------------
  Cash Flows from Financing Activities:
  Repayment of note payable                                                 -                    -                 (100)
  Proceeds from private equity sale                                     5,000                    -                    -
  Equity issuance costs                                                   (41)                   -                    -
  Proceeds from issuance of debt                                        3,400                    -                2,000
  Debt issuance costs                                                    (361)                   -                  (84)
  Repayment of debt                                                      (240)                   -                    -
  Proceeds from stock issuance to investors                                 -                    -                1,200
------------------------------------------------------------------------------------------------------------------------
      Net cash flows provided by financing activities                   7,758                    -                3,016
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                         1,791                 (598)                 637
Cash at beginning of year                                               1,099                1,697                1,060
------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                         $           2,890    $           1,099   $            1,697
------------------------------------------------------------------------------------------------------------------------

Supplemental Cash Flow Data:
Interest paid                                               $           1,873    $              97                    -
                                                              ================      ===============     ================
Income taxes paid                                           $              31    $               -                    1
                                                              ================      ===============     ================
The accompanying Notes to Financial Statements are an integral part of these statements.
</table>

                                      F-6

<PAGE>

                        Innovative Micro Technology, Inc
                          NOTES TO FINANCIAL STATEMENTS

1.    Reorganization, Basis of Presentation

         Innovative Micro  Technology,  Inc. (the "Company") was incorporated in
California in 1957 and was  reincorporated  in Delaware in 1987.  The Company is
engaged in the business of the design and  manufacture of MEMS devices.  MEMS is
an acronym for  micro-electro-mechanical  system, and MEMS devices are sometimes
referred to as  "micromachines."  MEMS devices were first  developed in the late
1970s and early 1980s.  Generally  speaking,  MEMS devices are made using modern
wafer-processing  technology,  similar to that used in making silicon electronic
devices or thin-film recording heads for magnetic storage devices. However, what
distinguishes  MEMS devices is that they are designed to include  moving  parts,
hence the  "mechanical"  part of the name.  By using  modern  wafer  techniques,
device complexity and performance is enhanced,  and cost is lowered owing to the
large number of devices that can be made on a single wafer. Common uses for MEMS
devices are automotive  air-bag sensors  (accelerometers),  pressure and airflow
sensors,  and inkjet printer heads. Future uses for MEMS devices are expected to
be  numerous,  in that many  mechanical  systems  which  today  are built  using
conventional techniques could be made using MEMS.

         Prior to the commencement of the Chapter 11 Reorganization,  on January
7, 2000, the Company operated in one industry segment namely, components for the
computer peripheral  industry with one major product group,  recording heads for
hard disk drives which are used in computer applications.

         The Company has incurred net losses and losses from operations for each
quarter since 1999. The Company filed for reorganization under Chapter 11 of the
U.S.  Bankruptcy Code in January 2000 and, on emergence from bankruptcy,  all of
the  previously  issued  and  outstanding  common  stock  was  canceled  without
consideration  to the holders.  The Company  incurred a net loss of $1.2 million
for the two month period ended  November 24, 2001 and a net loss of $7.8 million
for the ten month period ended September 28, 2002. The Company's  monthly fiscal
calendar  ended with  November 24, 2001.  There were no  significant  accounting
transactions  between  the  Company's  exit from the Chapter 11  proceedings  on
November 16, 2001 and November 24, 2001 and therefore it believes this reporting
to be appropriate  for  presentation  of the Company prior to its emergence from
the Chapter 11 proceedings. The Company expects to continue to incur substantial
operating  losses for the foreseeable  future,  and cannot predict the extent of
the future  losses or when it may become  profitable.  Even if the Company  does
achieve  profitability,  it may not be able to sustain or increase profitability
in the future.  The Company  expects to incur  increasing  sales and  marketing,
research and development and general and administrative  expenses.  As a result,
it will need to  significantly  increase its revenues to achieve  profitability.
Although the Company's  revenues have increased,  the growth may not continue at
the current  rate or at all. The above items raise  substantial  doubt about the
Company's ability to continue as a going concern.

         The Company  exited its Chapter 11  Reorganization  process on November
16,  2001  ("Effective  Date").  The Company  adopted the fresh start  reporting
requirements of Statement of Position 90-7,  "Financial Reporting by Entities in


                                      F-7
<PAGE>


Reorganization  under the  Bankruptcy  Code" during the first  quarter of fiscal
2002.  In  accordance   with  the  fresh  start  reporting   requirements,   the
reorganization  value of the Company was  allocated to the  Company's  assets in
conformity  with the procedures  specified by Statement of Financial  Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible  Assets". As provided
for under the Company's  reorganization plan (the "Plan"), the Company converted
approximately $12 million of its secured liabilities to debt and $304 million of
unsecured liabilities to equity in the reorganized entity.

         The Company has  initiated the process for issuance of the common stock
and  warrants  pursuant  to the Plan,  however  it will not  perform  the actual
distribution  until  the  Company  is  current  with all of its  Securities  and
Exchange  Commission  filings.  The Company anticipates that the filings will be
current by the end of January 2003.










































                                      F-8
<PAGE>
                        Innovative Micro Technology, Inc
                            Fresh-start Balance Sheet
                                 (In Thousands)

The adoption of the Fresh-start reporting  requirements had the following effect
on the Company's unaudited balance sheet dated November 24, 2001:

Balance Sheet

(In  thousands, except share and par value data)
<table>
<caption>
                                                       Pre        Exchange   Debt    Exchange
                                                    Confirmation  to Debt  Discharge of Stock  Fresh-Start   Adjusted
                                                    ------------------------------------------------------------------
<S>                                                <C>            <C>      <C>       <C>       <C>          <C>
ASSETS
Current assets:
    Cash                                           $    1,099         -         -        -          -        $ 1,099
    Accounts receivable, net of allowance for
        doubtful accounts of $11                          814         -         -        -          -            814
    Other receivable                                      177         -         -        -          -            177
    Inventories                                           409         -         -        -          -            409
    Prepaid expenses and other                            311         -         -        -          -            311
                                                    ------------------------------------------------------------------
Total current assets                                    2,810         -         -        -          -          2,810
                                                    ------------------------------------------------------------------
Property, plant and equipment, at cost:
    Land                                                8,750         -         -        -          -          8,750
    Buildings                                          10,725         -         -        - $   (1,316)         9,409
    Manufacturing equipment                             1,683         -         -        -        (72)         1,611
    Construction in progress                              120         -         -        -          -            120
                                                    ------------------------------------------------------------------
Total property, plant and equipment, at cost           21,278         -         -        -     (1,388)        19,890
    Less-accumulated depreciation and amortization     (1,388)        -         -        -      1,388              -
                                                    ------------------------------------------------------------------
Total property, plant and equipment                    19,890         -         -        -          -         19,890
                                                    ------------------------------------------------------------------
Other assets                                            6,108         -         -        -          -          6,108
                                                    ------------------------------------------------------------------
Total assets                                       $   28,808         -         -        -          -        $28,808
                                                    ==================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
    Current portion of long-term debt (1)          $    2,000 $     188         -        -          -        $ 2,188
    Accounts payable (2)                                  664     4,529         -        -          -          5,193
    Accrued payroll and benefits                          245         -         -        -          -            245
    Accrued audit and legal (3)                         4,274    (4,137)$    (127)       -          -             10
    Accrued property taxes (4)                             63       635         -        -          -            698
    Deferred revenue                                      609         -         -        -          -            609
    Other current liabilities (5)                          97      (146)        -        -          -            (49)
                                                    ------------------------------------------------------------------
Total current liabilities                               7,952     1,069      (127)       -          -          8,894
                                                    ------------------------------------------------------------------
Long Term Debt (6)                                          -    10,484         -        -          -         10,484
                                                    ------------------------------------------------------------------
Other long-term liabilities                               174         -         -        -          -            174
                                                    ------------------------------------------------------------------
Liabilities subject to compromise under
reorganization proceedings (7)                         315,941  (11,553)  (304,388)      -          -              -
                                                    ==================================================================
Shareholders' Deficiency:
   Preferred stock, $.10 par value, authorized
      5,000,000 shares, none issued and outstanding
      at November 24, 2001, no par value, 2,500,000
      shares authorized, none issued and
      outstanding "as adjusted for fresh start
      accounting."
   Common stock, $.10 par value, 120,000,000 shares
      authorized, 70,574,306 shares issued and
      outstanding at November 24, 2001,
      $.0001 par value, 25,000,000 shares
      authorized, 4,500,000 to be issued "as
      adjusted for fresh start accounting"              7,057         -         -  $ (7,057)        -             -
    Paid-in capital                                   345,100         -   304,515  (637,859)        -        11,756
    Accumulated deficit                              (645,835)        -         -   645,835         -             -
                                                    ------------------------------------------------------------------
                                                     (293,678)        -   304,515       919         -        11,756
  Unearned restricted stock (8)                             -         -         -    (2,500)        -        (2,500)
  Treasury stock, at cost (130,552 shares at
      November 24, 2001                                (1,581)        -         -     1,581         -             -
                                                    ------------------------------------------------------------------
Total shareholder's equity (deficiency)              (295,259)        -   304,515         -         -         9,256
                                                    ------------------------------------------------------------------
Total liabilities and shareholder's equity
      (deficiency)                                 $   28,808 $       - $       - $       - $       -     $  28,808
                                                    ==================================================================
</table>

Notes:
(1) Current portion of delinquent property taxes to be paid over a five year
       term.
(2) Bankruptcy claims that require cash payments and Professional fees (see 3
       below).
(3) Professional fees associated with the Reorganization that were converted
      to a two year interest bearing convertible note in the second fiscal
      quarter of 2002.
(4) Secured county property taxes required to be paid in cash.
(5) Record the settlement of a bankruptcy claim with a mortgage holder allowing
      use of property insurance proceeds to pay down the mortgage principal.
(6) Settlement resulting in the reduction of a secured property mortgage
      required to be paid in cash pursuant to the terms of the original
      agreement and delinquent property taxes to be paid over a five year term.
(7) Unsecured liabilities that were converted to equity and warrants in the
      reorganized Company.
(8) Restricted stock granted to the employees as part of the Plan of
      Reorganization.
                                      F-9
<PAGE>


         The Company's  former Malaysian  subsidiary had credit  facilities with
five  Malaysian  Banks  ("Malaysian  Banks") that were  guaranteed by the parent
corporation,  which provided them with a senior credit position to the Company's
note  holders.  Another  provision of the Plan related to the treatment of these
subordinated  Note claims.  The  Company's  14% Note, 2% Notes and 7% Notes each
contained subordination  provisions.  Pursuant to these provisions the Malaysian
Banks,  the holder of the 14% Note, the holders of the 2% Notes, and the holders
of the 7% Notes have certain  Subordination Rights and Subordination Claims. The
Company  guaranteed  the bank  loans  for its  Malaysian  subsidiary.  A Warrant
Agreement  was developed to provide a method for the  subordinated  claimants to
participate in the  anticipated  future growth in value of the Company's  Common
Stock that is issuable pursuant to the Plan ("New Common Stock").

         Pursuant to the approved  Warrant  Agreement,  one million Warrants are
issuable.  Each Warrant represents the right: (1) to purchase 0.946805 shares of
New Common Stock at a price per share of $20.00; (2) to purchase 0.423822 shares
of New Common  Stock at a price of $22.50 per share;  (3) to  purchase  0.509937
shares of New Common  Stock at a price of $27.50  per share;  and (4) to receive
the Cash Asset Sale  Distribution,  as defined in the  agreement.  Each  Warrant
automatically  vests upon  issuance,  and is  exercisable,  in whole or in part,
during the period of three (3) years from the  Effective  Date and  expires  and
will be of no  further  force and  effect  thereafter.  Each  Warrant  is freely
transferable.  The total  number of new shares that the  warrants may convert to
during  this three year  period is  1,880,564.  Of the  4,500,000  shares of New
Common Stock to be issued under the Plan to the former creditors of the Company,
946,805  shares  will  have a  legend  identifying  them  as  being  subject  to
repurchase by the Company during the three year period from the Effective  Date,
by the  Company,  at a price of $20.00 per  share,  423,822  shares  will have a
legend  identifying  them as being subject to  repurchase  during the three year
period from the Effective  Date, by the Company,  at a price of $22.50 per share
and  509,937  shares  will have a legend  identifying  them as being  subject to
repurchase during the three year period from the Effective Date, by the Company,
at a price of $27.50 per share.  The  shares  can be settled  with cash,  if the
Company is acquired by an independent third party. An additional  231,600 shares
will have a legend identifying them as being subject to repurchase at a price of
$0.01 per share in connection with a cash sale of the Company.  The Company will
be responsible for processing the Warrant  payment and the subsequent  mandatory
Call and  payment  for the  legend  shares.  This  process  does not  create any
additional  outstanding shares of stock for the Company.  The Company issues the
same number of new shares to the Warrant holders as it retires upon  transacting
the Call for the legend shares. The value of these warrants was determined to be
$1.6 million  using the  Black-Scholes  option  pricing model with the following
assumptions:  a risk-free interest rate of 3.46%, an expected volatility of 76%,
a warrant term of 3 years, and no expected dividends.  The value of the warrants
is not  reflected in the  accompanying  financial  statements as it was recorded
within common stock.

         Another  provision of the Plan  relates to the  treatment of the unpaid
professional persons involved in the Chapter 11 Reorganization. The total amount
owed to these  professional  persons as of the Effective  Date was $4.1 million.
The Bankruptcy Code provides that each Professional  Person,  defined as the law
firms and  investment  bankers  employed  by the  Company  during the Chapter 11
reorganization,  is entitled to be paid cash, in full, at the Effective  Date an
amount equal to their  Professional  Person's Allowed  Administrative  Claim. In

                                      F-10
<PAGE>

consideration  for each  Professional  Person waiving this right and agreeing to
accept a convertible  note,  the Plan provides for each  Professional  Person to
have an Allowed  Administrative  Claim as of the  Effective  Date.  (See Note 5-
Debt)

         The Company used the Chapter 11  Reorganization to reposition itself in
the MEMS business. MEMS is an acronym for  micro-electro-mechanical  system, and
MEMS devices are sometimes referred to as  "micromachines."  The core competency
of the Company is wafer  manufacturing and assembly in high volume. To that end,
the  Company  has  determined   that  the  MEMS  business   allows  use  of  the
manufacturing facility, many of the manufacturing techniques,  and the skills of
its employees obtained while manufacturing magnetic recording heads in the past.
Statistical quality control techniques, operator training protocols, and general
practices  for  volume   manufacturing  are  employed  to  ensure  high  quality
production at low costs.

         The Company's  three  additional  lines of business are: "Santa Barbara
Tool and Die,"  "Insight  Analytical"  and leasing of excess  space in its owned
facility  under  long-term  lease  contracts.   Santa  Barbara  Tool  and  Die's
technology  permits high precision  manufacturing  of tooling,  and the business
features  electron-discharge  machining (EDM) which includes metals and ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal
properties.  Santa  Barbara Tool and Die and Insight  Analytical  are  strategic
parts of the  core  company  in that  their  services  are used to make the core
business  more  competitive  and both use the  capacity  that  exceeds  internal
Company  needs to  provide  services  to  outside  customers.  The  Company  has
approximately  51,000 square feet of building  space  available to lease.  As of
September 28, 2002,  approximately 34,000 square feet were under long-term lease
arrangements.


2.    Summary of Significant Accounting Policies

         Use of Estimates: The preparation of financial statements in conformity
with accounting  principles  generally  accepted in the United States of America
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from these estimates.

         Management  believes  that these  estimates and  assumptions  provide a
reasonable basis for the fair presentation of the financial statements.

         Depreciation  and Amortization  Policies:  In accordance with the fresh
start reporting requirements  property,  plant, and equipment are stated at fair
value and are depreciated or amortized over their  estimated  useful lives using
the straight-line  method except for leasehold  improvements which are amortized
over the shorter of the estimated useful life or the life of the lease.

                                      F-11
<PAGE>

Estimated useful lives are as follows:

                                                             Average Useful Life
     Buildings                                                     25   Years
     Manufacturing equipment                                    3 - 5 Years
     Other equipment                                            1 - 5 Years
     Building improvements                                         10 Years

         Depreciation and amortization  expense from operations amounted to $0.2
million for the two months ended  November 24, 2001 and $0.9 million for the ten
months ended September 28, 2002 compared to $1.8 million for fiscal 2001.

         Long-lived Assets: The Company reviews long-lived assets for impairment
whenever events or changes in  circumstances  indicate that an asset's  carrying
value may exceed the undiscounted  expected future cash flows to be derived from
that asset.  Whenever  undiscounted expected future cash flows are less than the
carrying value,  the asset will be reduced to an amount equal to the net present
value  of the  expected  future  cash  flows  and an  impairment  loss  will  be
recognized.

         The Company adjusted its machinery and equipment to market value in the
fourth  fiscal  quarter of 2001.  An orderly  liquidation  value  appraisal  was
performed  by a third party at the  request of the  Company,  and the  valuation
indicated   that  the   equipment,   similar  to  that  used  by   semiconductor
manufacturers, required a reduction in value of approximately $2.5 million.

         Reorganization  Costs:  Expenditures directly related to the Chapter 11
filing and the emergence from bankruptcy are classified as reorganization  costs
and are expensed as incurred.  These expenses  primarily consist of professional
fees.

         Inventories:  Inventories  are  stated at the lower of cost  (first-in,
first-out  method)  or  market.  Market for  purchased  parts and  manufacturing
supplies is based on replacement  costs and for other inventory  classifications
on net realizable value. Inventory at September 28, 2002 was all work in process
of $1.4 million related to capitalized costs under completed  contract method of
accounting as described below.

         Revenue  Recognition  and  Warranty  Policies:  The  Company  uses  the
completed contract method of accounting for its product development projects due
to  the  inability  to  accurately  estimate  percentage  of  completion  during
performance  of the  contract.  Costs are  capitalized  during  the  project  as
inventories  and  expensed  at its  completion  along  with the  recognition  of
revenue.  Santa Barbara Tool and Die delivers a finished product to the customer
and revenue is  recognized  at the time the product is shipped and title passes.
Insight  Analytical has service  related  revenue and this revenue is recognized
upon completion of the service for the customer.  The Company's MEMS development
contracts  do not have any  rights of  return.  Santa  Barbara  Tool and Die and
Insight  Analytical  did not have any sales returns in fiscal 2002 or 2001.  The
Company's  warranty  policy provides for the replacement of defective parts when
the  customers  return  request is approved  within  thirty days of the original
shipment date. To date, warranty costs have not been significant.

                                      F-12
<PAGE>


         A portion of the  Company's  facilities  are  leased to  tenants  under
long-term  contracts.  The terms of the leases expire within the next five years
with  renewal at the option of the  tenants.  Future  minimum  lease  income for
agreements as of September 28, 2002 are as follows (in thousands):


                                        Rental
                                        Income
                                        ------
2003
                                          493

2004                                      493

2005                                      493

Thereafter                                462
                                        ------
Total minimum income
                                        1,941
                                        ======

         Fair Value of  Financial  Instruments:  The  carrying  amounts of cash,
customer  receivables,  trade  accounts  payable and other  accrued  liabilities
approximate  their fair value because of the short  maturity of these  financial
instruments.  The  carrying  amounts  of  approximately  $19.1  million  of  the
Company's  debt  approximates  fair  market  value as the debt is with  multiple
lenders and it had been negotiated at the same rate which appears to represent a
market rate of interest. The carrying amounts of $0.9 million of the debt due on
delinquent  property  taxes is at rates below  market and its fair market  value
would be $0.6 million.

         Net Loss per  Common  Share:  Basic  loss per  share  are  computed  by
dividing net loss by the weighted  average number of common shares  outstanding.
Diluted  loss per  share are  computed  by  dividing  net loss by the sum of the
weighted  average  number of common shares  outstanding  for the period plus the
assumed exercise of all dilutive securities.  However, in the case of a loss per
share,  dilutive  securities   outstanding  would  be  antidilutive  and  would,
therefore, be excluded from the computation of diluted loss per share.

         All of the following  dilutive  securities,  which were outstanding for
the two  month  period  ending  November  24,  2001 and the  fiscal  year  ended
September  29,  2001,  were  canceled  or are no longer  convertible  due to the
bankruptcy  which  occurred on January 7, 2000;  options to purchase 3.8 million
shares of common  stock at prices  ranging  from  $1.90 to $43.13,  warrants  to
purchase  1.5  million  shares of common  stock at the lower of (i) the  current
market  price  on the  vesting  date,  as  defined  or (ii)  $7.00,  subject  to
adjustments  defined in the  agreement  and  approximately  58.1 million  common
shares from potential conversion of certain Convertible Debentures.

         The following  dilutive  securities  were  outstanding at September 28,
2002;  500,000 shares of restricted common stock issuable per the Plan,  options
to purchase  1,265,110  shares of common  stock at prices  ranging from $5.00 to
$5.35,  warrants to purchase  167,000 shares of common stock at a price of $5.35
per share with a term of eighteen  months ending  February 1, 2004,  warrants to
purchase  700,000  shares of common  stock at a price of $7.29 per share  with a
term of thirty six months ending August 1, 2005 and approximately 504,500 common

                                      F-13
<PAGE>


shares from the potential  conversion of the  Professional  Persons  convertible
debt which is due November 16, 2003. The warrants  issuable to the  subordinated
note claimants pursuant to the Plan, which are convertible into 1,880,564 common
shares, are not considered dilutive as the Company will issue the same number of
new common  shares  upon  payment  from the Warrant  holders as it retires  upon
processing  the associated  Call on the parties that hold the shares  containing
the legend that restricts their trading specifically for this purpose.

         Research and Development  Expenses:  The Company is actively engaged in
basic  technology  and  applied  research  and  development  programs  which are
designed  to  develop  new  products  and  product   applications   and  related
manufacturing  processes. The costs of these programs are classified as research
and development expenses and are charged to operations as incurred.

         Income Taxes: Income taxes are computed using the liability method. The
provision for income taxes includes  income taxes payable for the current period
and the  deferred  income  tax  consequences  of  transactions  that  have  been
recognized in the  Company's  financial  statements  or income tax returns.  The
carrying  value  of  deferred  income  tax  assets  is  determined  based  on an
evaluation  of whether the  realization  of such assets is more likely than not.
Temporary  differences result primarily from deferred revenue,  basis difference
in property,  plant and  equipment  and net  operating  loss  carryforwards. The
valuation allowance is reviewed periodically to determine the amount of deferred
tax asset considered realizable.

         Recent  Accounting  Pronouncements:   SFAS  No.  133,  "Accounting  for
Derivative   Instruments  and  Hedging  Activities,"  as  amended,   establishes
accounting and reporting standards for derivative instruments, including certain
derivative  instruments  embedded in other contracts and for hedging activities.
The Company adopted SFAS 133 effective October 1, 2000. The adoption of SFAS 133
did  not  have a  significant  impact  on the  financial  position,  results  of
operations, or cash flows of the Company.

         During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets,"
was  issued by the  Financial  Accounting  Standards  Board  ("FASB").  SFAS 142
applies to all acquired  intangible assets whether acquired singly, as part of a
group,  or in a business  combination.  SFAS 142  specifies  that  goodwill  and
indefinite lived intangible  assets will no longer be amortized but instead will
be subject to periodic impairment testing. Intangible assets with a determinable
useful life will continue to be amortized over their expected lives. The Company
early  adopted SFAS 142  beginning in its fiscal year 2002 and it did not have a
significant impact on its financial position or results of operations.

         In  August  2001,  SFAS No.  144,  "Accounting  for the  Impairment  or
Disposal of Long-Lived  Assets," was issued by the FASB.  SFAS 144 addresses the
financial  accounting  and  reporting  issues for the  impairment or disposal of
long-lived  assets.   This  statement   supersedes  SFAS  121  but  retains  the
fundamental  provisions  for  (a)   recognition/measurement   of  impairment  of
long-lived  assets to be held and used and (b) measurement of long-lived  assets
to be disposed of by sales.  It is effective  for fiscal years  beginning  after
December 15, 2001, and interim  periods  within those fiscal years.  The Company
early  adopted SFAS 144  beginning in its fiscal year 2002 and it did not have a
significant  impact on its  financial  position or results of  operations as the
Company had consistently applied the impairment provisions of SFAS 121.

                                      F-14
<PAGE>

         In May of 2002, SFAS No. 145,  "Rescission of FASB Statements No. 4, 44
and 64,  Amendment of FASB  Statement  No. 13, and Technical  Corrections,"  was
issued by the FASB.  The  statement  rescinds FASB No. 4,  "Reporting  Gains and
Losses from  extinguishment  of Debt," and an amendment of that statement,  FASB
No. 64,  "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." As
a  result,  gains  and  losses  from  extinguishment  of debt  will no longer be
aggregated  and classified as an  extraordinary  item, net of related income tax
effect, in the statement of operations.  Instead,  such gains and losses will be
classified as  extraordinary  items only if they meet the criteria of unusual or
infrequently  occurring items.  SFAS No. 145 also requires that gains and losses
from debt extinguishments, which were classified as extraordinary items in prior
periods,  be  reclassified  to  continuing  operations  if they do not  meet the
criteria for extraordinary  items. The provisions related to this portion of the
statement  are  required to be applied in fiscal years  beginning  after May 15,
2002, with earlier application  encouraged.  The Company is currently evaluating
the provisions of SFAS 145 and it has not  determined  the impact,  if any, that
this statement will have on its financial position or results of operations.

         In June of 2002, SFAS 146,  "Accounting for Costs  Associated with Exit
or Disposal  Activities,"  which  nullifies  EITF issue 94-3,  was issued by the
FASB. SFAS 146 is effective for exit and disposal  activities that are initiated
after December 31, 2002 and requires that a liability for a cost associated with
an exit or disposal  activity be recognized  when the liability is incurred,  in
contrast to the date of an entity's  commitment  to an exit plan, as required by
EITF issue 94-3. The Company is currently evaluating the provisions of SFAS 146,
but does not expect a material  impact on its financials  position or results of
operations.

         Risk Concentrations: Financial instruments that potentially subject the
Company  to   concentrations  of  credit  risk  consist  primarily  of  accounts
receivable. The Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential credit losses.

         The table below shows the sales by customer and indicates that Fidelica
Microsystems,  Inc. represented 10% for the ten months ended September 28, 2002,
32% for the two months ended November 24, 2001 and 34% of fiscal 2001 sales. The
Company had no accounts  receivable  from this  customer at September  28, 2002.
Coventor,  Inc.  ("Coventor")  represented 8% of the Company's sales for the ten
months ended  September  28, 2002 and 35% for the two months ended  November 24,
2001. The Company had no accounts  receivable from Coventor at the end of fiscal
2002.  Spectra  represented  10% of the Company's sales for the ten month period
ending  September  28,  2002.  The Company  had  approximately  $0.1  million in
outstanding  accounts  receivable,  due from Spectra,  representing 13.7% of the
Company's accounts  receivable balance at September 28, 2002. Marubeni Solutions
represented 11% of the Company's sales for the ten month period ending September
28, 2002. The Company had  approximately  $0.1 million in  outstanding  accounts
receivable  due from  Marubeni,  representing  14.9% of the  Company's  accounts
receivable  balance at  September  28,  2002.  OCCAM  Networks,  Inc.  ("OCCAM")
represented  14% for the ten months ended September 28, 2002 and 11% for the two
months ended  November 24, 2001 of the  Company's  sales.  OCCAM  entered into a
long-term  lease  arrangement  with the Company  beginning  in the third  fiscal
quarter of 2001.  The  Company had  approximately  $0.1  million in  outstanding


                                      F-15
<PAGE>
accounts receivable, due from OCCAM, representing 7.4% of the Company's accounts
receivable balance at September 28, 2002.
<table>
<caption>
Sales by Customer
                                            Successor Co.       Predecessor Co.        Predecessor Co.
                                              Ten Months           Two Months
                                                Ended                Ended               Year Ended
                                            September 28,         November 24,          September 29,
(As a percentage of sales)                       2002                 2001                  2001
                                          -------------------------------------------------------------
<S>                                                 <C>                   <C>                    <C>
Fidelica Micro Systems, Inc.                        10%                   32%                    34%
Coventor, Inc.                                       8%                   35%                     0%
Spectra                                             10%                    0%                     0%
Marubeni Solutions                                  11%                    0%                     0%
OCCAM Networks, Inc.                                14%                   11%                     0%
All Others                                          47%                   22%                    66%
                                          -------------------------------------------------------------
Total                                              100%                  100%                   100%
                                          =============================================================
</table>
         Prepaids and Other Current Assets: The major components of prepaids and
other current assets include prepaid insurance of $0.1 million,  current portion
of  deferred  rent and realtor  commissions  of $0.1  million  related to tenant
agreements  and $0.1  million  related to the current  portion of debt  issuance
costs  related to the $5.4  million  loan  secured by the Company on December 5,
2001.

         Other Assets:  Other assets includes the following:

                                Other
                                Assets
                               ($000's)

Building held for sale         $    5,500
Debt issue costs                      143
Deferred rent                         138
Employee loans                         94
Lease commission                       83
Other                                 203
                             -------------
Total                         $     6,161
                             =============

         The building held for sale was initially offered for sale in the summer
of 1999. The Company entered into a sale agreement with a buyer with the plan of
raising additional working capital, but the transaction was cancelled before the
end of 1999.  However,  shortly  after the Chapter 11 filing on January 7, 2000,
the Company  placed the building for sale again.  The Company is  continuing  to
market this property for sale. The asset is held in the MEMS business segment.

         The employee loans are notes  receivable  from one former  employee and
two current  employees of the Company,  which have  interest  rates ranging from
5.25% to 8.0% and terms of from two years to ten years.

                                      F-16
<PAGE>

         Advertising:  The Company  expenses  advertising  costs when  incurred.
Advertising expense was immaterial for both fiscal 2002 and 2001.

         Fiscal Year: The Company's  fiscal year ends on the Saturday closest to
September  30.  Fiscal  years  2002 and 2001  ended on  September  28,  2002 and
September 29, 2001, respectively.

         Both fiscal year 2002 and 2001  included 52 weeks.  References to years
in this annual report relate to fiscal years rather than calendar years.


3.    Segments of Business

         Indicated  below is the  information  required  to comply with SFAS No.
131,  "Disclosures  about  Segments of an Enterprise  and Related  Information."
Under SFAS No. 131,  "operating  segments" are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating  decision maker in deciding how to allocate resources and in
assessing  performance.  Generally,  financial  information  is  required  to be
reported  on the  basis  that  it is  used  internally  for  evaluating  segment
performance and deciding how to allocate resources to segments.

         The Company operates in four segments of business. It manufactures MEMS
devices for several industries.  It also operates a machine, model and die shop,
a materials science analytical lab and leases excess space in its owned facility
to tenants under long-term lease contracts. The Company's assets are all located
in the United States.

         The  Company's  management   evaluates   performance  of  each  segment
primarily  on the net sales and gross  profit  (loss).  The  information  in the
following  table is  derived  directly  from the  segments'  internal  financial
reporting used for corporate management  purposes.  Research and development and
general  and  administrative  expenses  are not  allocated  to and/or  among the
segments.
















                                      F-17
<PAGE>

         The following table represents net sales,  gross profit (loss) and long
lived assets by segment (in thousands):
<table>
<caption>
($000's)                               Santa Barbara  Insight     Rental    United States
                                MEMS   Tool and Die   Analytical  Income        Total
                        -----------------------------------------------------------------
<S>                        <C>         <C>            <C>         <C>        <C>

Successor Co.
Ten Months Ended:
September 28,
2002

Net sales                $  1,874      $    460       $    126    $    426   $  2,886
                        =================================================================
Intercompany Sales       $     17      $     72       $    297    $      -
                        =================================================================
Gross profit (loss)      $ (2,956)     $    (32)      $    144    $    315   $ (2,529)
                        =================================================================
Long Lived Assets        $ 16,544      $    152       $     70    $  2,660   $ 19,426
                        =================================================================


Predecessor Co.
Two Months Ended:
November 24,
 2001

Net sales                $    514      $     76       $     16    $     86   $    692
                        =================================================================
Intercompany Sales       $      4      $      8       $     41    $      -
                        =================================================================
Gross profit (loss)      $   (359)     $    (12)      $     15    $     80   $   (276)
                        =================================================================
Long Lived Assets        $ 16,853      $    195       $     89    $  2,753   $ 19,890
                        =================================================================

Predecessor Co.
Year Ended:
September 29,
2001

Net sales                $  1,631      $    657       $    210    $    275   $  2,773
                        =================================================================
Intercompany Sales       $     26      $     60       $    303    $      -
                        =================================================================
Gross (loss)             $ (3,976)     $      5       $    166    $     81   $  (3,724)
                        =================================================================
Long Lived Assets        $ 16,896      $    203       $     93    $  2,774   $  19,966
                        =================================================================
</table>

         Capital  additions  for the two months ended  November 24, 2001 and the
ten  months  ended  September  28,  2002 were  $0.1  million  and $0.4  million,
respectively.  Capital  additions for fiscal 2001 were $0.1 million.  The fiscal
2002  additions were  predominantly  related to the MEMS portion of the business
and the 2001 additions were related to the Santa Barbara Tool and Die portion of
the business.

                                      F-18
<PAGE>


         The following table represents the Company's net sales for domestic and
foreign customers (in thousands):

                           Successor          Predecessor         Predecessor
                               Co.                Co.                 Co.
                           Ten Months          Two Months
                             Ended               Ended              Year Ended
                           September 28,       November 24,        September 29,
($000's)                       2002                2001                 2001
                          ------------------------------------------------------
Net sales
Domestic                   $   2,291           $      692           $   2,773
Foreign                    $     595           $        -           $       -
                          ------------------------------------------------------
Total                      $   2,886           $      692           $   2,773
                          ======================================================

         The Company's products are sold in the United States, Japan, Canada and
Europe by its direct sales personnel.


4.    Income Taxes

         The provision for income taxes for the following  fiscal years consists
of (in thousands):


                             Successor Co.     Predecessor Co.
                              Ten Months        Two Months       Predecessor Co.
                                Ended             Ended           Year Ended
                             -------------     ---------------    -------------
                             September 28,      November 24,      September 29,
                                2002               2001              2001
                             -------------     ---------------    -------------
Federal Income Taxes
   Current                   $           -     $          -       $          -
   Deferred                              -                -                  -
State Income Taxes                                                           -
   Current                              31                -                  1
   Deferred                              -                -                  -
                             -------------     ---------------    -------------
                             $          31     $          -       $          1
                             =============     ===============    =============

                                      F-19
<PAGE>
         Reconciliation  of the actual provisions for income taxes to the income
tax calculated at the United States Federal rates for operations were as follows
(in thousands):
<table>
<caption>
                                                Successor Co.            Predecessor Co.
                                                 Ten Months                 Two Months            Predecessor Co.
                                                    Ended                     Ended                 Year Ended
                                            ----------------------     ---------------------    --------------------
                                                September 28,              November 24,            September 29,
                                                    2002                       2001                    2001
                                            ----------------------     ---------------------    --------------------
<S>                                         <C>                         <C>                     <C>
Income tax benefit at the United            $      (2,623)              $        (420)          $       (4,022)
States federal income tax rate
State income taxes, net of federal income
tax benefit                                          (444)                        (74)                    (708)

Change in valuation allowance                       3,098                         494                    4,731
                                            ----------------------     ---------------------    --------------------

                                            $          31               $           -           $            1
                                            ======================     =====================    ====================
</table>
         The  components  of deferred  income  taxes at  September  28, 2002 and
September 29, 2001 are as follows (in thousands):
<table>
<caption>
                                                Successor Co.           Predecessor Co.
                                                 Ten Months                Two Months
                                                    Ended                    Ended                 Year Ended
                                            ----------------------    ---------------------    -------------------
                                                September 28,             November 24,           September 29,
                                                    2002                      2001                    2001

<S>                                         <C>                         <C>                     <C>
Net operating loss carryforwards            $      10,055               $       7,214           $        6,708
Basis difference in property, plant and
equipment                                             986                         986                      986

Deferred revenue                                      559                         302                      314
                                            ----------------------    ---------------------    -------------------
subtotal                                           11,600                       8,502                    8,008

Valuation allowance                               (11,600)                     (8,502)                  (8,008)
                                            ----------------------    ---------------------    -------------------
Total net deferred tax asset (liability)    $           -               $           -           $            -
                                            ======================    =====================    ===================
</table>
      SFAS 109 requires that all deferred tax balances be  determined  using the
tax rates and limitations  expected to be in effect when the taxes will actually
be paid or recovered.  Consequently,  the income tax provision  will increase or
decrease in the period in which a change in tax rate or  limitation  is enacted.
As of September 28, 2002 and September 29, 2001,  the Company had total deferred
tax assets of $11.6 million and $8.0 million, respectively. The Company recorded
a valuation  allowance in the amount of $11.6  million and $8.0 million  against
the amount by which  deferred  tax assets  exceed  deferred tax  liabilities  at
September 28, 2002 and September 29, 2001, respectively. The change in valuation
allowance  was $3.6  million for the 2002  periods and $4.7 million for the 2001
period. The valuation reserve at September 28, 2002 has been provided due to the
uncertainty of the amount of future taxable income. The valuation  allowance has
been  provided  after  determining  that under the criteria of SFAS No. 109, the
Company  does not have a basis to conclude  that it is more likely than not that
it will realize the deferred tax assets.

                                      F-20
<PAGE>
      Under the terms of the bankruptcy,  the Company may not be able to receive
any benefit from previously  accumulated net operating loss carryforwards  prior
to the bankruptcy.  Portions of the Company's  pre-bankruptcy  tax losses may be
eligible for use in future periods.  The Company is currently  evaluating  these
amounts.  Since January 7, 2000, the Company has  accumulated net operating loss
carryforwards of approximately  $25.1 million for federal tax purposes and $12.6
million for state tax  purposes as of September  28, 2002.  Once the Company has
utilized these remaining net operating loss carry forwards, future U.S. earnings
will be taxed at the U.S. statutory rates less available tax credits, if any. To
the extent not used, the net operating loss  carryforwards for federal and state
purposes expire in varying amounts beginning in 2021 and 2011, respectively.  At
September  28,  2002,  all  identified  deferred  tax  assets  are  reduced by a
valuation allowance  therefore,  any additional operating loss carryforwards not
recognized  would not result in a benefit in the  provision for income taxes due
to the  uncertainty  of future  realization of those  additional  operating loss
carryforwards.

5.    Debt

         On September 5, 2001, the Company  completed a mortgage of $2.0 million
secured by one of its  California  properties.  The loan had a three-month  term
with the ability to extend it for an additional  nine months.  The loan required
interest-only  monthly  payments  at 12%  annual  interest  rate.  The loan also
provided an option for the Company to borrow an  additional  $3.4 million at 12%
annual  interest  rate with a three-year  loan term for the entire $5.4 million.
The  Company  exercised  this  option  in  December  of 2001 and the  additional
proceeds were received on January 5, 2002.

         The Chapter 11 Reorganization  provided for the treatment of the unpaid
professional  persons involved in the reorganization  process.  The total amount
owed to these  professional  persons as of the Effective  Date was $4.1 million.
The Bankruptcy Code provides that each Professional  Person,  defined as the law
firms and  investment  bankers  employed  by the  Company  during the Chapter 11
reorganization,  is entitled to be paid cash, in full, at the Effective  Date an
amount equal to their  Professional  Person's Allowed  Administrative  Claim. In
consideration  for each  Professional  Person waiving this right and agreeing to
accept a convertible  note,  the Plan provided for each  Professional  Person to
have an Allowed  Administrative  Claim as of the Effective Date. The convertible
notes are due on November 15, 2003. The notes require interest-only  payments at
12% annual  interest  rate.  The notes are  convertible  to common  stock of the
Company at a conversion  price of $8.20 per share.  The Company has not made any
of the monthly interest  payments to the  Professional  Persons and is currently
negotiating the terms of these notes with the holders.  Consequently,  the notes
are  considered  to be current  debt.  As of September  28, 2002,  the amount of
accrued interest  associated with these notes is $0.4 million and it is recorded
as part of other current liabilities. The notes are secured by substantially all
of the assets of the Company.

         The  Company  settled two claims  during the Chapter 11  Reorganization
that were  secured by its owned  properties.  One of these  claims is a property
mortgage  of $9.6  million due on  November  24,  2005.  The  mortgage  requires
interest-only  payments  at 12% annual  interest  rate.  The other claim was for
delinquent property taxes of $0.9 million.  The settlement requires  semi-annual
principal and interest payments on November 1st and May 1st of each year with an
8% annual interest rate. The final payment is due on November 1, 2006.

                                      F-21
<PAGE>

         The  aggregate  principal  payments  of long-  term  debt for the years
subsequent to September 28, 2002 are: 2003 - $4.3 million,  2004 - $0.2 million,
2005 - $5.6 million,  2006 -$9.8 million and 2007 - $0.1 million.  These amounts
relate to convertible  notes owed to the  professionals  used in the bankruptcy,
property  taxes and two  property  mortgages,  which are all  secured by the two
California properties owned by the Company.

         On the Petition  Date,  the Company  stopped  accruing  interest on all
un-secured debt in accordance with SOP 90-7.  Contractual  interest  expense not
accrued or recorded on certain  pre-petition  debt  totaled $1.4 million for the
two months ended November 24, 2001 and $10.1 million in fiscal 2001.

         The Company's long-term debt is summarized below:

                                                            September 28,
                                                                2002
                                                        ------------------
Property Mortgages                                       $        14,987
Property Taxes                                                       846
Convertible Notes with Bankruptcy Professionals                    4,137
                                                        ------------------
                                                                  19,970

Current portion                                                    4,325
                                                        ------------------
Total                                                    $        15,645
                                                        ==================

6.   Commitments and Contingencies

         The  Company  uses  hazardous  chemicals  in its  manufacturing  and is
subject to a variety of environmental and land use regulations  related to their
use, storage and disposal. If the Company fails to comply with present or future
regulations,   liability,  production  suspension  or  delay  could  result.  In
addition,  environmental  or land use  regulations  could restrict the Company's
ability to expand its current  production  facilities  or  establish  additional
facilities in other  locations,  or could require the Company to acquire  costly
equipment,   or  to  incur  other  significant   expenses  for  compliance  with
environmental regulations or to clean up prior discharges.

         The  Company  has been  subject  to  regulatory  and legal  proceedings
related to past environmental  contamination,  and other proceedings could arise
in the future.  The Company has recently been advised by the U.S.  Environmental
Protection  Agency that it may be required to pay for part of the remediation of
a solvent and refrigerant  recycling and treatment facility formerly operated by
the Omega Chemical Company in Whittier,  California,  and may be required to pay
an additional  amount which  management does not expect to be material.  The EPA
alleges that the Company provided solvent and refrigerant waste to this facility
for recycling  and  disposal.  The Company is still  exploring  legal  defenses,
including defenses arising out of the bankruptcy proceedings.  At this time, the
Company  intends  to  defend  this  matter  vigorously.   The  Company  is  also
remediating  and  monitoring  ground water  contaminated  with volatile  organic
compounds ("VOCs") at a former Company site in Goleta, California under an order
of  the  California  Regional  Water  Quality  Control  Board  ("CRWQCB").   VOC

                                      F-22
<PAGE>


contamination  at the site has been  reduced  and the  Company  does not  expect
further  expenditures at the site to be material.

         The  Company  is in the  process of selling  an  unneeded  facility  in
California,  the Hollister property.  The environmental testing performed by the
Company  in  support of this sale  determined  that the soil  showed no metal or
volatile organic compound ("VOC") contamination. Ground water samples showed low
levels of VOC  contamination.  The CRWQCB  required  the  Company to install one
monitoring well, and test results confirmed the low level VOC concentration. The
owners of the  property  adjacent to the  Hollister  property  are  conducting a
remediation project on their site for this same VOC and the CRWQCB has requested
this property to place  monitoring  wells  between the two  properties to make a
determination of possible intrusion from the adjacent site. The results of their
testing showed by-products of the pertinent VOC. They have been asked to conduct
bi-annual sampling of the wells.

         Purchase commitments  associated with capital expenditures were minimal
at September 28, 2002.

7.   Benefit Plans

         The Company has a qualified  retirement  plan (the "401(k) Plan") under
the provisions of section 401(k) of the Internal Revenue Code, in which eligible
employees may participate.  Substantially all participants in this plan are able
to defer  compensation up to the annual maximum amount  allowable under Internal
Revenue Service  regulations.  The Company has a 401(k) cash match program which
provides  a match  of one  half  of the  first  five  percent  of an  employee's
contributions.  This  matching  contribution  was less than $0.1 million in both
fiscal 2002 periods and 2001.  The  Company's  401(k) Plan has a provision  that
provides  management with an option to make a discretionary  contribution to the
plan. Additionally, the Company has a profit sharing plan, in which all eligible
employees participate. There was no compensation expense recorded under the cash
profit sharing plan and the Company made no discretionary  401(k)  contributions
during both fiscal 2002 periods and fiscal 2001 under this plan.

8.   Financing Transaction

         The  Company   completed  an  equity  financing   transaction  with  L3
Communications  Corporation ("L3") on August 2, 2002 for $5 million in cash. The
Company is a subcontractor to L3 for a long-term  government contract to produce
gyroscopes and accelerometers for use in inertial navigation. The Company issued
935,000 shares of common stock to L3 along with two warrants.  The first warrant
has a term of eighteen  months to purchase  167,000  shares of common stock at a
price of $5.35 per share.  The value of the first  warrant was  determined to be
$.3 million  using the  Black-Scholes  option  pricing  model with the following
assumptions:  a risk-free interest rate of 1.93%, an expected volatility of 76%,
a warrant term of 1.5 years, and no expected dividends. The second warrant has a
term of thirty-six  months to purchase 700,000 shares of common stock at a price
of $7.29 per share.  The value of the second  warrant was  determined to be $1.4
million  using  the  Black-Scholes  option  pricing  model  with  the  following
assumptions:  a risk-free interest rate of 2.49%, an expected volatility of 76%,
a warrant term of 3 years, and no expected dividends.  The value of the warrants
is not  reflected in the  accompanying  financial  statements as it was recorded
within common stock.

                                      F-23
<PAGE>


9.   Restricted Stock and Stock Option Program

         Restricted  Stock and Option  Program:  The Company's  stock option and
long-term   incentive   plans  were   cancelled   as  part  of  the  Chapter  11
Reorganization Plan ("Plan").  The Company had approximately 3.8 million options
outstanding  as of the  Petition  Date.  The  Plan  provided  for  future  stock
incentives for the employees and directors of the Company.  Pursuant to the Plan
the Company, as of the Effective Date, adopted the Employee Restricted Stock and
Option  Program,  authorizing  the grant of  Employee  Restricted  Stock and New
Options to purchase  shares of New Common  Stock to employees as provided for in
the Employee  Restricted  Stock and Option  Program.  Pursuant to the Plan,  the
Company  issued as of the  Effective  Date,  Employee  Restricted  Stock and New
Options  allocated and vested as provided for in the Employee  Restricted  Stock
and Option Program.

         Pursuant  to the  Plan,  2,250,000  shares  of New  Common  Stock  were
reserved for the Employee  Restricted  Stock and the New Options which are to be
issued pursuant to the New Employee  Restricted  Stock and Option  Agreement and
the Employee  Restricted Stock and Option Program.  There were 500,000 shares of
Employee  Restricted  Stock issued and each class of New Options shall represent
the right to  purchase,  in the  aggregate,  that number of shares of New Common
Stock as follows:


                                                       Number Of Shares Of New
           Class                                       Common Stock
           --------------------------------------------------------------------
           New Employee Options                             1,000,000
           --------------------------------------------------------------------
           Employee/Director
           Reserved Options                                   750,000
           --------------------------------------------------------------------

         Each New Employee  Option  provided for a purchase price for each share
of New Common stock of $5.00 per share. Each  Employee/Director  Reserved Option
provides for a purchase  price for each share of New Common Stock as  determined
by the Board of  Directors,  which price shall be the then fair market  value of
the New  Common  Stock as  determined  by the Board of  Directors.  The  vesting
schedule is two years for the Employee  Restricted Stock and three years for the
New Employee Options. Upon vesting, the New Employee Options can be exercised if
and only if all of the following  conditions have been  satisfied:  (i) not more
than ten (10) years after the  issuance  of the New Option has lapsed;  and (ii)
the  recipient  of the New  Option is  employed  by the  Company at the time the
recipient seeks to exercise the Employee Restricted Stock and New Option (or not
more than ninety (90) days have passed since such employee's employment has been
terminated);  provided, however, if the recipient is not employed by the Company
at the time of exercise by reason of the recipient's death, the recipient's heir
(or estate) can exercise the Employee  Restricted Stock and New Option;  The New
Employee  Restricted Stock and Option Agreement provides for accelerated vesting
upon certain specified  conditions related to a transfer of ownership or sale of
the business.

                                      F-24
<PAGE>


         The Employee  Restricted  Stock Program,  which includes 500,000 common
shares,  was  determined to have a market value of $2.5 million based on a $5.00
per share price determined by the Board of Directors. The employees received the
common  stock at a  purchase  price of $0.0001  and there is a two-year  vesting
period.  The  vesting  began  on the  Company's  effective  date for its Plan of
Reorganization  of November  16,  2001.  The Company  recorded  $1.1  million in
amortization expense in the ten months ended September 28, 2002 for the Employee
Restricted  Stock Program.  Cost of sales and Research and Development were each
charged with $0.3 million and Selling,  General and Administrative incurred $0.5
million of the amortization expense.  Fiscal 2003 will incur $1.3 million of the
remaining  $1.4 million of  amortization  expense  with the balance  expensed to
fiscal 2004.

         Stock option activity of the Company is as follows:

                                                 Options Outstanding
                              --------------------------------------------------
                                 Number       Exercise Price    Weighted Average
                               of Shares        Per Option       Exercise Price
                              --------------  --------------    ----------------
     Granted                     1,267,300     $5.00 - $5.35          $5.01
     Cancelled                      (2,190)            $5.00          $5.00
                              --------------
Balance September 28, 2002       1,265,110     $5.00 - $5.35          $5.01
                              ==============

         The  Company  accounts  for its  plans in  accordance  with  Accounting
Principles  Board Opinion No. 25. As stock options granted in the current period
were granted at or below fair market  value,  no  compensation  expense has been
recorded.  Had  compensation  cost been  determined  on the basis of fair  value
pursuant to SFAS No. 123,  "Accounting for Stock-Based  Compensation,"  net loss
and basic and diluted EPS would have been as follows:

                                        Ten Months Ended
                                          September 28,
                                               2002
                                        ----------------
Net loss:
As reported                                 (7,745)
Pro forma                                   (8,154)
Basic and Diluted EPS:
As reported                                 (1.67)
Pro forma                                   (1.76)

         The fair value of each option is  estimated  on the date of grant using
the Black-Scholes option pricing model with the following assumptions;  weighted
average  risk-free  interest  rate of  4.11%,  expected  volatility  of 76%,  an
expected option life of 4 years,  and no expected  dividends.  The fair value of
the option grants for the ten months ended September 28, 2002 was $3.7 million.

                                      F-25
<PAGE>



         The  following   table   summarizes   information   regarding   options
outstanding at September 28, 2002:
<table>
<caption>
                                Options Outstanding                                                Options Exercisable
--------------------- ------------------------------------------ --- ------------------    --------------------------------------
                                                 Weighted
                                                 Average                 Weighted                                  Weighted
      Range of             Number               Remaining                 Average              Number               Average
  Exercise Prices       Outstanding          Contractual Life           Exercise Price         Exercisable        Exercise Price
--------------------- -----------------    ---------------------     ------------------    ----------------    ------------------
<S>         <C>         <C>                             <C>                   <C>                         <C>                 <C>
            $5.00       1,245,110                       9.16                  $5.00                       -                   -
            $5.35          20,000                       9.84                  $5.35                       -                   -
                      -----------------                                                    -----------------
                        1,265,110                                                                         -
                      =================                                                    =================
</table>

10.   Related Party Transactions.

         The  Company  had  sales  of $0.1  million,  deferred  revenue  of $0.7
million,  inventory of $0.7 million and accounts receivable of $0.2 million from
L3 Communications,  Inc., a stockholder and customer,  as of September 28, 2002.
The Company had minimal  activity  with this  customer for its fiscal year ended
September 29, 2001.

























                                      F-26
<PAGE>

11.      Summarized Quarterly Financial Data (Unaudited)

(In thousands, except per share
data)
<table>
<caption>
                                                                                            Three months ended
                                        Two months       One month         ---------------------------------------------
                                          ended            ended             March               June          September
                                        November 24      December 29          30                   29             28
                                       ----------------------------------------------------------------------------------
 Fiscal 2002                           Predecessor        Successor        Successor           Successor       Successor

<S>                                 <C>              <C>              <C>                <C>              <C>
Net sales                           $           692  $           403  $          805     $           869  $          809

Gross loss                                    (276)            (138)           (739)               (849)           (803)

Net loss                                    (1,234)            (824)         (2,315)             (2,368)         (2,238)

Net loss per share:
   Loss per common share - basic
and diluted                         $         (.02)  $        (0.18)  $       (0.51)     $        (0.53)  $       (0.46)

Weighted average number of
common shares outstanding:
   Common shares - basic and
diluted                                      70,444            4,500           4,500               4,500           4,866

<caption>
                                                                         Three months ended
                                       ----------------------------------------------------------------------------------
                                                                            March               June          September
                                                        December 30          31                   30             29
                                                        -----------------------------------------------------------------
 Fiscal 2001                                            Predecessor      Predecessor         Predecessor     Predecessor

<S>                                                  <C>              <C>                <C>              <C>
Net sales                                            $           446  $          730     $           770  $          827

Gross loss                                                     (975)           (836)               (947)           (966)

Net loss                                                     (2,168)         (2,287)             (2,200)         (5,173)

Net loss per share:
   Loss per common share - basic
and diluted                                          $        (0.03)  $       (0.03)     $        (0.03)  $       (0.08)

Weighted average number of
common shares outstanding:
   Common shares - basic and
diluted                                                       70,444          70,444              70,444          70,444
</table>
                                      F-27