U.S. Securities and Exchange Commission
                             Washington, D.C. 20549

                                   Form 10-KSB

(Mark One)

|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

                  For the fiscal year ended September 27, 2003

|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

           For the transition period from ___________to _____________

                           Commission File No. 1-6635

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

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

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

                  Issuer's telephone number: (805) 681-2800

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

                         Common Stock, $.0001 par value
                                (Title of Class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 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 |X|   No |_|

Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation S-B contained in this form, 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.  |_|

The  issuer's  revenues  for  its  most  recently  completed  fiscal  year  were
$5,531,000

There is no public market for the registrant's  Common Stock. As of November 22,
2003,  the  aggregate  book  value  of the  registrant's  Common  Stock  held by
non-affiliates was $8,660,000.

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

Check  whether the issuer 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 |X|   No  |_|

As of January 5, 2004, there were 6,937,611 shares of the Company's common stock
outstanding.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant's  definitive  proxy statement  relating to its
2004 annual meeting of stockholders, which will be filed with the Securities and
Exchange  Commission  pursuant to Regulation 14A within 120 days of the close of
the  registrant's  last fiscal year, are incorporated by reference into Part III
of this report.

      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  INDEPENDENT AUDITORS HAVE
EXPRESSED  SUBSTANTIAL  DOUBT AS TO ITS ABILITY TO CONTINUE AS A GOING  CONCERN;
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.  THE COMPANY DOES NOT ASSUME ANY
OBLIGATION TO UPDATE OR CORRECT FORWARD-LOOKING STATEMENTS TO REFLECT SUBSEQUENT
EVENTS OR ACTUAL RESULTS.


























                                       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.  Generally, 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.  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 protection  under
Chapter 11 of the U.S.  Bankruptcy  code on January 7, 2000.  The Company exited
Chapter 11 on November 16, 2001 under a court  approved  plan of  reorganization
(the "Reorganization Plan") and changed its name to Innovative Micro Technology,
Inc.


THE COMPANY'S MEMS BUSINESS

      The Company used the Chapter 11  reorganization  process to reposition its
operations in the MEMS business.  MEMS devices were first  developed in the late
1970s and early  1980s.  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 include  moving  components,  hence the
"mechanical"  part of the name. By using wafer  techniques,  the  performance of
mechanical  systems can be enhanced due to their smaller size and/or complexity.
MEMS  devices  can be  manufactured  at a lower cost due 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  small-scale
mechanical systems such as electromagnetic  relays,  which today are built using
assembly  techniques,  could be made using MEMS.  In addition,  many  electrical
systems  may be replaced by MEMS. An example of this is optical fiber switching,


                                       3
<PAGE>

used in telecommunications. MEMS versions of these switches are now beginning to
find their way into the marketplace.  Another example is components 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's business activity is
currently  at  the  product  development  and  low  volume  prototype  phase  of
production.  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.


OTHER LINES OF BUSINESS

      The Company's three  additional lines of business are: "Santa Barbara Tool
& Die," "Insight  Analytical"  and leasing of excess space in its owned facility
under long-term lease contracts. The Company learned in October 2003 that it may
have been infringing upon the service mark of another firm operating in the same
business area under the name of Insight  Analytical  Labs, Inc. The Company will
change Insight  Analytical's  name to IMT Analytical in the first fiscal quarter
of 2004.

      Santa Barbara Tool & Die is a precision machining and tooling service that
provides  customers with  prototyping,  development  and production tool and die
manufacturing.  Santa  Barbara Tool & 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 is a precision  semiconductor and MEMS analysis service
provider.   Insight   Analytical's   laboratory   technology  includes  electron
microscopy in a variety of forms and a focused ion beam tool which can precisely
make  three-dimensional  cuts in samples to reveal  detailed  information  as to
dimension, material makeup, and material crystal properties.

      Santa Barbara Tool & Die and Insight  Analytical are both 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.  In
addition,  the Company has  approximately  51,000 square feet of building  space
available to lease. As of September 27, 2003,  approximately  34,000 square feet
were  under  long  term  lease   arrangements   with  annual  rental  income  of
approximately $0.5 million.


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:

      o    photolithography,  including resist application,  resist development,
           and patterned exposure;

      o    deposition, including sputtering, ion beam deposition, plating;

                                       4
<PAGE>

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

      o    planarization, including chemical-mechanical polishing;

      o    wafer slicing;

      o    assembly,   including  die  bonding,  electrical  bonding,  precision
           alignment; and

      o    testing, including mechanical and electrical testing.


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

      As of September 27, 2003, the Company had 65 employees at its headquarters
in Goleta, California.


TECHNOLOGY

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

      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
manufacturing  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
allows the  Company  to design and  manufacture  magnetic  actuators  of various
types.

      The Company's service technology comes in the form of the business offered
by  Santa  Barbara  Tool & Die and  Insight  Analytical  (See-  Other  Lines  of
Business).


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.  Two of these patents have been issued
by the U.S. Patent Office to the Company.

      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

                                       5
<PAGE>

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
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  using the patented
invention.


VENDORS

      The  Company  purchases  materials  from a variety of  vendors,  including
providers of manufacturing  supplies,  office supplies,  and raw materials.  The
Company is not solely  dependent on any of its  vendors,  and in the majority of
the cases there is a general market for the required products.


CASH FLOW AND RESULTS OF OPERATIONS

      The financial  results of the Company  presented in the  following  report
only include periods after the Company's  emergence from Chapter 11. 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").


INDUSTRY SEGMENTS

      The Company  analyzes  its  business  results  based on its four  lines of
business:  MEMS, Santa Barbara Tool & Die, Insight Analytical and Rental Income.
The following  table shows the  percentages  of revenue from each segment during
fiscal 2003 and the ten months ended September 28, 2002.

Revenue by Segment                          For the Periods:
                                            ---------------

                                                        Ten Months
                                         Year Ended        Ended
                                       September 27,   September 28,
(As a percentage of revenue)                2003            2002
                                       -----------------------------
MEMS                                         74%            65%
Santa Barbara Tool & Die                     14%            16%
Insight Analytical                            3%             4%
Rental Income                                 9%            15%
                                       -----------------------------
Total                                       100%           100%
                                       =============================

                                       6
<PAGE>

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   inertial   navigation,
telecommunication,   RF  wireless,  and  the  biomedical  industries.   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
September  3,  2003  for  $2.5  million  in cash  (see  Note 8 to the  financial
statements - Financing  Transaction).  In addition,  L-3  exercised  warrants to
purchase  167,000  shares of the common stock of the Company at a price of $5.35
per share for a total value of $0.9  million on October 31, 2003 (see Note 11 to
the  accompanying  financial  statements -  Subsequent  Events).  The  Company's
revenue with Galaxy  Scientific Corp. is funded by a contract from the U.S. Army
to support the development of the inertial navigation device that the Company is
developing for L-3. The Company's  revenue with Marubeni is for the  development
of a  telecommunications  optical switch.  The Company's business with Turnstone
Systems,  Inc. was for the development of an  electrostatic  relay array used in
the telephone industry Turnstone Systems,  Inc.  ("Turnstone").  Turnstone filed
for  dissolution  of its business on December 4, 2003.  The Company's  contracts
with Turnstone  were  completed in the third fiscal quarter of 2003.  Biomedical
MEMS includes the Company's  assistance agreement from the U.S. Defense Advanced
Research  Project  Agency  ("DARPA")  for  prototype  development  for rapid and
efficient  isolation of human  hematopoietic  stem cells for medical and defense
applications.  The Company  currently  has  contracts  with  customers in the RF
wireless industry,  which includes RF switching and phase-shifting  electronics.
The Company also leases  approximately 34,000 square feet of excess space within
its  owned  facility  to  tenants  under  long-term  contracts,  of which  OCCAM
Networks, Inc., an unrelated party, leases approximately 31,000 square feet. The
Company's  revenue by  significant  customer  for fiscal 2003 and the ten months
ended September 28, 2002 are displayed on the following chart.


Revenue by Customer                         For the Periods:
                                            ---------------
                                                        Ten Months
                                         Year Ended        Ended
                                       September 27,   September 28,
(As a percentage of revenue)                2003            2002
                                       -----------------------------
Galaxy Scientific Corp.                      14%            0%
Marubeni Solutions                           13%           11%
Turnstone Systems Inc.                       12%            4%
DARPA assistance agreement                   11%            0%
OCCAM Networks, Inc.                          9%           14%
Fidelica Micro Systems, Inc.                  0%           10%
Coventor, Inc.                                0%            8%
Spectra                                       9%           10%
All Others                                   32%           43%
                                       ---------------------------
Total                                       100%          100%
                                       ===========================

                                       7
<PAGE>

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


GOVERNMENT APPROVAL

      The  Company  is a  subcontractor  to DARPA and L-3 in  certain  long-term
contracts of L-3 with the U.S. Army to produce gyroscopes and accelerometers for
use in inertial  navigation.  The Company's status as a  subcontractor,  and the
products it produces in that  capacity,  are subject to  substantial  government
regulation and continuing agency approval.


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  Micralyne,
Colibrys, 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  compared  to the  smaller  four-inch  wafer.  This
feature provides the Company with certain cost advantages.

      The Company also competes with large Integrated Circuit manufacturers with
six-inch  wafer  fabrication  ("wafer  fab")  facilities.  These  firms  include
Honeywell,   Dalsa,  Analog  Devices,  Texas  Instruments  and  Motorola.  These
competitors  are  all  significantly   larger  than  the  Company  with  greater
financial,  technical and marketing  resources than the Company.  In some cases,
these firms 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.,
which recently  announced that it will be closing its fab; and Cronos,  owned by
Memscap S. A. These firms are primarily focused on producing  products for their
respective parents, but they also service external customers.

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

                                       8
<PAGE>


ENVIRONMENTAL COMPLIANCE

      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 for the cost of remediation,  damages or penalties,  and
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.  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.  If these legal defenses are  unsuccessful,  the
Company  could be  required  to pay an amount of less  than  $0.1  million.  The
Company is also  remediating  and  monitoring  ground  water  contaminated  with
volatile  organic  compounds  ("VOCs") at a former site leased by the Company 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 future expenditures related to the site to be material.

      In fiscal 2003, the Company sold its Hollister facility. The environmental
testing  performed  by the Company in support of this sale  determined  that the
soil showed no metal or VOC contamination.  However, 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
Company has recently been asked by the CRWQCB to submit new sample  results from
its well.  One  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. Their testing detected the
presence  of  breakdown  products  of the same VOC.  The owners of the  adjacent
property have been asked to conduct  bi-annual  sampling of the wells.  A second
property adjacent to the Company is conducting site  characterization  under the
guidance of the CRWQCB related to the same VOC found on the Company's  site. The
CRWQCB is  requesting  investigation  of the  sites  adjacent  to the  Company's
property  in order  to  attempt  to  determine  the  responsible  party  for the
Company's  ground  water  contamination.   The  Company  is  unable  to  make  a
determination  of potential  future costs for this situation.  The Company has a
$5.0  million  environmental   insurance  policy  covering  potential  liability
relating to this  property.  The  Company's  accumulated  cost to date for these
activities has been less than $0.1 million.

      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

                                       9
<PAGE>

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 December 15, 2003:

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

Dr. John S. Foster     45      Chief Executive Officer and Chairman of the Board
Peter T. Altavilla     50      Chief Financial Officer, Corporate Controller and
                               Secretary

      Dr.  John S.  Foster has over 16 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.


ITEM 2.  PROPERTIES

      The Company owns its headquarters,  office, plant and warehouse in Goleta,
California.  The facility, used for marketing,  manufacturing and engineering is
130,000 square feet, and includes a 30,000 square foot wafer fabrication plant.
<table>
<caption>
Location                             Type                   Principal Use                 Footage           Ownership
----------------------------------------------------------------------------------------------------------------------
<S>                           <C>                        <C>                              <C>               <C>
Goleta (Santa Barbara), CA    Headquarters, Office,      manufacturing, research,         130,000           Owned
                              plant and warehouse        engineering and marketing

Goleta (Santa Barbara), CA    Vacant plant                                                103,000           Sold(1)
</table>

(1) The  Company  sold its  Hollister  property,  a vacant  103,000  square foot
manufacturing plant, in the second fiscal quarter of 2003.

                                       10
<PAGE>

      The Company believes its existing manufacturing facilities are adequate to
support customer requirements during fiscal 2004.


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.  The
Company is involved in ongoing  compliance  activities with local  environmental
agencies. See "Item 1- Business- Environmental Compliance."


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.

      As of January 5, 2004, there were  approximately  972 holders of record of
the Company's Common Stock.

      The Company has not paid  dividends in the last two fiscal years.  Because
the  Company is not yet  profitable  and  because it  intends  to  reinvest  any
earnings in the  expansion of its  business,  the Company does not expect to pay
dividends for the foreseeable future.


RECENT SALES OF UNREGISTERED SECURITIES

      On September 3, 2003, the Company  privately sold 467,500 shares of common
stock and warrants to purchase an additional 433,500 shares of common stock (the
"Warrants")  to L-3 for a total  purchase  price  of  $2,500,000.  The  Warrants
consist of (i) an 18-month  warrant to purchase 83,500 shares of common stock at
a purchase  price of $5.35 per share,  which will  expire on March 3, 2005,  and
(ii) a three-year  warrant to purchase  350,000  shares of common stock at $7.29
per share,  which will  expire on  September  3, 2006.  L-3 is a customer of the
Company's  products and  services.  The sale was made  pursuant to the exemption
from registration available under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities  Act"), for transactions by an issuer not involving any
public offering.

      The following unregistered sales of securities took place after the end of
the 2003 fiscal year.

                                       11
<PAGE>

      On September 30, 2003, the Company  reached a settlement  with the holders
of its Professional Notes, who had provided professional services to the Company
during its Chapter 11  reorganization  and received  promissory notes evidencing
the Company's  indebtedness for those services. As partial consideration for the
cancellation  of the  Professional  Notes,  the Company issued 368,113 shares of
Common Stock,  18-month warrants for the purchase of a total of 16,437 shares of
Common Stock at a price of $5.35 per share, which will expire on March 30, 2005,
and  three-year  warrants for the purchase of a total of 68,777 shares of Common
Stock at a purchase price of $7.29 per share, which will expire on September 30,
2006. Of these  securities,  276,287 shares of Common Stock were issued pursuant
to the  exemption  from  registration  under the  Securities  Act under  Section
1145(a) of the  Bankruptcy  Code for the sale of  securities by a debtor under a
plan of  reorganization  in  exchange  for a claim  against or  interest  in the
debtor,  including a claim for administrative expense in the bankruptcy case. Of
the Common Stock and the warrants  described in this  paragraph,  91,826  shares
were sold pursuant to the exemption from  registration  available  under Section
4(2) of the  Securities  Act for  transactions  by an issuer not  involving  any
public offering.

      On October 31, 2003,  the Company  sold 167,000  shares of Common Stock to
L-3 at a price of $5.35 per share,  upon L-3's  exercise of an 18-month  warrant
that it had  purchased on August 1, 2002.  The shares were sold  pursuant to the
exemption from  registration  available under Section 4(2) of the Securities Act
for transactions by an issuer not involving any public offering.

      No underwriter or agent was involved in any of the above transactions.

                      EQUITY COMPENSATION PLAN INFORMATION

      The  following  table  provides  information  about shares of Common Stock
available for issuance under the Company's equity incentive plan.
<table>
<caption>
                                                                      Number of Securities
                      Number of Securities to                        Remaining available for
                          be Issued Upon                            future issuance under
                          Exercise of                                   Equity Compensation
                        Outstanding Options,   Weighted Average    Plans (excluding securities
Plan Category           Warrants and Rights    Exercise Price      reflected in column (a))
                                (a)                  (b)                       (c)
<S>                          <C>                    <C>                       <C>
Plans Approved by
Stockholders(1)              1,664,897              $5.09                     85,103

Plans Not Approved by
Stockholders                     None


      Total                  1,664,897              $5.09                     85,103
</table>

(1) All of the listed securities are available for issuance under the Innovative
    Micro  Technology 2001 Stock  Incentive Plan (the "2001 Plan").  The Company
    was directed to implement the 2001 Plan in the order of the U.S.  Bankruptcy
    Court confirming the Reorganization Plan (the "Order"). At the same time the

                                       12
<PAGE>

    Order  canceled all of the Company's  previously  outstanding  common stock.
    Under Section 303(a) of the Delaware General  Corporation Law, the Order had
    the effect of unanimous  approval by the directors and  stockholders  of the
    Company.



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 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"). The ten months ended September 28, 2002 is
deemed to represent the fiscal year 2002 in the following analyses.

















                                       13
<PAGE>

(In thousands, except per
share and employment amounts)                         Successor      Successor
                                                         Co.            Co.

                                                      Year Ended    Ten Months
                                                                       Ended
                                                     ------------  -------------
                                                     September 27   September 28
                                                         2003          2002
                                                     ------------  -------------
OPERATIONS

Net revenue                                          $  5,531          $  2,886
                                                     --------          --------
Net loss                                             $ (5,524)         $ (7,745)
                                                     ========          ========

Loss per common share-basic
and diluted                                          $   (.97)         $  (1.67)
                                                     ========          ========

Weighted average number of
common shares outstanding-
basic and diluted                                       5,684             4,645

BALANCE SHEET
Working capital deficit                              $   (802)         $ (2,204)

Total assets                                           22,573            31,009

Long term debt                                         12,057            15,645


Shareholders' equity                                    5,777             7,564


OTHER DATA

Period-end employment                                      65                48


BUSINESS

      The  following  discussion  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

                                       14
<PAGE>

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.


GENERAL

      The Company has  incurred net losses and losses from  operations  for each
quarter  since 1999.  The Company filed for  protection  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 $5.5 million
for the fiscal year ended  September  27, 2003.  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  that
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 doubt about
the  Company's  ability  to  continue  as a  going  concern  without  additional
financing and/or injections of equity capital.

       The Company exited  Chapter 11 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 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  currently  built using  conventional  techniques  could be replaced and
improved  with  MEMS.  Examples  of  this  include  electromagnetic  relays.  In
addition, many electrical systems may be replaced by MEMS. An example of this is

                                       15
<PAGE>

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.

      The Company's three  additional lines of business are: "Santa Barbara Tool
& Die," "Insight  Analytical"  and leasing of excess space in its owned facility
under long-term lease contracts  (see  Item 1-Business-Other Lines of Business).




































                                       16
<PAGE>


ANNUAL RESULTS OF OPERATIONS

      The following table sets forth certain  financial data for the Company for
the last two fiscal years and provides a presentation  of this  information as a
percentage of net revenue.  The ten months ended September 28, 2002 includes the
Fresh-Start  Reporting  adjustments  and is deemed to represent  the fiscal year
2002 in the following analyses. Pursuant to SOP 90-7, a new reporting entity has
been created and as such the financials  presented  reflect the operations since
the effectiveness of the Reorganization Plan.

<table>
<caption>
(in thousands except
% of revenue)                          Successor Co.                   Successor Co.

                                        Year Ended:                 Ten Months Ended:
                                   September 27, 2003              September 28, 2002
                                   ------------------              ------------------
                                                % of Revenue                    % of Revenue
                                                ------------                    ------------
<S>                             <C>                  <C>        <C>                  <C>
Net revenue
  MEMS and other                $   5,013            90.6%      $   2,460            85.2%
  Rental income                       518             9.4%            426            14.8%
  Subtotal                          5,531           100.0%          2,886           100.0%
Cost of revenue
  MEMS and other                    6,140           111.0%          5,304           183.8%
  Rental income                       152             2.8%            111             3.8%
  Subtotal                          6,292           113.8%          5,415           187.6%
Gross loss                           (761)          -13.8%         (2,529)          -87.6%
Research and development              939            17.0%            815            28.2%
Selling, general and
administrative                      2,447            44.2%          1,947            67.5%
Gain on building sale                (623)          -11.3%              -             0.0%
Loss from operations               (3,524)          -63.7%         (5,291)         -183.3%
Interest income                        15             0.3%             19             0.7%
Interest expense                   (2,021)          -36.6%         (2,121)          -73.5%
Other income, net                      42             0.8%            100             3.4%
Reorganization costs                    -             0.0%           (421)          -14.6%
Loss from operations
before income taxes                (5,488)          -99.2%         (7,714)         -267.3%
Provision for income
taxes                                  36             0.7%             31             1.1%
                                ----------------------------------------------------------
Net loss                        $  (5,524)          -99.9%      $  (7,745)         -268.4%
                                ==========================================================
</table>

      NET  REVENUE:  Net  revenue  increased  to $5.5  million in fiscal 2003 as
compared to net revenue of $2.9 million in fiscal 2002. The revenue increase was
due to growth in revenue for the MEMS portion of the business and an increase in
revenue for Santa  Barbara  Tool & Die.  The MEMS  portion of the  business  had
revenue of $4.1 million and $1.9 million for fiscal 2003 and 2002, respectively.
The  Company  has added new  customers  through  its  marketing  efforts  and is
beginning to see a resulting growth in revenue. Santa Barbara Tool & Die revenue
increased  to $0.7  million in fiscal  2003,  compared to $0.5 million in fiscal

                                       17
<PAGE>

2002.  Insight Analytical had revenue of $0.2 million and $0.1 million in fiscal
2003 and fiscal 2002,  respectively.  The leasing of excess space generated $0.5
million in revenue in fiscal 2003 and $0.4 million for fiscal 2002.  The Company
expects its revenue to continue to grow, but it is uncertain whether the current
rate of growth is indicative of the future growth rate.

      GROSS LOSS:  The gross loss was $0.8 million or cost  exceeded  revenue by
13.8% for fiscal 2003  compared to $2.5  million or cost in excess of revenue of
87.6% for fiscal 2002. The gross loss  improvement in fiscal 2003 was due to the
increase in MEMS business revenue which allowed for additional absorption of the
factory  fixed costs (eg,  depreciation,  utilities).  As the  Company  migrates
toward high volume  production it expects to be able to continue to increase the
absorption of its fixed costs. The MEMS portion of the business had a gross loss
of $1.3 million or a negative 31.0% in fiscal 2003 and a $2.9 million gross loss
or a negative  157.7% in fiscal 2002.  The MEMS gross loss included $0.4 million
and $0.3 million in amortization of employee stock incentives in fiscal 2003 and
2002, respectively.  Santa Barbara Tool & Die had a $0.1 million gross profit in
fiscal 2003 as compared to minimal gross loss in fiscal 2002. Insight Analytical
generated  a minimal  gross  profit in fiscal 2003  compared to $0.1  million in
fiscal 2002. The leasing of space to third party tenants provided a gross profit
of $0.4  million in fiscal 2003  compared to $0.3  million in fiscal  2002.  The
Company had fifty-four  production employees at the end of fiscal 2003, compared
to thirty-eight at the end of fiscal 2002.

      RESEARCH AND DEVELOPMENT:  Research and development  expenses ("R&D") were
$0.9  million in fiscal 2003  compared  to $0.8  million in fiscal  2002.  These
amounts include $0.3 million in amortization of employee stock  incentives.  The
R&D expenses represented 17.0% and 28.2% of net revenue in fiscal 2003 and 2002,
respectively.

      R&D  expenditures for the Company focus on development of new MEMS devices
and the  associated  production  processes for the  telecommunication,  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 had four employees  focused on the development of new
products and  manufacturing  processes  at the end of fiscal 2003,  which is the
same headcount as in fiscal 2002.

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES:   Selling,  general  and
administrative  ("SG&A")  expenses  were $2.4 million and $1.9 million in fiscal
2003 and 2002,  respectively.  These amounts include $0.1 million in fiscal 2003
and $0.2 million in fiscal 2002 of property tax,  insurance and utility  expense
related to the  Hollister  property  which the Company sold in the second fiscal
quarter  of 2003.  SG&A  expenses  include  $0.6  million  and $0.5  million  in
amortization of employee stock incentives in fiscal 2003 and 2002, respectively.

      While SG&A expenses  increased by approximately  25.6% from fiscal 2002 to
2003,  in part due to the ten month  period of 2002  compared to the full fiscal
year of 2003,  such expenses  decreased as a percentage of revenue from 67.5% to
44.2% respectively,  for such periods. The Company currently has seven employees
providing the services  reported as SG&A  compared to eight  employees in fiscal
2002.

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

                                       18
<PAGE>

      INTEREST  EXPENSE:  Interest  expense was $2.0 million and $2.1 million in
fiscal 2003 and 2002,  respectively.  The Company sold its Hollister facility in
the second fiscal quarter of 2003 and paid off its mortgage,  which accounts for
the decrease in interest  expense.  The annual reduction in interest expense due
to the mortgage payoff is approximately  $0.6 million.  Subsequent to the end of
the fiscal year the Company  completed  the  negotiations  for the payoff of its
Professional  Notes,  which cancelled  notes with an annual interest  expense of
approximately $0.6 million.

      OTHER  INCOME.  The  Company  recognized  $0.7  million  in  other  income
associated  with the sale of its  Hollister  property  and  other  miscellaneous
income for fiscal 2003  compared to $0.1 million in fiscal 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 2003 and 2002 provision for income
taxes included minimum state income taxes.

      Due to the change in control as a result of the  bankruptcy,  the  Company
may  not  be  able  to  receive  the  full  benefit  from  net  operating   loss
carryforwards  accumulated  prior to the  bankruptcy.  Portions of the Company's
pre-bankruptcy tax losses,  however,  may be eligible for use in future periods.
The Company is currently evaluating these amounts.  From the commencement of the
Chapter  11   Reorganization   through  September  27,  2003,  the  Company  has
accumulated net operating loss carryforwards of approximately  $27.3 million for
federal tax purposes and $13.6 million for state tax purposes.  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  27, 2003,  all  identified  deferred tax assets are
reduced by a valuation allowance due to the uncertainty of future realization of
those  additional  operating  loss  carryforwards;   therefore,  any  additional
operating loss carryforwards not recognized would not result in a benefit in the
provision for income taxes.


BACKLOG AND BILLINGS

      As of  September  27,  2003,  the Company had $1.2  million in sales order
backlog and $4.8 million in billings on uncompleted contracts. These amounts are
substantially  related to  contracts  the  Company  has with L-3 and DARPA.  The
Company's  development  project with DARPA had $1.2 million in billings and $0.9
million in capitalized  costs resulting in $0.3 million in billings in excess of
costs.  The  Company's  two  development  projects  with L-3 had $3.5 million in
billings  and $3.0  million in  capitalized  costs  resulting in $0.5 million in
billings  in excess of costs.  The Company  expects to  complete  one of the L-3
contracts for a value of $1.6 million in its first fiscal  quarter of 2004.  The
Company  presents the billings in excess of costs on uncompleted  contracts as a
net figure in accordance with ARB45.

                                       19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

      The  Company's  principal  need for  liquidity is working  capital to fund
continuing  operations,  research and development and expansion of the business.
Since exiting  Chapter 11, the Company has relied on sales of equity  securities
and funds provided by development  project  revenue as its principal  sources of
liquidity.  The Company's  liquidity  and ability to fund  operating and capital
expenditure  requirements  during  fiscal 2004 depend  heavily on its ability to
achieve  volume  production of its MEMS products on a timely basis and to 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. As
discussed in greater  detail  below,  the Company may seek to obtain  additional
funds  for  operations  by  borrowing,  but it can give no  assurance  that debt
financing will be available on terms that are  acceptable to the Company,  or at
all.

      The Company's cash balance was $2.5 million at September 27, 2003 vs. $2.9
million at September 28, 2002. The decrease in cash was primarily due to the net
use of cash by  operations of $2.7 million plus the purchase of new equipment of
$0.1 million.  The Company sold its Hollister facility for $6.2 million and paid
off debt of an equivalent  amount.  The Company offset these uses when it raised
$2.5  million  from the sale of  Common  Stock to L-3,  which was  completed  on
September 3, 2003.  The Company  issued L-3 467,500 shares of Common Stock along
with two warrants.  The first warrant has a term of eighteen months.  The second
warrant  has a term of  thirty-six  months.  The  value of the  warrants  is not
reflected separately in the accompanying financial statements as it was recorded
within  common  stock.  The  Company  used the  proceeds  of its sale of  equity
securities for working capital and for part of the repayment of the Professional
Notes (See Note 11 to the financial statements- Subsequent Events).

      Subsequent  to  the  end  of  the  fiscal  year,  the  Company   completed
negotiations with the holders of its Professional  Notes. On September 30, 2003,
the Company used $2.4  million in cash as part of the  agreement to cancel these
Professional  Notes.  The Company also issued  368,113  shares of Common  Stock,
16,437  warrants for the purchase of Common Stock at a price of $5.35 and 68,777
warrants  for the  purchase  of Common  Stock at a price of $7.29 to these  note
holders.  This transaction cancelled $5.1 million in notes and accrued interest.
The Company received an additional equity investment of $0.9 million from L-3 on
October 31, 2003, when L-3 exercised  warrants to purchase  167,000 Common Stock
that it had received as part of its August 2002  investment  in the Company (See
Note 11 to the financial statements - Subsequent Events).

      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
2004,  the Company  plans  approximately  $0.1  million in capital  expenditures
primarily to continue  development and production of new MEMS  technologies  and
products and to increase overall production capacity. Capital equipment purchase
commitments were minimal at September 27, 2003.

                                       20
<PAGE>


      The Company is currently  pursuing a replacement  mortgage on its facility
in California. The Company is in negotiation with a lender on a loan application
that  could  provide  up to $2.8  million in working  capital  and  replace  the
existing 12% interest  mortgage with current  lower rates.  The  refinancing  is
expected to be completed in the second fiscal  quarter of 2004. The Company will
require an  additional  cash  infusion  in order to finance  itself  through the
completion of the mortgage  refinancing.  The Company expects to secure the cash
through an advance from L-3 on its existing MEMS development contract or through
the exercise of additional  warrants by L-3. The Company  cannot give  assurance
that  refinancing of this mortgage will be available or, if available,  that its
terms will be favorable to the Company.  The Company is currently  investigating
accounts  receivable  financing  opportunities.  The Company has determined that
this financing is not available for its development  projects;  however, it will
be available for its products when it achieves  volume  production.  The Company
expects to be in limited  volume  production by its third fiscal quarter of 2004
and will  attempt to secure  accounts  receivable  financing  at that time.  The
Company  cannot  give  assurance  that  accounts  receivable  financing  will be
available or, if available, that its terms will be acceptable 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  auditors 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 $5.5 million
for the fiscal year ended  September  27, 2003.  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 doubt about
the  Company's  ability  to  continue  as a  going  concern  without  additional
financing.

       During the fourth  quarter of fiscal 2003,  the Company was in default of
the Professional Notes, which had an aggregate principal amount of approximately
$4.5  million,  because  of the  Company's  failure  to make  required  interest
payments.  The  holders  of the  Professional  Notes  did  not  take  action  to
accelerate,  declare a default or to  foreclose on the Notes,  and  negotiated a

                                       21
<PAGE>

settlement  with the Company under which the  Professional  Notes were repaid in
full and  retired on  September  30,  2003,  partly by  conversion  into  equity
securities of the Company and partly by the Company's payment of $2.4 million in
cash to the  holders  (See  Note 11 to the  financial  statements  -  Subsequent
Events).

      The  Company's  principal  remaining  indebtedness  is the mortgage on its
headquarters and operating  facility.  The Company has not been in default under
this indebtedness.


COMMITMENTS AND CONTINGENCIES

      The Company's use of hazardous chemicals in its manufacturing  subjects it
to a variety of  environmental  and land use  regulations  related to their use,
storage and disposal. The Company is currently engaged in efforts to remedy soil
and water  contamination  under the supervision of government  agencies.  If the
Company  fails to comply with present or future  regulations,  liability for the
cost of remediation,  damages and penalties,  and production suspension or delay
could result.

      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.  See "Item 1.
Business - Environmental Compliance."

      Purchase commitments  associated with capital expenditures were minimal at
September 27, 2003

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














                                       22
<PAGE>

      The following summarizes the Company's significant contractual obligations
at September 27, 2003 and the effects such  obligations  are expected to have on
liquidity and cash flow in future periods.

--------------------------------------------------------------------------------
                             Payments Due by Period

                                 (in thousands)
--------------------------------------------------------------------------------
Significant Contractual         Less than
 Obligations            Total     1 Year    1-3 Years  4-5 Years   After 5 Years
--------------------------------------------------------------------------------
Property Mortgage     $  8,830  $       -   $  8,830   $       -   $           -
--------------------------------------------------------------------------------
Professionals Convertible
Note                     4,137      4,137          -           -               -
--------------------------------------------------------------------------------
Property Taxes             658        188        376          94               -
--------------------------------------------------------------------------------
Long-Term Debt        $ 13,625   $  4,325   $  9,206   $      94   $           -
                      --------   --------   --------   ---------   -------------
--------------------------------------------------------------------------------

      The  professionals  convertible  notes  relate  to  the  amounts  owed  to
professionals  used in the bankruptcy.  The Company completed  negotiations with
the holders of its convertible  notes late in the fourth fiscal quarter of 2003.
On September 30, 2003,  subsequent to the fiscal year end, the Company used $2.4
million in cash as part of the agreement to cancel these Professional Notes. The
Company  discharged its remaining  indebtedness on the Professional Notes by the
issuance of 368,113 shares of Common Stock,  16,437 warrants for the purchase of
common stock at a price of $5.35 and 68,777  warrants for the purchase of Common
Stock at a price of $7.29 to the note holders.  The portion of the debt that was
converted to equity,  approximately  $2.8 million,  was  classified as long-term
debt in the  accompanying  financial  statements.  See Note 11 to the  financial
statements - Subsequent Events.

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.

                                       23
<PAGE>

      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 $5.5  million for fiscal 2003.  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.
The financial  statements do not include the adjustments that would result if it
became clear that the Company could not continue as a going concern.

      STATEMENT OF POSITION 90-7 AND FRESH START ACCOUNTING:  The Company exited
Chapter 11 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." 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  completed  the  issuance  of the common  stock and  warrants
pursuant to the Reorganization Plan in its third fiscal quarter of 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 and recorded as cost of
revenue at its  completion  along with the  recognition  of  revenue.  Losses on
projects are recognized as they are determined.  The Company's MEMS  development
contracts  include  milestones  that require  delivery of  engineering  reports,
wafers and/or dies. The Company's MEMS  development  contracts are determined to
be complete  after all contract  milestones  have been  completed,  reviewed and
accepted by the customer.  Santa Barbara Tool & Die delivers a finished  product
to the customer and revenue is recognized  after both 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 & Die
and Insight  Analytical  did not have any sales  returns in fiscal 2003 or 2002.
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

                                       24
<PAGE>

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.


RECENT ACCOUNTING PRONOUNCEMENTS

      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 Company adopted SFAS 145 beginning in its
fiscal  year  2003,  and it has not had a  significant  impact on the  Company's
financial position or results of operations.

      In June of 2002, SFAS 146,  "Accounting for Costs  Associated with Exit or
Disposal  Activities,"  which nullifies Emerging Issue Task Force ("EITF") Issue
94-3, was issued by 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  adopted  SFAS 146
beginning in its second fiscal  quarter of 2003 and it has not had a significant
impact on its financial position or results of operations.

      In  December  2002,  the  FASB  issued  SFAS  No.  148,   "Accounting  for
Stock-Based  Compensation--Transition  and Disclosure--an  Amendment to SFAS No.
123." SFAS No. 148 provides  alternative  methods of transition  for a voluntary
change to the fair value based method on  accounting  for  stock-based  employee
compensation,  as well as additional disclosure  requirements for both quarterly
and annual  reporting.  The  Company  has  elected to  continue  to account  for
stock-based employee compensation by the intrinsic value method under APB 25, as
permitted by SFAS No.  123,,while  disclosing on a pro forma basis the effect on
the  Company's  financial  statements  had the  fair  value  method  been  used.
Accordingly, the implementation of SFAS No. 148 has not had a material effect on
the Company's consolidated financial position or results of operations.

      In November  2002,  the FASB issued  Interpretation  No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  including  Indirect
Guarantees  of  Indebtedness  of  Others,"  which  requires   guarantees  to  be
recognized  at  fair  value.   Interpretation   45  also   requires   additional
disclosures,  which  disclosures  are  effective for  financial  statements  for
periods ending after December 15, 2002. While the Company has various guarantees

                                       25
<PAGE>

included in contracts in the normal  course of business,  in the form of product
warranties and indemnification  of the officers and directors,  these guarantees
would only result in immaterial  increases in future costs, but do not represent
significant commitments or contingent liabilities of the indebtedness of others.

      Under its bylaws and indemnification agreements, the Company has agreed to
indemnify its officers and directors for certain events or  occurrences  arising
as a result of the officer of director's serving in such capacity,  that require
it,  subject to certain  exceptions,  to indemnify the officers and directors to
the  fullest  extent  authorized  or  permitted  by its bylaws and the  Delaware
General  Corporation  Law. The maximum  potential  amount of future payments the
Company  could be  required to make under these  indemnification  agreements  is
unlimited. However, the Company has a directors and officers liability insurance
policy  that  limits  its  exposure  and  enables it to recover a portion of any
future amounts paid. As a result of its insurance policy  coverage,  the Company
believes the estimated fair value of these indemnification agreements is minimal
and has no liabilities recorded for these agreements as of September 27, 2003.

      In January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable  Interest  Entities"  (FIN 46)  which  requires  the  consolidation  of
variable  interest  entities,  as defined.  FIN 46 is  applicable  to  financial
statements  to be issued by the Company  after 2002;  however,  disclosures  are
required  currently if the Company expects to consolidate any variable  interest
entities. No material entities were consolidated as a result of FIN 46.

      In June 2003, the FASB issued  Statement No. 150,  "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires certain instruments,  including mandatorily  redeemable shares,
to be  classified  as  liabilities,  not as  part  of  stockholders'  equity  or
redeemable  equity.  For instruments that are entered into or modified after May
31, 2003,  Statement 150 is effective  immediately upon entering the transaction
or modifying the terms. For other instruments covered by Statement 150 that were
entered  into  before June 1, 2003,  Statement  150 is  effective  for the first
interim  period  beginning  after June 15,  2003.  The Company does not have any
outstanding  financial  instruments  of the type  addressed  by SFAS No. 150 and
accordingly,  SFAS No. 150 will not have a  significant  effect on the Company's
financial position.

      In November  2002,  the EITF reached a consensus  on EITF 00-21,  "Revenue
Arrangements  with  Multiple   Deliverables,"  related  to  the  separation  and
allocation of consideration for arrangements that include multiple deliverables.
The  EITF  requires  that  when  the  deliverables  included  in  this  type  of
arrangement  meet certain  criteria they should be accounted  for  separately as
separate units of  accounting.  This may result in a difference in the timing of
revenue  recognition  but will not  result in a change  in the  total  amount of
revenues  recognized in a bundled sales arrangement.  The allocation of revenues
to the separate  deliverables  is based on the relative fair value of each item.
If the fair value is not  available  for the  delivered  items then the residual
method  must be used.  This method  requires  that the amount  allocated  to the
undelivered items in the arrangement is their full fair value. This would result
in the discount,  if any, being allocated to the delivered items. This consensus
is effective  prospectively  for  arrangements  entered  into in fiscal  periods

                                       26
<PAGE>

beginning  after June 15, 2003. The Company does not expect the adoption of EITF
00-21 to have a material impact on its financial statements.

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 IN FUTURE QUARTERS.

      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 $5.5 million
for the fiscal year ended  September  27, 2003.  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.

      LIQUIDITY

      The Company is currently  pursuing a replacement  mortgage on its facility
in California. The Company is in negotiation with a lender on a loan application
that  could  provide  up to $2.8  million in working  capital  and  replace  its
existing 12% interest  mortgage with current lower rates.  The  re-financing  is
expected to be completed in the second fiscal  quarter of 2004. The Company will
require an  additional  cash  infusion  in order to finance  itself  through the
completion of the mortgage  re-finance.  The Company  expects to secure the cash
through an advance from L-3 on its existing MEMS development contract or through
the exercise of additional  warrants by L-3. The Company  cannot give  assurance
that re-financing of this mortgage will be available or, if available,  that its
terms will be favorable to the Company.  The Company is currently  investigating
accounts  receivable  financing  opportunities.  The Company has determined that
this financing is not available for its development  projects;  however, it will
be available for its products when it achieves  volume  production.  The Company
expects to be in limited  volume  production by its third fiscal quarter of 2004
and will  attempt to secure  accounts  receivable  financing  at that time.  The
Company  cannot  give  assurance  that  accounts  receivable  financing  will be
available or, if available, that its terms will be favorable to the Company.

                                       27
<PAGE>

      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 2003 totaling $0.1 million.
During fiscal 2004, the Company plans to purchase or enter into lease  financing
for  approximately  $0.1 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
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

                                       28
<PAGE>

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.

      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
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

                                       29
<PAGE>

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 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.  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 REVENUE 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:

      o    difficulties in collecting  accounts receivable and longer collection
           periods;

      o    seasonal business activity in certain parts of the world;

      o    potentially adverse tax consequences;

      o    fluctuations in currency exchange rates;

      o    political and economic instability; and

      o    trade barriers.

                                       30
<PAGE>

      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 - Environmental Compliance" and "Item 3. - Legal Proceedings." 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:

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

      o    stockholders have limited ability to remove directors;

                                       31
<PAGE>

      o    stockholders cannot call a special meeting of stockholders; and

      o    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. (See Pages F-1 through F-29)


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

Reports filed by the Company on Form 8-K.

(i) The Company filed a Current  Report on Form 8-K on April 16, 2003  reporting
under Item 4 that on April 9, 2003,  Deloitte & Touche LLP  resigned as auditors
of the Company.

(ii) The Company  filed a Current  Report on Form 8-K on May 29, 2003  reporting
under Item 4 that on May 20, 2003, the Company  engaged BDO Seidman,  LLP as its
independent public accountant.

                                       32
<PAGE>


ITEM 8A. CONTROLS AND PROCEDURES.

      The Company's Chief Executive Officer, John S. Foster, and Chief Financial
Officer, Peter T. Altavilla, 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-15(e). Based upon that
evaluation,  the Chief Executive Officer and the Chief Financial Officer believe
that,  as of the  end of the  period  covered  by  this  report,  the  Company's
disclosure  controls  and  procedures  are  effective  in  making  known to them
material  information  relating  to  the  Company  (including  its  consolidated
subsidiaries) 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 objectives 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,
mistakes or intentional circumvention of the established processes.

      There was no change  in the  Company's  internal  control  over  financial
reporting,  known to the Chief Executive Officer or the Chief Financial Officer,
that  occurred  during the period  covered by this  report  that has  materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.


                                    PART III


ITEMS 9, 10, 11 AND 12.

      The information  required in this item is incorporated herein by reference
to portions of the Proxy  Statement  for Annual  Meeting of  Shareholders  to be
filed with the Securities and Exchange  Commission  within 120 days of the close
of the fiscal year ended September 27, 2003.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

      a.  Exhibits

   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, as
                    amended to date.

          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).

                                       33
<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).

          4.3       Warrant Agreement between the Company and L-3 Communications
                    Corporation, dated September 3, 2003.

          4.4       Warrant  Agreement  between the Company and Stutman Treister
                    & Glatt, Professional Corporation, dated September 30, 2003.

         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).

         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).

                                       34
<PAGE>

         10.12      Stock  Purchase   Agreement  between  the  Company  and  L-3
                    Communications Corporation, dated September 3, 2003.

         10.13      Letter   Agreement   between   Stutman   Treister  &  Glatt,
                    Professional  Corporation,  Houlihan  Lokey  Howard & Zukin,
                    O'Melveny & Myers LLP, Sheppard Mullin Richter & Hampton LLP
                    and the  Company  for  the  settlement  of the  Professional
                    Persons Notes, dated as of September 22, 2003.

         31.1       Certification  Pursuant to Rule  13a-14(a) of the Securities
                    Exchange Act of 1934, Adopted Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.

         31.2       Certification  Pursuant to Rule  13a-14(a) of the Securities
                    Exchange Act of 1934, Adopted Pursuant to Section 302 of the
                    Sarbanes-Oxley Act of 2002.

         32         Certification  Pursuant to 18 U.S.C.  Section 1350,  Adopted
                    Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      b.  Reports on Form 8-K.

      None.




                                       35
<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.

Date:  January 9, 2004                INNOVATIVE MICRO TECHNOLOGY, INC.


                                      By:  /s/ John S. Foster
                                           -----------------------------------
                                           Dr. 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                        /s/ Peter T. Altavilla
-------------------                       -----------------------
Dr. John S. Foster                        Peter T. Altavilla
Chairman and Chief Executive Officer      Chief Financial Officer, Corporate
                                          Controller and Secretary

Date:  January 9, 2004                    Date:  January 9, 2004


/s/ Malcolm Currie                        /s/ Calvin Quate
------------------------                  ------------------------
Dr. Malcolm Currie                        Dr. Calvin Quate
Director                                  Director

Date:  January 9, 2004                    Date:  January 9, 2004


/s/ Scott Avila                           /s/ Daniel E. Armel
------------------------                  ------------------------
Scott Avila                               Daniel E. Armel
Director                                  Director

Date:  January 9, 2004                    Date:  January 9, 2004


/s/ William Howard                        /s/ Jill Wittels
------------------------                  ------------------------
Dr. William Howard                        Dr. Jill Wittels
Director                                  Director

Date:  January 9, 2004                    Date:  January 9, 2004



                                       36
<page>
                        Innovative Micro Technology, Inc.


ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Related Information


Financial Statements:

Report of Independent Certified Public Accountants                           F-2

Independent Auditor's Report                                                 F-3

Balance Sheet as of September 27, 2003                                       F-4

Statements of Operations for the year ended September 27, 2003 and
the ten months ended September 28, 2002                                      F-5

Statements of Shareholders' Equity for the year ended September 27,
2003 and the ten months ended September 28, 2002                             F-6

Statements of Cash Flows for the year ended  September 27, 2003 and
the ten months ended September 28, 2002                                      F-7

Notes to Financial Statements                                                F-8






















<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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


We have audited the balance sheet of  Innovative  Micro  Technology,  Inc. as of
September  27, 2003,  and the related  statements of  operations,  shareholders'
equity, and cash flows for the year then ended.  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 audit.

We conducted our audit 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  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Innovative Micro Technology,
Inc. as of September 27, 2003,  and the results of its  operations  and its cash
flows for the year then ended 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 to the
financial statements,  the Company has suffered recurring losses from operations
and has negative working capital.  These factors raise  substantial  doubt about
the  Company's  ability to continue as a going  concern.  Management's  plans in
regard to these matters are also  described in Note 1. The financial  statements
do not  include  any  adjustments  that might  result  from the  outcome of this
uncertainty.





/s/ BDO Seidman, LLP
--------------------
Los Angeles, California
November 21, 2003


                                      F-2
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

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

We have audited the accompanying statements of operations,  shareholders' equity
and cash flows for the ten months ended  September 28, 2002  (Successor  Company
operations) of Innovative Micro Technology,  Inc. 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 audit.

We conducted our audit 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  audit  provides  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 results of operations  and cash flows of Innovative
Micro  Technology,  Inc.  for  the ten  months  ended  September  28,  2002,  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-3
<PAGE>

INNOVATIVE MICRO TECHNOLOGY, INC.


BALANCE SHEET

(In  thousands, except share and par value data)                   Successor Co.
                                                                        As of
                                                                  --------------
                                                                   September 27,
                                                                         2003

ASSETS
Current assets:
    Cash                                                               $  2,463
    Accounts receivable, net of allowance for doubtful accounts of $0       634
    Accounts receivable-related party                                       436
    Prepaid expenses and other                                              272
                                                                       --------
Total current assets                                                      3,805
                                                                       --------
Property, plant and equipment, at cost:
    Land                                                                  8,750
    Buildings                                                             9,408
    Manufacturing equipment                                               2,170
                                                                       --------
Total property, plant and equipment, at cost                             20,328
    Less-accumulated depreciation and amortization                       (2,008)
                                                                        --------
Total property, plant and equipment                                      18,320
                                                                        --------

Other assets                                                                448
                                                                        --------
Total assets                                                           $ 22,573
                                                                        ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt                                  $  1,568
    Accounts payable                                                        627
    Accrued payroll and benefits                                            386
    Accrued audit and legal                                                  54
    Accrued property taxes                                                   33
    Billings in excess of costs for development projects                    306
    Billings in excess of costs for development projects-related party      536
    Other current liabilities                                             1,097
                                                                        --------
Total current liabilities                                                 4,607
                                                                        --------
Long-term debt                                                           12,057
                                                                        --------
Other long-term liabilities                                                 132
                                                                        --------
Shareholders' Equity:
    Preferred stock, $.0001 par value, authorized 2,500,000 shares,
           none issued and outstanding                                        -
    Common stock, $.0001 par value, 25,000,000 shares authorized,
          6,152,498 shares issued at September 27, 2003                       1
    Paid-in capital                                                      19,202
    Accumulated deficit                                                 (13,269)
                                                                        --------
                                                                          5,934
Unearned restricted stock                                                  (157)
                                                                        --------
Total shareholders' equity                                                5,777
                                                                        --------
Total liabilities and shareholders' equity                             $ 22,573
                                                                        ========

The  accompanying  Notes to Financial  Statements  are an integral part of these
statements.

                                      F-4
<PAGE>
<table>
INNOVATIVE MICRO TECHNOLOGY, INC.

STATEMENTS OF OPERATIONS
<caption>
(In thousands, except per share data)                                                              Successor Co.
                                                                                      Successor Co. Ten Months
                                                                                       Year Ended     Ended
                                                                                      ---------------------------
                                                                                      September 27, September 28
                                                                                           2003        2002
                                                                                      -------------- -----------
<S>                                                                                      <C>         <C>
Net revenue
  MEMS and Other                                                                         $    5,013  $   2,460
  Rental income                                                                                 518        426
                                                                                      -------------- -----------
  Total                                                                                       5,531      2,886
Cost of revenues
  Cost of MEMS and Other revenue (including stock-based compensation of $378 for the
     year ended September 27, 2003 and $331 for the period ended September 28, 2002)          6,140      5,304
  Expenses applicable to rental income                                                          152        111
                                                                                      -------------- -----------
  Total                                                                                       6,292      5,415
                                                                                      -------------- -----------
   Gross loss                                                                                  (761)    (2,529)
                                                                                      -------------- -----------

Research and development expenses (including stock-based compensation of $316 for
   the year ended September 27, 2003 and $277 for the period ended September 28, 2002)          939        815
Selling, general and administrative expenses (including stock-based compensation of $556
     for the year ended September 27, 2003 and $486 for the period ended September 28, 2002)  2,447      1,947
Gain on sale of building                                                                       (623)         -
                                                                                      -------------- -----------
   Loss from Operations                                                                      (3,524)    (5,291)
                                                                                      -------------- -----------
Interest income                                                                                  15         19
Interest expense                                                                             (2,021)    (2,121)
Other income                                                                                     42        100
                                                                                      -------------  -----------
   Other expense                                                                             (1,964)    (2,002)

Reorganization Costs                                                                              -        421
                                                                                      -------------  -----------
  Loss from operations before provision for income taxes                                     (5,488)    (7,714)
Provision for income taxes                                                                       36         31
                                                                                      -------------  -----------
   Net loss                                                                              $   (5,524) $  (7,745)
                                                                                      =============  ===========

Net loss per share:
   Loss per common share - basic and diluted                                             $    (0.97) $   (1.67)
                                                                                      =============  ===========

Weighted average number of common shares outstanding:
   Common shares - basic and diluted                                                          5,684      4,645
                                                                                      =============  ===========

The accompanying Notes to Financial Statements are an integral part of these statements.
</table>
                                      F-5
<PAGE>

<table>
INNOVATIVE MICRO TECHNOLOGY, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands, except share amounts)
<caption>
                                                              Successor
                                                            Common Stock
                                                       -----------------------

                                                          Number of              Paid-in    Accumulated  Restricted  Shareholders'
                                                           Shares     Amount      Capital     Deficit      Stock        Equity

                                                       ------------   --------   ---------  -----------  ----------- -------------
<S>                                                       <C>          <C>        <C>        <C>         <C>           <C>
Balance, November 24, 2001                                4,499,998    $     1    $ 11,755   $      -    $   (2,500)   $    9,256
  Private equity sale                                       935,000          -       4,959                                  4,959
  Amortization of restricted stock                                                                            1,094         1,094
  Net loss                                                                                     (7,745)                     (7,745)
                                                       ---------------------------------------------------------------------------
Balance, September 28, 2002                               5,434,998          1      16,714     (7,745)       (1,406)        7,564
  Private equity sale                                       467,500          -       2,488                                  2,488
  Amortization and deemed issuance of restricted stock      250,000                                           1,249         1,249
  Net loss                                                                                     (5,524)                     (5,524)
                                                       ---------------------------------------------------------------------------
Balance, September 27, 2003                               6,152,498    $     1    $ 19,202   $(13,269)   $     (157)   $    5,777
                                                       ==========================================================================-


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

                                      F-6
<PAGE>
<table>
INNOVATIVE MICRO TECHNOLOGY, INC.

STATEMENTS OF CASH FLOWS
<caption>
(In thousands)
                                                                       Successor Co.   Successor Co.
                                                                       Twelve Months   Ten Months
                                                                           Ended         Ended
                                                                       --------------  -----------
                                                                       September 27,   September 28,
                                                                           2003           2002
                                                                       --------------  -----------
<S>                                                                    <C>             <C>
  Cash Flows from Operating Activities:
  Net loss                                                             $      (5,524)  $   (7,745)
  Adjustments to reconcile net loss to net cash provided
    by operating activities:
      Depreciation and amortization                                            1,165          852
      Employee restricted stock amortization                                   1,249        1,094
      Amortization of loan costs                                                  46          112
      Gain on sale of  assets                                                   (623)           -
      Non-cash interest                                                          574          434
      Changes in assets and liabilities:
          Accounts receivable                                                     21          287
          Accounts receivable-related party                                     (280)        (107)
          Costs in excess of billings on development projects                     48          (22)
          Costs in excess of billings on development projects-related party       25          (25)
          Prepaid expenses and other                                             (37)        (172)
          Other assets                                                            70          320
          Accounts payable                                                       (41)        (388)
          Accrued payroll and benefits                                           100           41
          Accrued property taxes                                                 (30)        (635)
          Accrued audit and legal                                                (35)          79
          Billings in excess of costs for development projects                   204           82
          Billings in excess of costs for development projects-related party     536          (49)
          Other current liabilities                                             (135)         263
          Other long-term liabilities                                            (42)           -
------------------------------------------------------------------------------------------------------
      Net cash flows used in operating activities                             (2,709)      (5,579)
------------------------------------------------------------------------------------------------------

  Cash Flows from Investing Activities:
  Purchases of property, plant and equipment                                     (64)        (388)
  Proceeds from sale of building                                               6,198            -
  Proceeds from sale of equipment                                                  5            -
------------------------------------------------------------------------------------------------------
      Net cash flows provided by (used in) investing activities                6,139         (388)
------------------------------------------------------------------------------------------------------

  Cash Flows from Financing Activities:
  Proceeds from sale of common stock                                           2,500        5,000
  Equity issuance costs                                                          (12)         (41)
  Proceeds from issuance of debt                                                   -        3,400
  Debt issuance costs                                                              -         (361)
  Repayment of debt                                                           (6,345)        (240)
------------------------------------------------------------------------------------------------------
      Net cash flows (used in) provided by financing activities               (3,857)       7,758
------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash                                                 (427)       1,791
Cash at beginning of year                                                      2,890        1,099
------------------------------------------------------------------------------------------------------
Cash at end of year                                                    $       2,463   $    2,890
-----------------------------------------------------------------------==============  ===========

Supplemental Cash Flow Data:
Interest paid                                                          $       1,406   $    1,873
                                                                       ==============  ===========
Income taxes paid                                                      $          22   $       31
                                                                       ==============  ===========

The accompanying Notes to Financial Statements are an integral part of these statements.
</table>
                                      F-7
<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.  To date
these operations have consisted of product development contracts.  The Company's
business plan is to transition itself to a high volume manufacturer.  MEMS is an
acronym for  micro-electro-mechanical  system. MEMS devices were first developed
in the late 1970s and early 1980s. Generally, 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. MEMS devices,
however,  are  distinguished  in 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 due 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.

      The  Company  used  the  Chapter  11  Reorganization  discussed  below  to
reposition  itself in the MEMS business.  The core  competency of the Company is
wafer  manufacturing and assembly.  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.

      The Company's three  additional lines of business are: "Santa Barbara Tool
& Die," "Insight  Analytical"  and leasing of excess space in its owned facility
under long-term lease contracts.  Santa Barbara Tool & 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 & 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.  In  addition,  the  Company  has
approximately  51,000 square feet of building  space  available to lease.  As of
September 27, 2003,  approximately 34,000 square feet were under long term lease
arrangements with annual rental income of approximately $0.5 million.

      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 $5.5 million
for the year ended  September 27, 2003 and has a working capital deficit of $0.8
million as of  September  27,  2003.  The  Company  expects to continue to incur
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

                                      F-8
<PAGE>

in the  future.  The Company  expects to have  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 doubt about the  Company's
ability to continue as a going concern without additional financing.

      The Company  completed  negotiations  with the holders of its Professional
Notes  late in the  fourth  fiscal  quarter  of 2003  for the  repayment  of its
Professional  Notes. On September 30, 2003,  subsequent to the end of the fiscal
year,  the Company used $2.4 million in cash as part of the  agreement to cancel
these  Professional  Notes (See Note 11 - Subsequent  Events).  The Company also
issued  368,113  shares of Common  Stock,  16,437  warrants  for the purchase of
Common Stock at a price of $5.35 and 68,777  warrants for the purchase of Common
Stock at a price of $7.29 to cancel these  Professional  Notes. This transaction
cancelled $4.1 million in notes and $1.0 million in accrued interest.

      On October 31, 2003,  L-3 exercised  167,000  warrants for the purchase of
Common  Stock at a price of $5.35  per share  for a total of $0.9  million.  L-3
received these warrants,  as well as a thirty-six month warrant for the purchase
of  700,000  shares of  Common  Stock at $7.29  per  share,  as part of its $5.0
million  August 2002  investment  in the Company.  The Company  plans to use the
funds for working capital requirements.

      The Company  expects to complete a  refinancing  of its existing  mortgage
that  could  provide  up to $2.8  million in working  capital  and  replace  the
existing 12% interest  mortgage with current  lower rates.  The  refinancing  is
expected to be completed in the second fiscal  quarter of 2004. The Company will
require an  additional  cash  infusion  in order to finance  itself  through the
completion of the mortgage  refinancing.  The Company expects to secure the cash
through an advance from L-3 on its existing MEMS development contract or through
the exercise of additional  warrants by L-3. The Company  cannot give  assurance
that  refinancing of this mortgage will be available or, if available,  that its
terms will be  favorable to the Company or that it will be able to secure a cash
infusion  from  L-3.  The  Company  is  also  currently  investigating  accounts
receivable  financing  opportunities.  The  Company  has  determined  that  this
financing is not available for its development projects; however, it is expected
to be available for its  receivables  when it achieves  volume  production.  The
Company  expects to be in limited volume  production by its third fiscal quarter
of 2004 and will attempt to secure accounts  receivable  financing at that time.
The Company  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  auditors have  expressed  substantial  doubt about its ability to
continue as a going concern.

      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

                                      F-9
<PAGE>

(referred to as "Successor Company"). The ten months ended September 28, 2002 is
deemed to represent the fiscal year 2002 in these financial statements.

      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  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  completed  the  issuance  of the common  stock and  warrants
pursuant to the Plan in its third fiscal quarter of 2003.

      A provision of the Plan  related to the  treatment  of  subordinated  Note
claims.  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 credit  position that was senior to the
Company's  note  holders.  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 had guaranteed  the bank loans for its former  Malaysian  subsidiary.  A
Warrant  Agreement  was  approved  to  provide  a  method  for the  subordinated
claimants  to  participate  in the  anticipated  future  growth  in value of the
Company's  Common  Stock  that was  issued  pursuant  to the Plan  ("New  Common
Stock"). The Company has no remaining guaranties.

      Pursuant to the approved  Warrant  Agreement,  one million  Warrants  were
issued.  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  ("Cash  Asset  Sale"),  defined  below.  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 that were  issued  under the Plan to the former  creditors  of the
Company,  946,805  shares  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 have a legend

                                      F-10
<PAGE>

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 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.  As indicated by the legends on the shares,  the shares can
be  settled  with  cash,  by the  Company,  if the  Company  is  acquired  by an
independent third party. An additional  231,600 shares 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.  If the Company  consummates the sale of all or
substantially  all of  its  assets  for  cash,  then  immediately  prior  to the
consummation  of the  transaction,  the Company  shall  repurchase  these legend
shares  determined  by a formula  defined  in the  Plan,  at a price of $0.01 in
accordance with the Cash Asset Sale, and the proceeds will be distributed to the
warrant  holders.  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 separately, 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
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). On
September 30, 2003,  subsequent to the end of the fiscal year,  the Company paid
$2.4 million in cash and issued 368,113 shares of Common Stock,  16,437 warrants
for the purchase of Common Stock at a price of $5.35 and 68,777 warrants for the
purchase  of Common  Stock at a price of $7.29 to these  note  holders to cancel
their  notes.  This  transaction  cancelled  $5.1  million in notes and  accrued
interest (See Note 11).


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

                                      F-11
<PAGE>

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  consolidated  financial
statements.

      Depreciation and Amortization Policies: In accordance with the fresh start
reporting requirements,  property, plant, and equipment are stated at fair value
at the Effective  Date 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.

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 amounted to $1.2 million for fiscal
2003 and $0.9 million for the ten months ended September 28, 2002.

      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.

      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.

      Billings in excess of costs on development projects: These amounts reflect
the excess of billings  over the  accumulated  costs as defined in the completed
contract  method of accounting  for long-term  contracts.  Billings in excess of
costs at September 27, 2003 were $0.8 million related to capitalized costs under
completed contract method of accounting,  as described below. Contracts with L-3
(a related  party)  account for $0.5 million of this billings in excess of costs
on development projects balance.

      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 and recorded as cost of
revenue at its  completion  along with the  recognition  of  revenue.  Losses on
projects are recognized as they are determined.  The Company's MEMS  development
contracts  include  milestones  that require  delivery of  engineering  reports,

                                      F-12
<PAGE>

wafers and/or dies. The Company's MEMS  development  contracts are determined to
be complete  after all contract  milestones  have been  completed,  reviewed and
accepted by the customer.  Santa Barbara Tool & Die delivers a finished  product
to the customer and revenue is recognized  after both 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 & Die
and Insight  Analytical  did not have any sales  returns in fiscal 2003 or 2002.
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.

      A  portion  of the  Company's  facilities  are  leased  to  tenants  under
long-term contracts.  The terms of the leases expire within the next three years
with renewal at the option of the tenants. Future minimum lease income for these
agreements, as of September 27, 2003 are as follows (in thousands):


Fiscal Year                   Rental
                              Income
                           ----------
2004                           $ 493
2005                             493
2006                             462
                           ----------
Total minimum income          $1,448
                           ==========

      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  $13.6  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 8% interest  rate on $0.7  million of debt due on
delinquent  property taxes is at rates below market.  The fair value of the debt
would be $0.4 million based on the Company's cost of capital of 12%.

      Net Loss per Common  Share:  Basic loss per share is  computed by dividing
net loss by the weighted  average number of common shares  outstanding.  Diluted
loss per  share is  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.

                                      F-13
<PAGE>


      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
shares from the potential  conversion of the  Professional  Persons  convertible
debt which is due November 16, 2003 (See Note 11). 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.

      The following dilutive  securities were outstanding at September 27, 2003;
250,000  shares of  restricted  Common Stock  issuable per the Plan,  options to
purchase 1,664,897 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,  warrants to purchase  83,500
shares of Common  Stock at a price of $5.35  per share  with a term of  eighteen
months ending March 3, 2005, warrants to purchase 350,000 shares of Common Stock
at a price of $7.29 per share with a term of thirty six months ending  September
3, 2006 and approximately 504,500 common shares from the potential conversion of
the  Professional  Persons  convertible debt which is due November 16, 2003 (See
Note 11). 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.











                                      F-14
<PAGE>


      Stock Based Compensation: 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 above 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  (in  thousands,
except per share amounts):


                            Successor Co.   Successor Co.
                                             Ten Months
                             Year Ended         Ended
                            --------------  --------------
                            September 27,   September 28,
                                2003            2002
                            --------------  --------------

Net loss -- as reported         $ (5,524)      $  (7,745)
Less -- fair value of stock-
based employee compensation
expense                           (1,099)           (409)
                            --------------  --------------
Net loss -- pro forma           $ (6,623)      $  (8,154)
                            ==============  ==============
Net loss per share (basic and
  diluted) -- as reported       $   (.97)       $  (1.67)
                            ==============  ==============
Net loss per share (basic
  and diluted) -- pro forma     $  (1.17)       $  (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 for the fiscal
2003  period:  weighted  average  risk-free  interest  rate of  3.80%,  expected
volatility  of  72%,  an  expected  option  life  of 4  years,  and no  expected
dividends.  The  assumptions  for the ten months ended September 28, 2002 are as
follows:  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 was $4.8  million for the year ended  September  27,
2003 and $3.7 million for the ten months ended September 28, 2002.

      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 basis differences in property, plant

                                      F-15
<PAGE>

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:   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 Company  adopted SFAS 145 beginning in its fiscal year 2003,  and it
has not had a significant impact on the Company's  financial position or results
of operations.

      In June of 2002, SFAS 146,  "Accounting for Costs  Associated with Exit or
Disposal  Activities,"  which nullifies Emerging Issue Task Force ("EITF") Issue
94-3, was issued by 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  adopted  SFAS 146
beginning in its second fiscal  quarter of 2003 and it has not had a significant
impact on its financial position or results of operations.

      In  December  2002,  the  FASB  issued  SFAS  No.  148,   "Accounting  for
Stock-Based  Compensation--Transition  and Disclosure--an  Amendment to SFAS No.
123." SFAS No. 148 provides  alternative  methods of transition  for a voluntary
change to the fair value based method on  accounting  for  stock-based  employee
compensation,  as well as additional disclosure  requirements for both quarterly
and annual  reporting.  The  Company  has  elected to  continue  to account  for
stock-based employee compensation by the intrinsic value method under APB 25, as
permitted by SFAS No. 123,  while  disclosing on a pro forma basis the effect on
the  Company's  financial  statements  had the fair  value   method  been  used.
Accordingly, the implementation of SFAS No. 148 has not had a material effect on
the Company's consolidated financial position or results of operations.

      In November  2002,  the FASB issued  Interpretation  No. 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  including  Indirect
Guarantees  of  Indebtedness  of  Others,"  which  requires   guarantees  to  be
recognized  at  fair  value.   Interpretation   45  also   requires   additional
disclosures,  which  disclosures  are  effective for  financial  statements  for
periods ending after December 15, 2002. While the Company has various guarantees
included in contracts in the normal  course of business,  in the form of product
warranties and  indemnification of the officers and directors,  these guarantees
would only result in immaterial  increases in future costs, but do not represent
significant commitments or contingent liabilities of the indebtedness of others.

                                      F-16
<PAGE>

      In January 2003, the FASB issued  Interpretation No. 46, "Consolidation of
Variable  Interest  Entities"  (FIN 46)  which  requires  the  consolidation  of
variable  interest  entities,  as defined.  FIN 46 is  applicable  to  financial
statements issued by the Company after 2002;  however,  disclosures are required
currently if the Company expects to consolidate any variable interest  entities.
No material entities were consolidated as a result of FIN 46.

      In June 2003 the FASB issued  Statement No. 150,  "Accounting  for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 requires certain instruments,  including mandatorily  redeemable shares,
to be  classified  as  liabilities,  not as  part  of  stockholders'  equity  or
redeemable  equity.  For instruments that are entered into or modified after May
31, 2003,  Statement 150 is effective  immediately upon entering the transaction
or modifying the terms. For other instruments covered by Statement 150 that were
entered  into  before June 1, 2003,  Statement  150 is  effective  for the first
interim  period  beginning  after June 15,  2003.  The Company does not have any
outstanding  financial  instruments  of the type  addressed  by SFAS No. 150 and
accordingly,  SFAS No. 150 will not have a  significant  effect on the Company's
financial position.

      In November  2002,  the EITF reached a consensus  on EITF 00-21,  "Revenue
Arrangements  with  Multiple   Deliverables,"  related  to  the  separation  and
allocation of consideration for arrangements that include multiple deliverables.
The  EITF  requires  that  when  the  deliverables  included  in  this  type  of
arrangement  meet certain  criteria they should be accounted  for  separately as
separate units of  accounting.  This may result in a difference in the timing of
revenue  recognition  but will not  result in a change  in the  total  amount of
revenues  recognized in a bundled sales arrangement.  The allocation of revenues
to the separate  deliverables  is based on the relative fair value of each item.
If the fair value is not  available  for the  delivered  items then the residual
method  must be used.  This method  requires  that the amount  allocated  to the
undelivered items in the arrangement is their full fair value. This would result
in the discount,  if any, being allocated to the delivered items. This consensus
is effective  prospectively  for  arrangements  entered  into in fiscal  periods
beginning after June 15, 2003. The adoption of EITF 00-21 has not had a material
impact on the Company's financial statements.

      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 revenue by customer  and  indicates  that Galaxy
Scientific  Corp.  represented  14% of the Company's  revenue for the year ended
September  27, 2003.  The Company had $0.2 million of accounts  receivable  from
this customer,  representing 19% of the Company's accounts receivable balance at
September 27, 2003. Marubeni Solutions  represented 13% of the Company's revenue
for the year ended  September  27,  2003.  The  Company had  approximately  $0.1
million in outstanding accounts receivable,  due from Marubeni,  representing 9%
of the Company's accounts  receivable  balance at September 27, 2003.  Turnstone
Systems  Inc.  represented  12% of the  Company's  revenue  for the  year  ended
September 27, 2003. The Company had no outstanding  accounts receivable due from

                                      F-17
<PAGE>

Turnstone  Systems Inc. at September 27, 2003. An assistance  agreement from the
U.S. Defense Advanced Research Projects Agency ("DARPA")  represented 11% of the
Company's  revenue for the year ended  September  27,  2003.  The Company had no
outstanding accounts receivable due from DARPA at September 27, 2003.


Revenue by Customer                Successor Co.  Successor Co.
                                                   Ten Months
                                   Year Ended        Ended
                                  -------------------------------
                                   September 27,  September 28,
(As a percentage of revenue)          2003            2002
                                  -------------------------------

Galaxy Scientific Corp.                    14%            0%
Marubeni Solutions                         13%           11%
Turnstone Systems Inc.                     12%            4%
DARPA assistance agreement                 11%            0%
OCCAM Networks, Inc.                        9%           14%
Fidelica Micro Systems, Inc.                0%           10%
Coventor, Inc.                              0%            8%
Spectra                                     9%           10%
All Others                                 32%           43%
                                  -------------------------------
Total                                     100%          100%
                                  ===============================

      Cash  Concentration:  The  Company  places its cash with  major  financial
institutions.  At times, cash and cash equivalents  balances may be in excess of
amounts  insured by Federal  agencies.  At September  27, 2003,  uninsured  cash
balances approximated $2.4 million.

      Advertising:   The  Company  expenses  advertising  costs  when  incurred.
Advertising expense was immaterial for both fiscal 2003 and 2002.

      Fiscal Year:  The  Company's  fiscal year ends on the Saturday  closest to
September  30.  Fiscal  years  2003 and 2002  ended on  September  27,  2003 and
September 28, 2002, respectively.  Fiscal 2003 included 52 weeks and fiscal 2002
included 44 weeks.  References to years in these financial  statements 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.

                                      F-18
<PAGE>

      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 net  revenue and gross  profit  (loss),  as well as  long-lived  assets.  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-19
<PAGE>

      The  following  table   represents  net  revenue,   gross  profit  (loss),
depreciation expense and long-lived assets by segment (in thousands):


(000's)                       Santa Barbara    Insight    Rental   United States
                     MEMS       Tool & Die   Analytical   Income       Total
                  --------------------------------------------------------------
Successor Co.
Year Ended:
September 27, 2003
Net revenue          $  4,076  $    766        $    171    $    518 $  5,531
                  ==============================================================
Intercompany
Revenue              $      7  $     90        $    291    $      - $      -
                  ==============================================================
Gross profit (loss)  $ (1,264) $     89        $     48    $    366 $   (761)
                  ==============================================================
Depreciation Expense $    958  $     51        $     23    $    119 $  1,151
                  ==============================================================
Non-Cash Stock
Based Compensation   $    378  $      -        $      -    $      - $    378
                  ==============================================================
Long-Lived Assets    $ 15,617  $    125        $     46    $  2,532 $ 18,320
                  ==============================================================

Successor Co.
Ten Months Ended:
September 28, 2002

Net revenue          $  1,874  $    460        $    126    $    426 $  2,886
                  ==============================================================
Intercompany
Revenue              $     17  $     72        $    297    $      - $      -
                  ==============================================================
Gross profit (loss)  $ (2,956) $    (32)       $    144    $    315 $ (2,529)
                  ==============================================================
Depreciation Expense $    672  $     43        $     19    $    101 $    835
                  ==============================================================
Non-Cash Stock
Based Compensation   $    331  $      -        $      -    $      - $    331
                  ==============================================================
Long-Lived Assets    $ 16,544  $    152        $     70    $  2,660 $ 19,426
                  ==============================================================


      The MEMS  intercompany  revenue is recorded at the cost of the  management
service provided to Insight Analytical. The Santa Barbara Tool & Die and Insight
Analytical  intercompany revenue, for the services provided to the MEMS segment,
is recorded at market prices for their services.

                                      F-20
<PAGE>

      Capital additions for fiscal 2003 were $0.1 million. Capital additions for
the ten months ended  September 28, 2002 were $0.4 million.  The fiscal 2003 and
2002  additions  were both  predominantly  related  to the MEMS  portion  of the
business.


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

                 Successor Co.   Successor Co.
                     Year          Ten Months
                    Ended            Ended
                 ------------------------------
                 September 27,   September 28,
($000's)             2003            2002
                 ------------------------------

Net revenue
Domestic            $    4,830    $    2,291
Foreign                    701           595
                 ------------------------------
Total               $    5,531    $    2,886
                 ==============================

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


4.    Income Taxes

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


                           Successor Co.     Successor Co.
                               Year            Ten Months
                              Ended             Ended
                       ----------------  -----------------
                           September 27,      September 28,
                              2003               2002
                       ----------------  -----------------
Federal Income Taxes
   Current                  $        -         $        -
   Deferred                          -                  -

State Income Taxes
   Current                          36                 31
   Deferred                          -                  -
                       ----------------  -----------------
Total                       $       36         $       31
                       ================  =================

                                      F-21
<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):
                                 Successor Co.   Successor Co.
                                     Year          Ten Months
                                    Ended            Ended
                                 ------------     ------------
                                 September 27,    September 28,
                                     2003             2002
                                 ------------     ------------
Income tax benefit at the
United States federal income
tax rate                         $    (1,878)      $   (2,623)
State income taxes, net of
federal income tax benefit              (295)            (444)

Change in valuation allowance          2,209            3,098
                                 ------------     ------------
                                 $        36       $       31
                                 ============     ============

      The  components  of deferred  income  taxes at  September  27, 2003 are as
follows (in thousands):

Net operating loss carryforwards         $  10,904
Basis difference in property, plant
and equipment                                  986
Other                                        1,919
                                         -------------
subtotal                                    13,809

Valuation allowance                        (13,809)
                                         -------------
Total net deferred tax asset (liability) $       -
                                         =============

      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  27, 2003,  the Company had total  deferred tax assets of $13.8
million.  The  Company  recorded a  valuation  allowance  in the amount of $13.8
million at September 27, 2003,  against the amount by which  deferred tax assets
exceed  deferred tax  liabilities.  The change in valuation was $2.2 million for
the 2003 period.  The valuation  reserve at September 27, 2003 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.

      Due to the change in control as a result of the  bankruptcy,  the  Company
may not be able to receive the full benefit of net operating loss  carryforwards
accumulated  prior to the bankruptcy.  Portions of the Company's  pre-bankruptcy
tax losses,  however,  may be eligible for use in future periods. The Company is
currently  evaluating  these amounts.  From the  commencement  of the Chapter 11
Reorganization  through  September  27, 2003,  the Company has  accumulated  net
operating  loss  carryforwards  of  approximately  $27.3 million for federal tax

                                      F-22
<PAGE>

purposes and $13.6 million for state tax purposes. 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  27,  2003,  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

      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 were 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, in accordance
with the Secured  Promissory  Note,  the Company has accrued an additional 3% of
annual  interest due to default.  Consequently,  the notes are  considered to be
current  debt.  As of  September  27,  2003,  the  amount  of  accrued  interest
associated  with these notes is $1.0 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  completed  negotiations  with the holders of its Professional
Notes  late in the  fourth  fiscal  quarter  of 2003.  On  September  30,  2003,
subsequent  to fiscal year end, the Company paid $2.4 million in cash and issued
368,113 shares of Common Stock, 16,437 warrants for the purchase of Common Stock
at a price of $5.35 and 68,777  warrants  for the  purchase of Common Stock at a
price of $7.29 to cancel these  Professional  Notes. This transaction  cancelled
$4.1 million in notes and $1.0 million in accrued  interest.  The Company issued
91,826  shares  of the  Common  Stock at $5.35  per  share,  which was below the
original notes  conversion  price of $8.20.  This reduced price plus warrants to
purchase  additional  common  stock were  offered to induce the holder to take a
reduced amount of cash for their final  agreement with the Company.  The Company
will recognize approximately $0.2 million in expense in the first fiscal quarter
of 2004 related to this  transaction.  The amount of the Professional  Notes and
accrued  interest  refinanced  through the issuance of common stock and warrants
(approximately  $2.8  million)  has been  classified  as  long-term  debt on the
accompanying balance sheet.

      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.  Upon the  sale of the  Company's

                                      F-23
<PAGE>

Hollister  facility,  in the  second  quarter of fiscal  2003,  a portion of the
proceeds  were used to reduce  this debt to $8.8  million.  The  balance  of the
proceeds  were used to pay,  in full,  a  separate  loan with a balance  of $5.4
million. The remaining mortgage requires  interest-only payments at a 12% annual
interest  rate.  The  other  claim  was for  delinquent  property  taxes of $0.9
million,  of which $0.7 million  remains  outstanding at September 27, 2003. 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.

      On the  Petition  Date,  the  Company  stopped  accruing  interest  on all
unsecured  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.

      The Company's long-term debt is summarized below ($000's):



                                                  September 27,
                                                       2003
                                                 -------------
Property Mortgage                                 $     8,830
Property Taxes                                            658
Convertible Notes with Bankruptcy Professionals         4,137

                                                 -------------
                                                       13,625

Current portion                                       (1,568)
                                                 -------------
Total                                             $    12,057
                                                 =============

      The aggregate maturities of long-term debt are as follows.

Fiscal Year      ($000's)
              ------------

2004              $ 4,325
2005                  188
2006                9,018
2007                   94
              ------------
Total            $ 13,625
              ============


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

                                      F-24
<PAGE>

environmental regulations or to clean up prior discharges. The Company currently
maintains a restricted  cash account of $0.1 million in other assets as required
by the Department of Toxic Substance Control.

      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.  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.  If these legal defenses are  unsuccessful,  the
Company  could be  required  to pay an amount of less  than  $0.1  million.  The
Company is also  remediating  and  monitoring  ground  water  contaminated  with
volatile  organic  compounds  ("VOCs") at a former site leased by the Company 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 future expenditures related to the site to be material.

      In fiscal 2003, the Company sold its Hollister facility. The environmental
testing  performed  by the Company in support of this sale  determined  that the
soil showed no metal or VOC contamination.  However, 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
Company has recently been asked by the CRWQCB to submit new sample  results from
its well.  One  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. Their testing detected the
presence  of  breakdown  products  of the same VOC.  The owners of the  adjacent
property have been asked to conduct  bi-annual  sampling of the wells.  A second
property adjacent to the Company is conducting site  characterization  under the
guidance of the CRWQCB related to the same VOC found on the Company's  site. The
CRWQCB is  requesting  investigation  of the  sites  adjacent  to the  Company's
property  in order  to  attempt  to  determine  the  responsible  party  for the
Company's  ground  water  contamination.   The  Company  is  unable  to  make  a
determination  of potential  future costs for this situation.  The Company has a
$5.0  million  environmental   insurance  policy  covering  potential  liability
relating to this  property.  The  Company's  accumulated  cost to date for these
activities has been less than $0.1 million.

      The Company was informed in October 2003 that it was  infringing  upon the
service mark of another firm  operating in the  analytical  laboratory  business
area under the name of Insight  Analytical  Labs,  Inc.  The Company will change
Insight Analytical's name to IMT Analytical beginning in fiscal 2004.

      Purchase commitments  associated with capital expenditures were minimal at
September 27, 2003.

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

                                      F-25
<PAGE>

      Under its bylaws and indemnification agreements, the Company has agreed to
indemnify its officers and directors for certain events or  occurrences  arising
as a result of the officer of director's serving in such capacity,  that require
it,  subject to certain  exceptions,  to indemnify the officers and directors to
the  fullest  extent  authorized  or  permitted  by its bylaws and the  Delaware
General  Corporation  Law. The maximum  potential  amount of future payments the
Company  could be  required to make under these  indemnification  agreements  is
unlimited. However, the Company has a directors and officers liability insurance
policy  that  limits  its  exposure  and  enables it to recover a portion of any
future amounts paid. As a result of its insurance policy  coverage,  the Company
believes the estimated fair value of these indemnification agreements is minimal
and has no liabilities recorded for these agreements as of September 27, 2003.


7.    Employee 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 $.1  million in both
fiscal 2003 and 2002.  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 less than $0.1 million in compensation expense
recorded  under the cash profit sharing plan in fiscal 2003. The Company made no
discretionary  401(k)  contributions  during  either  fiscal 2003 or fiscal 2002
under this plan.


8.    Financing Transaction

      The  Company  completed  a  sale  of  Common  Stock  and  warrants  to L-3
Communications  Corporation  ("L-3") on  September  3, 2003 for $2.5  million in
cash. The Company is a subcontractor to L-3 for a long-term  government contract
to produce  gyroscopes and accelerometers  for use in inertial  navigation.  The
Company  issued  467,500  shares of Common Stock to L-3 along with two warrants.
The first  warrant has a term of eighteen  months to purchase  83,500  shares of
Common  Stock at a price of $5.35 per share.  The second  warrant  has a term of
thirty-six months to purchase 350,000 shares of Common Stock at a price of $7.29
per  share.  The  value  of the  warrants  is not  reflected  separately  in the
accompanying financial statements as it was recorded within common stock.

      L-3 made a  previous  investment  in the  Company on August 2, 2002 for $5
million in cash.  The Company issued 935,000 shares of Common Stock to L-3 along
with two warrants.  The first warrant had a term of eighteen  months to purchase
167,000  shares of Common Stock at a price of $5.35 per share.  This warrant was
exercised by L-3 on October 31, 2003 (see footnote 11- Subsequent  Events).  The
second  warrant has a term of thirty-six  months to purchase  700,000  shares of

                                      F-26
<PAGE>

Common  Stock at a price of $7.29 per share.  The value of the  warrants  is not
reflected separately in the accompanying financial statements as it was recorded
within common stock.


9.    Restricted Stock and Stock 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                                   750,000
            Reserved Options
            ------------------------------------------------------------
            Restricted stock                                    500,000
            ------------------------------------------------------------
            Total                                             2,250,000
            ------------------------------------------------------------


      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 for the Employee  Restricted Stock is 50% vests one year after the Plan
of  Reorganization  Effective  date of November 16, 2001 and the  remaining  50%
after year two. The  restricted  stock  agreement  contains  additional  vesting
provisions,  which the  Company  does not intend to  enforce.  Accordingly,  the
Company measured the compensation  expense  associated with the Plan on November
16, 2001 and is recognizing the expense over two years. The New Employee Options


                                      F-27
<PAGE>

vest ratably over three years.  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.

      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 $1.2 million and $1.1
million in  amortization  expense for the year ended  September 27, 2003 and the
ten month period ended  September  28, 2002,  respectively.  Cost of revenue was
charged  with $0.4  million,  Research  and  Development  was charged  with $0.3
million and Selling,  General and  Administrative  incurred  $0.5 million of the
amortization  expense  in  fiscal  2003.  Cost of sales  was  charged  with $0.3
million,  Research  and  Development  was charged with $0.3 million and Selling,
General and Administrative  incurred $0.5 million of the amortization expense in
the ten month period ended  September 28, 2002.  The  remaining  $0.2 million of
amortization expense will be recorded in 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

     Exercised                      -

     Cancelled                 (2,190)           $5.00        $5.00
                          -------------
Balance September 28, 2002  1,265,110    $5.00 - $5.35        $5.01
                          =============
     Granted                  411,855            $5.35        $5.35

     Exercised                      -

     Cancelled                (12,068)   $5.00 - $5.35        $5.10
                          -------------
Balance September 27, 2003  1,664,897    $5.00 - $5.35        $5.09
                          =============


                                      F-28
<PAGE>

      The following table summarizes  information  regarding options outstanding
at September 27, 2003:

            Options Outstanding                           Options Exercisable
-------------------------------------------------     --------------------------
                           Weighted
                            Average     Weighted                    Weighted
Range of                   Remaining     Average                     Average
Exercise      Number      Contractual   Exercise        Number      Exercise
 Prices     Outstanding      Life         Price       Exercisable     Price
 ------     -----------      ----         -----       -----------     -----

 $5.00      1,236,610        8.17         $5.00        428,491       $5.00
 $5.35        428,287        9.27         $5.35          6,660       $5.35
            ----------                                ---------
            1,664,897                                  435,151
            ==========                                =========


      The weighted  average fair value of options  granted during the year ended
September 27, 2003 and the ten months ended September 28, 2002 totaled $2.95 and
$2.65, respectively.

10.   Related Party Transactions.

      The Company had  revenue of $0.5  million,  billings in excess of costs on
development  projects of $0.5 million,  which includes capitalized costs of $3.0
million,  and accounts receivable of $0.4 million from L-3 Communications,  Inc.
("L-3"), a stockholder and customer,  as of and for the year ended September 27,
2003.  The Company  had  revenue of $0.1  million  from L-3, a  stockholder  and
customer, for the year ended September 28, 2002.

11. Subsequent Events.

      On September 30, 2003,  the Company  reached an agreement with the holders
of its Professional Notes, which were due on November 16, 2003. The Company paid
$2.4 million in cash and issued 368,113 shares of Common Stock,  16,437 warrants
for the purchase of Common Stock at a price of $5.35 and 68,777 warrants for the
purchase of Common Stock at a price of $7.29 to cancel these Professional Notes.
This  transaction  cancelled  $4.1  million in notes and $1.0 million in accrued
interest.  The Company  issued  91,826  shares of the Common  Stock at $5.35 per
share,  which was below  the  original  notes  conversion  price of $8.20.  This
reduced price plus warrants to purchase  additional common stock were offered to
induce the holder to take a reduced amount of cash for its final  agreement with
the Company. The Company will recognize approximately $0.2 million in expense in
the first fiscal quarter of 2004 related to this transaction.

      On October 31, 2003,  L-3 exercised  167,000  warrants for the purchase of
Common  Stock at a price of $5.35  per share  for a total of $0.9  million.  L-3
received these warrants,  as well as a thirty-six month warrant for the purchase
of  700,000  shares of  Common  Stock at $7.29  per  share,  as part of its $5.0
million  August 2002  investment  in the Company.  The Company  plans to use the
funds for working capital requirements.


                                      F-29