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

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2001

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

                           COMMISSION FILE NO. 1-6635

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

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

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

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

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

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

                    Name of each exchange on which registered
                               Title of each class

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

                         Common Stock, $.0001 par value

                                (Title of Class)

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

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

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

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

      The aggregate market value of the Common Stock held by  non-affiliates  of
registrant  was $0.00 as of December 2, 2002.

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

                           DOCUMENTS INCORPORATED BY REFERENCE
None
<page>


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




































                                       2
<PAGE>

ITEM 1. BUSINESS

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


HISTORY

       The Company was incorporated in California in 1957 and was reincorporated
in Delaware in 1987 under the name "Applied Magnetics  Corporation." The Company
was an  independent  manufacturer  of head gimbal  assemblies  ("HGAs") and head
stack assemblies  (which consist of multiple HGAs assembled  together with other
components)  to the disk drive  industry.  The disk drive  industry is intensely
competitive  and largely  dependent  on sales to a limited  number of major disk
drive manufacturers and systems companies. Due to the small number of disk drive
manufacturers and systems companies requiring  independent sources of supply for
magnetic recording heads, the Company's customer base was concentrated.

      The  Company  experienced  a sudden  drop in the  demand for its family of
inductive  thin film heads starting in the middle of its first fiscal quarter of
1998.  This drop in demand was due in part to an overall  softening  in the disk
drive industry and reduced demand for recording heads and in part due to a rapid
industry-wide  adoption of  magnetoresistive  based recording head technology in
the desktop platform. The Company was unable to respond.

       The Company filed for Chapter 11  Reorganization  on January 7, 2000. The
Company  exited its Chapter 11  Reorganization  on November 16, 2001 and changed
its name to Innovative Micro  Technology,  Inc. The following  section describes
the history leading up to the Chapter 11 filing.

      FINANCIAL  DIFFICULTIES.  As a result  of the  technology  changes  in the
marketplace,  the Company  experienced a 62.9% decline in revenue  during fiscal
1998 and a 78.8%  decline in fiscal 1999.  This loss in revenue  resulted in the
Company experiencing  significant  operating losses in fiscal 1998 and 1999. The
Company took several  steps in 1999,  in an effort to improve its  financial and
operating strength.

                                       3
<PAGE>

      On February  11,  1999,  the Company  completed a merger with DAS Devices,
Inc., a research and development  company. The merger initially improved product
development  efforts,  but  ultimately  the  Company  was  unable to use the new
technology in its product offerings.

      On April 12,  1999,  the  Company  completed  the sale of its  subsidiary,
Magnetic  Data  Technologies,  LLC to Dubilier & Company.  The Company  received
approximately  $25.9  million in net proceeds from the Mag Data Sale. On May 12,
1999, the Company embarked on a significant  cost reduction  program in order to
realign expenses to respond to the reduced projections for revenue and cash flow
from  operations for the balance of calendar 1999,  resulting in a 35% reduction
in work force and  consolidation  of  facilities.  On July 14, 1999, the Company
sold four million shares of its common stock to  Kennilworth  Partners II LP for
$16 million and a senior  subordinated  convertible note receiving in return $25
million.  On September 8, 1999 the Company completed a rights offering of common
stock  to  its   stockholders   which  raised   approximately   $17.2   million.
Additionally, during September 1999, the Company reached agreements with respect
to individual private  placements of 2% convertible  notes. These  transactions,
together  with  the  Rights  Offering,  provided  the  Company  with a total  of
approximately $27.4 million in new financing.

      Despite the foregoing  efforts,  throughout  the last quarter of 1999, the
Company  continued to lose money as it  attempted  to keep pace with  technology
developments  within its industry. As a result of its continuing losses, and the
inability to obtain on a timely basis orders for its  products,  the Company was
unable to turn  around  its  business.  As a  result,  the  Company  experienced
continuing liquidity shortfalls and mounting pressure from its creditors,  whose
claims were increasingly past-due.

       RESTRUCTURING  EFFORTS.  In the months prior to the  commencement  of the
Chapter 11 Reorganization, the Company initiated discussions with various of its
equipment  lessors  in  an  effort  to  negotiate  a  comprehensive  and  global
moratorium  and   restructuring.   The  Company  was  unable  to  consummate  an
out-of-court  restructuring  with the equipment  lessors due in large measure to
the  Company's  inability to obtain  orders for its new products in time to turn
the Company around.

      The  Company  made a formal  proposal to its trade  creditors  regarding a
compromise  and  extension of the  Company's  obligations.  While certain of the
Company's trade creditors accepted the Company's proposal,  a substantial number
of  the  trade  creditors  did  not  and in  certain  instances  they  commenced
enforcement actions against the Company.

      Throughout  the last  quarter  of 1999 and  continuing  until the  Company
commenced  the Chapter 11  Reorganization,  the Company  attempted  to raise new
capital to finance its ongoing  operations and avoid a Chapter 11 filing and the
termination of its operations. The Company was not successful in this regard and
filed for Chapter 11 Reorganization on January 7, 2000.

                                       4
<PAGE>

      DEBTOR IN  POSSESSION  ADMINISTRATION.  During the  administration  of the
Chapter  11  Reorganization,  a number  of  events  occurred  in the  effort  to
restructure the Company. These events included:

      LIQUIDATION  OF  NON-CORE  EQUIPMENT  ASSETS.  To assist  the  Company  in
connection  with the liquidation of equipment not required for the MEMS Business
(the "Non-Core Equipment  Assets"),  the Bankruptcy Court authorized the Company
to retain a professional auctioneer. The Company generated $3.1 million from the
orderly,  nonauction, sales of Non-Core Equipment Assets. The remaining Non-Core
Equipment Assets were sold at auction. The auction sale generated  approximately
$3.0  million  of net  proceeds  to the  estate  and  there  was no gain or loss
recognized  on the sale as the assets were  written down to fair market value as
of September 1999.

      REAL ESTATE BROKERS - LIQUIDATION OF REAL ESTATE. To assist the Company in
the liquidation of its real property located at 6300 Hollister  Avenue,  Goleta,
CA (the  "Hollister  Property"),  the Company  retained  commercial  real estate
professionals.  The Company was unable to sell the Hollister Property before the
November  16, 2001 exit from the Chapter 11, but instead  used the equity in the
property as collateral to increase a short term loan of $2.0 million, secured in
August of 2001,  to an amount of $5.4  million to be used to fund the  Company's
working  capital  requirements.  The  increase  to the loan was  consummated  in
January  2002.  The  Company  continues  to  pursue  the  sale of the  Hollister
Property.

      LIQUIDATION OF SUBSIDIARIES.  On the Petition Date, the Company owned 100%
of the outstanding  stock of Applied  Magnetics Korea,  Ltd.  ("AMC-Korea")  and
Applied  Magnetics  (M) SDN. BHD.  ("AMC-Malaysia").  As a result of the Company
ceasing its prior line of business, AMC-Korea and AMC-Malaysia both commenced an
orderly liquidation process. In connection with the wind-down of AMC-Korea,  the
Company was able to sell the stock of  AMC-Korea  for net  consideration  to the
Company of $1.7  million,  and a release of any claims of AMC-Korea  against the
Company.  The liquidation of AMC-Malaysia  did not result in any proceeds to the
Company.

      WARN ACT LITIGATION.  Former AMC employees filed  approximately 340 claims
pursuant  to the  Worker  Adjustment  and  Retraining  Notification  Act  ("WARN
Claims") asserting $1.4 million in obligations owing by the Company. The Company
negotiated  a  settlement  with the  claimants.  Each  holder of WARN Claims who
participates  in the settlement  will receive shares of new common stock,  based
upon  the  new  common  stock   purchase   price   determined  in  the  Plan  of
Reorganization,  with a value equal to $1,505 per claimant.  The settlement also
provided for reimbursement of the out-of-pocket  expenses and fees of counsel to
the WARN Claims in the amount of $32,000.

      SUMMARY OF CLAIMS.  Based upon the  Company's  review and  analysis of its
books and records, and the proofs of claim filed, the Company estimates that the
total of claims allowed by the Bankruptcy  Court (the "Allowed  Claims") will be
approximately $315.7 million.

      ISSUANCE  OF  NEW  COMMON  STOCK  TO  CLAIMANTS.  The  Company's  Plan  of
Reorganization provided that, on the effective date, all of the old common stock
was  cancelled  without  consideration  to the  holders  and the  Company  would

                                       5
<PAGE>

subsequently  issue  4,500,000  shares of new  common  stock to the  classes  of
claimants designated in the Plan.

      EXIT FROM CHAPTER 11. The  Confirmation  Hearing for the Company's Plan of
Reorganization  was held on November 2nd and 3rd of 2001.  The Plan was approved
and the  Effective  Date of the Plan was  determined  to be  November  16,  2001
("Effective Date").

THE COMPANY'S MEMS BUSINESS

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

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

      The Company's MEMS Business  operations  commenced in February 2000.  From
that point the Company  focused on  establishing  and growing the MEMS Business.
Initial  employees  were  hired  to  provide  key  services  needed  to start up
facilities,  plan equipment  requirements,  develop business plans, and seek out
new  customers.  By March 2000, IMT was servicing its first MEMS customer in the
telecommunications business.

      The Company's three  additional lines of business are: "Santa Barbara Tool
and Die," "Insight Analytical" and leasing of excess space in its owned facility
under long-term lease contracts. Santa Barbara Tool and Die's technology permits
high  precision   manufacturing  of  tooling,  and  the  organization   features
electron-discharge   machining   (EDM)  which   includes   metals  and  ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal

                                       6
<PAGE>

properties.  Santa  Barbara Tool and Die and Insight  Analytical  are  strategic
parts of the  core  company  in that  their  services  are used to make the core
business more  competitive,  and both provide service to outside customers using
the  portion of their  capacity  that  exceeds  Company  needs.  The Company has
approximately  51,000 square feet of building  space  available to lease.  As of
September 29, 2001  approximately  34,000 square feet were under long term lease
arrangements with annual future rental income of approximately $0.5 million.

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


EMPLOYEES

      The majority of the employees of the Company were employees of the Company
when it was previously known as Applied Magnetics Corporation. Key engineers and
technicians  were  rehired to maintain and operate the  sophisticated  equipment
that is used in the fabrication of MEMS devices.  Most of these individuals play
a dual role of operations as well as process  development.  The employees  cover
the following technical areas:

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

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

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

      4.   planarization, including chemical-mechanical polishing;

      5.   wafer slicing, including gang-saw processing;

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

      7.   testing, including mechanical and electrical testing.

      For Santa Barbara Tool and Die, the Company hired former AMC employees who
had extensive tool and die experience. For Insight Analytical, the Company hired
former AMC employees to operate the Company's analytical tools.

      As of September 29, 2001, the Company had 39 employees at its headquarters
in Goleta, California.

                                       7
<PAGE>

TECHNOLOGY

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

      The  manufacturing  technology  encompasses   photolithography,   material
deposition,  and material removal,  which are the essential methods of producing
integrated  wafers.  While much of this technology was acquired to make magnetic
recording heads for the disk drive storage industry,  the techniques are broadly
applicable  and  can  be  used  in  making  MEMS  devices.   In  addition,   new
manufacturing  technology has been introduced into the Company via new equipment
that has been  purchased and the training  required of the  Company's  personnel
associated with the  installation of this  equipment.  Additional  manufacturing
technology  includes  assembly  and  testing  procedures,   including  precision
alignment  and  assembly,   ceramic  bonding,   wire  attachment,   and  testing
algorithms.

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

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

INTELLECTUAL PROPERTY

      The Company  regards  elements  of its  manufacturing  processes,  product
designs,  and  equipment  as  proprietary  and seeks to protect its  proprietary
rights  through  a  combination  of  employee  and  third  party   nondisclosure
agreements,  internal  procedures and patent  protection.  The Company has filed
eight patent  applications  with the United  States  Patent Office since January
2000,  and more are in  preparation  for the MEMS  business.  In fiscal 2002 the
Company received  notification from the U.S. Patent office that its first patent
had been issued.  The Company  holds many  patents  issued  before  January 2000
pertaining to the magnetic recording industry.  These are deemed unnecessary for
operations going forward.

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

                                       8
<PAGE>

liabilities or to suspend the manufacture of the products utilizing the patented
invention.

VENDORS

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


CUSTOMERS

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

       The MEMS business customers are in the telecommunication,  biotechnology,
microfluidics,  inertial  navigation,  biomedical,  and  the  personal  security
businesses.   The  personal  security  company,   Fidelica  Microsystems,   Inc.
("Fidelica"),   which  specializes  in  hardware  for  personal  identification,
represented  a  significant  portion of the  Company's  sales in fiscal 2001, as
shown in the  table  below.  In the  second  fiscal  quarter  of 2002,  Fidelica
cancelled  their  existing  order with the  Company for  product  cost  reasons.
Inertial  navigation  MEMS refers to MEMS  gyroscopes.  Biomedical MEMS includes
manufacturing  filters.  Biotechnology  refers  to  a  variety  of  gene  chips.
Microfluidics  includes print heads for ink-jet printing.  Machine shop tool and
die customers and analytical  laboratory  customers include multiple  California
companies and extend to out-of-state  companies.  The Company also leases excess
space  within its owned  facility to tenants.  The  Company's  sales by business
segment for fiscal 2001 and 2000 are displayed below.

Sales by Customer:

                                        For the Years
                                           Ended:
                                      ------------------ -- ----------------
                                        September 29,        September 30,
(As a percentage of sales)                  2001                 2000
                                      ------------------    ----------------
Fidelica Microsystems, Inc.                         34%                 19%
All Others                                          66%                 81%
                                      ------------------    ----------------
Total                                              100%                100%
                                      ==================    ================

      Other than Fidelica  Microsystems,  Inc.,  no customer  accounted for more
than 10% of total sales.

                                       9
<PAGE>





Sales by Segment:

                                            For the Years
                                       Ended:
                                 ------------------- --- -------------------
                                   September 29,           September 30,
(As a percentage of sales)              2001                    2000
                                 -------------------     -------------------
MEMS                                            59%                     43%
Santa Barbara Tool and Die                      24%                     51%
Insight Analytical                               7%                      6%
Rental Income                                   10%                      0%
                                                         -------------------
                                 -------------------
Total                                          100%                    100%
                                 ===================     ===================

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


COMPETITION

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

      The Company also competes with large Integrated Circuit manufacturers with
six-inch wafer fabrication  ("wafer fab") facilities.  These firms include Sony,
Analog  Devices,   Texas   Instruments   and  Motorola.   These  firms  are  all
significantly  larger than the Company with  greater  financial,  technical  and
marketing  resources  than  the  Company.  They  operate  wafer  fabs  based  on
Complimentary Metal Oxide  Semiconductor  ("CMOS") technology which limits their
use compared to the Company's equipment capabilities.

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

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

                                       10
<PAGE>

ENVIRONMENTAL REGULATIONS

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

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

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

                                       11
<PAGE>


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 April 30, 2002:

      Name                 Age Position or Office

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

      Dr.  John S.  Foster has over 14 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.






























                                       12
<PAGE>

ITEM 2.  PROPERTIES

      Certain  information  concerning  the  Company's  principal  properties at
September 29, 2001 is set forth below:
<table>
<caption>
Location                             Type             Principal Use                   Footage      Ownership
------------------------------------------------------------------------------------------------------------------

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

      The Company believes its existing manufacturing facilities are adequate to
support customer requirements during fiscal 2002.


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.

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.
























                                       13
<PAGE>

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  "Item 7 --
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations."

(In thousands, except per share and
employment amounts)
                                                             2001         2000
--------------------------------------------------------------------------------
OPERATIONS

Net sales                                                $   2,773    $     456
Loss from continuing operations                            (11,828)     (10,716)

Loss from discontinued operations                                0      (23,048)
                                                         -----------  ----------
Net loss                                                   (11,828)     (33,764)

Net loss per share:
   Loss from continuing operations per
 common share                                            $   (0.17)   $   (0.16)

   Discontinued operations, net                               0.00        (0.33)
                                                         -----------  ----------

   Loss per common share - basic and diluted                 (0.17)       (0.49)


Weighted average number of common shares
outstanding-basic and diluted                               70,444       69,598

BALANCE SHEET

Working capital                                          $  (4,314)   $     477
Total assets                                                29,355       32,912
Total liabilities subject to compromise                    315,709      313,966
Shareholders' deficiency                                  (294,025)    (283,397)


OTHER DATA
Year-end employment                                             39           32


                                       14
<PAGE>

BUSINESS

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

      The Company exited its Chapter 11  Reorganization  process on November 16,
2001. The Company will adopt 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 will
be 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 will convert  approximately $185 million of debt discharge and
$131 million of trade credit and operating  leases to equity in the  reorganized
entity.

      The Company's MEMS Business  operations  commenced in February 2000.  From
that point the Company  focused on  establishing  and growing the MEMS Business.
Initial  employees  were  hired  to  provide  key  services  needed  to start up
facilities,  plan equipment  requirements,  develop business plans, and seek out
new  customers.  By March 2000, IMT was servicing its first MEMS customer in the
telecommunications business.

      The Company's three  additional lines of business are: "Santa Barbara Tool
and Die," "Insight Analytical" and leasing of excess space in its owned facility
under long term lease contracts. Santa Barbara Tool and Die's technology permits
high  precision   manufacturing  of  tooling,  and  the  organization   features
electron-discharge   machining   (EDM)  which   includes   metals  and  ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal
properties.  Santa  Barbara Tool and Die and Insight  Analytical  are  strategic
parts of the  core  company  in that  their  services  are used to make the core
business more  competitive,  and both use their  capacity  that exceeds  Company
needs to provide services to outside  customers.  The Company has  approximately
51,000  square feet of building  space  available to lease.  As of September 29,
2001  approximately  34,000 square feet were under long-term lease  arrangements
with annual rental income of approximately $.5 million.

                                       15
<PAGE>


ANNUAL RESULTS OF OPERATIONS

      The following table sets forth certain financial data for the Company as a
percentage of net sales for the last two fiscal years.


                                                      FOR THE YEARS ENDED
                                                  ------------------------------
                                                  SEPTEMBER 29,    SEPTEMBER 30,
                                                       2001            2000
                                                  ------------------------------
Net sales
  MEMS and Other                                       90.1%            100.0%
  Rental income                                         9.9%              0.0%
  Subtotal                                            100.0%            100.0%
Cost of sales
  MEMS and Other                                      227.3%            883.1%
  Rental income                                         7.0%              7.0%
  Subtotal                                            234.3%            890.1%
Gross loss                                           -134.3%           -790.1%
Operating expenses
     Research and development                          12.5%             61.6%
     Selling, general and administrative               57.5%            247.4%
     Impairment of long lived assets                   88.9%              0.0%
     Total operating expenses                         158.9%            309.0%
Loss from operations                                 -293.2%          -1099.1%
Interest income                                         1.2%              0.9%
Interest expense                                      -53.1%           -222.2%
Other income, net                                       0.0%            193.4%
  Loss from continuing operations before             -345.1%          -1127.0%
      reorganization costs and income taxes
Reorganization Costs                                  -81.3%           -440.3%
Loss from continuing operations before taxes         -426.4%          -1567.3%
Provision for income taxes                              0.1%              0.0%
Discontinued operations, net                            0.0%          -5837.1%
Net loss                                             -426.5%          -7404.4%

      NET SALES:  Net sales  increased  to $2.8  million in fiscal 2001 over net
sales of $0.5  million  in  fiscal  2000,  primarily  due to the fact  that 2001
represented a full year of operations  and that the start up of the  reorganized
business did not take place until late in the second fiscal quarter of 2000. The
MEMS  portion of the  business  had sales of $1.6  million and $0.2  million for
fiscal 2001 and 2000,  respectively.  Santa Barbara Tool and Die generated sales
of $0.7 million in fiscal 2001 compared to $0.2 million in fiscal 2000. Insight

                                       16
<PAGE>

Analytical  had $0.2 million of sales in fiscal 2001 and minimal sales in fiscal
2000.  The leasing of excess space did not begin until fiscal 2001 and generated
sales of $0.3 million.

      GROSS  LOSS:  The gross loss was a  negative  134.3% or $3.7  million  for
fiscal 2001 compared to a negative  790.1% or $3.6 million for fiscal 2000.  The
change is primarily due to the fact that fiscal 2001  represented a full year of
operations for the reorganized  business,  compared to fiscal 2000, in which the
start  up  occurred  late  in the  second  fiscal  quarter.  The  gross  deficit
improvement  was primarily  due to the revenue  increase in fiscal 2001 allowing
for absorption of the fixed cost elements  associated with the wafer fabrication
facility. These fixed costs include depreciation,  utilities and the engineering
staff. The MEMS portion of the business had a gross deficit of $4.0 million or a
negative  243.8% in fiscal 2001 compared to a gross deficit of $3.5 million or a
negative  1815.9% in fiscal 2000. Santa Barbara Tool and Die had a minimal gross
profit in fiscal  2001 and a  minimal  gross  deficit  in fiscal  2000.  Insight
Analytical  generated a minimal profit of $0.2 million or 79% in fiscal 2001 and
a minimal  gross  deficit in fiscal  2000.  The  leasing of space to our tenants
provided a gross profit of $0.1 million or 29% for its first year of business in
fiscal 2001.

      RESEARCH AND DEVELOPMENT:  Research and development  expenses ("R&D") were
$0.3 million for both fiscal 2001 and 2000. These expenses represented 12.5% and
61.6% of net sales, respectively, for such periods.

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

      SELLING,  GENERAL  AND  ADMINISTRATIVE  EXPENSES:   Selling,  general  and
administrative  ("SG&A")  expenses  were $1.6 million and $1.1 million in fiscal
2001 and 2000,  respectively.  These amounts include $0.5 million in each fiscal
year of expenses  related to a California  property that the Company is planning
to sell.  The total selling,  general and  administrative  expenses  represented
57.5% and 247.4% of net  sales,  respectively,  for such  periods.  The  Company
currently has six employees  providing the services  reported as SG&A.  The cost
increase in fiscal 2001 compared to 2000 was primarily due to the fact that 2001
represented a full year of operations  and the start up of the MEMS business did
not take place until late in the second fiscal quarter of 2000.

      IMPAIRMENT OF  LONG-LIVED  ASSETS:  The Company  adjusted the value of its
machinery and equipment to market value in the fourth fiscal quarter of 2001. An
orderly  liquidation  value  appraisal  was  performed  by a third  party at the
request of the Company, and the valuation indicated that the equipment,  similar

                                       17
<PAGE>

to that used by  semiconductor  manufacturers,  required a reduction in value of
approximately $2.5 million. . REORGANIZATION COSTS: Reorganization costs consist
primarily of professional fees directly related to the Chapter 11 filing.

      INTEREST  EXPENSE:  Interest  expense was $1.5 million and $4.6 million in
fiscal  2001  and  2000,   respectively.   The  decrease  from  fiscal  2000  is
predominantly  due  to  the  interest  expense  associated  with  the  Company's
unsecured debt that was extinguished  when the Company filed for  reorganization
under Chapter 11 of the U.S. Bankruptcy Code in January, 2000.

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

      Under the terms of the bankruptcy,  the Company may not be able to receive
any benefit from previously  accumulated net operating loss carryforwards  prior
to the bankruptcy.  Portions of the Company's  pre-bankruptcy  tax losses may be
eligible for use in future periods.  The Company is currently  evaluating  these
amounts.  Since January 7, 2000, the Company has  accumulated net operating loss
carryforwards of  approximately  $16.8 million for federal tax purposes and $8.4
million for state tax  purposes as of September  29, 2001.  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  29,  2001,  all  identified  deferred  tax  assets  are  reduced by a
valuation allowance  therefore,  any additional operating loss carryforwards not
recognized  would not result in a benefit in the  provision for income taxes due
to the  uncertainty  of future  realization of those  additional  operating loss
carryforwards.


LIQUIDITY AND CAPITAL RESOURCES

      The Company's cash balance increased to $1.7 million at September 29, 2001
from $1.1 million at September 30, 2000.  The increase in cash was primarily due
to the  following  sources  of  cash:  $1.6  million  from  the  sale of  excess
equipment,  $2.0 million from a mortgage  secured by the real property  owned by
the Company and $1.2 million  collected  from a stock  subscription  receivable.
These sources were primarily offset by the net use of cash by operations of $3.9
million plus the purchase of new equipment of $0.1 million.

      On  September 5, 2001 the Company  entered  into a $2.0  million  mortgage
secured by the Hollister  property.  The loan has a three-month  term,  with the
ability  to  extend  it  for  an  additional  nine  months.  The  loan  requires
interest-only  monthly  payments  at 12%  annual  interest  rate.  The loan also
provided an option for the Company to borrow an  additional  $3.4 million at 12%
annual  interest rate with a three-year  term for the entire $5.4  million.  The
Company  exercised  this  option  in  December  of 2001 (see  subsequent  events
footnote).

      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
2002,  the Company  plans  approximately  $0.5  million in capital  expenditures
primarily to continue  development and production of new MEMS  technologies  and

                                       18
<PAGE>

products and to increase overall production capacity. Capital equipment purchase
commitments totaled $0.4 million at September 29, 2001.

      The  Company's  liquidity  and  ability  to  fund  operating  and  capital
expenditure  requirements  during  fiscal 2002 depend  heavily on its ability to
achieve  volume  production  of its MEMS  products on a timely  basis and obtain
additional financing.  Although the Company is devoting substantial  engineering
and manufacturing  resources to its production goals, there can be no assurances
that the Company will achieve planned  production  levels on a timely basis. The
Company completed an equity financing  transaction with a strategic  investor on
August 2, 2002 for $5 million in cash. The Company  issued the investor  935,000
shares of common stock along with two warrants.  The first warrant has a term of
eighteen  months  and the  value was  determined  to be $0.3  million  using the
Black-Scholes  option pricing model. The second warrant has a term of thirty-six
months and the value was  determined to be $1.4 million using the  Black-Scholes
option pricing model.  The Company expects the $5 million  investment to provide
the cash required to fund the Company's working capital needs through the second
quarter of fiscal  2003.  The Company  cannot  give  assurance  that  additional
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,
negative cash flow and shareholders'  deficiency the Company's  accountants have
expressed substantial doubt about its ability to continue as a going concern.

      The Company has  incurred net losses and losses from  operations  for each
quarter since 1999. The Company filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy,  all of
the  previously  issued  and  outstanding  common  stock  was  canceled  without
consideration  to the holders.  The Company incurred net losses of $11.8 million
for the fiscal year ended  September  29, 2001.  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.

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

                                       19
<PAGE>

ability to expand its current  production  facilities  or  establish  additional
facilities in other  locations,  or could require the Company to acquire  costly
equipment,   or  to  incur  other  significant   expenses  for  compliance  with
environmental regulations or to clean up prior discharges.

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

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

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

      Purchase  commitments  associated  with  capital  expenditures  were  $0.4
million at September 29, 2001

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

                                       20
<PAGE>

CRITICAL ACCOUNTING POLICIES

      Application of the Company's  accounting  policies  require  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 could be
reported if there are changes in the  assumptions  and estimates.  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
our financial  statements and as areas most dependent on  management's  judgment
and estimates.

      REVENUE RECOGNITION AND WARRANTY POLICIES:  The Company uses the completed
contract  method of accounting for its product  development  projects due to the
inability to accurately  estimate percentage of completion during performance of
the  contract.  Costs are  capitalized  during the  project as  inventories  and
expensed at its completion along with the recognition of revenue.  Santa Barbara
Tool and Die  delivers  a  finished  product  to the  customer  and  revenue  is
recognized  at the time  the  product  is  shipped  and  title  passes.  Insight
Analytical  has service  related  revenue and this  revenue is  recognized  upon
completion  of the service for the  customer.  The  Company's  MEMS  development
contracts  do not have any  rights of  return.  Santa  Barbara  Tool and Die and
Insight  Analytical  did not have any sales returns in fiscal 2001 or 2000.  The
Company's  warranty  policy provides for the replacement of defective parts when
the  customer's  return  request is approved  within thirty days of the original
shipment date. To date, warranty costs have not been significant.

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

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

      FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of cash and cash
equivalents,  customer  receivables,  trade  accounts  payable and other accrued
liabilities  approximate their fair value because of the short maturity of these
financial  instruments.  As  a  result  of  the  Company's  Chapter  11  filing,

                                       21
<PAGE>

instruments  included as liabilities subject to compromise are recorded at their
historical value,  however,  the liabilities will not be settled at this amount.
The liabilities not under  compromise  approximate fair value due to their short
term nature or market rate of interest.

RECENT ACCOUNTING PRONOUNCEMENTS

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

      During July 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
issued by the  Financial  Accounting  Standards  Board.  SFAS 142 applies to all
acquired  intangible assets whether acquired singly, as part of a group, or in a
business  combination.  SFAS 142 specifies  that goodwill and  indefinite  lived
intangible  assets will no longer be  amortized  but instead  will be subject to
periodic impairment  testing.  Intangible assets with a determinable useful life
will  continue to be  amortized  over their  expected  lives.  The Company  will
implement  SFAS 142 beginning in its fiscal year 2003 and it has not  determined
the impact,  if any, that this statement will have on its financial  position or
results of operations.

      In August 2001,  SFAS No. 144,  "Accounting for the Impairment or Disposal
of Long-Lived Assets," was issued by the Financial  Accounting  Standards Board.
SFAS 144  addresses  the  financial  accounting  and  reporting  issues  for the
impairment or disposal of long-lived assets. This statement  supersedes SFAS 121
but  retains  the  fundamental  provisions  for (a)  recognition/measurement  of
impairment  of  long-lived  assets  to be held and used and (b)  measurement  of
long-lived  assets to be disposed of by sales.  It is effective for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years. The Company is currently evaluating the provisions of SFAS 144 and it has
not  determined  the  impact,  if any,  that  this  statement  will  have on its
financial position or results of operations.

      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 Financial  Accounting Standards Board. 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

                                       22
<PAGE>

if they do not meet the criteria for extraordinary items. The provisions related
to this  portion of the  statement  are  required to be applied in fiscal  years
beginning after May 15, 2002, with earlier application  encouraged.  The Company
is currently evaluating the provisions of SFAS 145 and it has not determined the
impact,  if any,  that this  statement  will have on its  financial  position or
results of operations.

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


RISK FACTORS AFFECTING THE COMPANY'S BUSINESS

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

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

      The Company has  incurred net losses and losses from  operations  for each
quarter since 1999. The Company filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy,  all of
the  previously  issued  and  outstanding  common  stock  was  canceled  without
consideration  to the holders.  The Company incurred net losses of $11.8 million
for the fiscal year ended  September  29, 2001.  It expects to continue to incur
substantial  operating losses for the foreseeable  future, and it cannot predict
the extent of the future losses or when it may become profitable. If the Company
does  achieve  profitability,  it  may  not  be  able  to  sustain  or  increase
profitability  even in the future. The Company expects to incur increasing sales
and marketing, research and development and general and administrative expenses.
As a result,  it will need to  significantly  increase  its  revenues to achieve
profitability.  Although the Company's  revenues have increased,  the growth may
not continue at the current  rate or at all.  The above items raise  substantial
doubt about the Company's ability to continue as a going concern.

      CAPITAL NEEDS.

      The MEMS  industry is capital  intensive  and  requires  expenditures  for
facilities, equipment and research and development to develop and keep pace with
technological improvements. The Company believes that to achieve its objectives,

                                       23
<PAGE>

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 2001 totaling $0.1 million.
During fiscal 2002, the Company plans to purchase or enter into lease  financing
for  approximately  $0.5 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

                                       24
<PAGE>

vertically  integrated MEMS users. Many of these competitors are larger than the
Company and have greater financial resources.  If the Company is unable to equal
or  surpass  its  competitors  in the area of  price,  performance,  quality  or
customer responsiveness, then the business will be unsuccessful.

      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

                                       25
<PAGE>

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
Company's  operating  results  have  been  adversely  affected  when  production
capacity is underutilized, and will likely be so affected in the future.

      PLANT EXCESS CAPACITY.

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

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

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

      INTERNATIONAL SALES IN THE FUTURE COULD EXPOSE THE COMPANY TO RISK.

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

           .    difficulties  in  collecting   accounts  receivable  and  longer
                collection periods;

           .    seasonal business activity in certain parts of the world;

           .    potentially adverse tax consequences;

           .    fluctuations in currency exchange rates;

                                       26
<PAGE>

           .    political and economic instability; and

           .    trade barriers.

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

      ENVIRONMENTAL LAWS AND REGULATIONS.

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

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

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

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

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

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

                                       27
<PAGE>


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

           .    stockholders have limited ability to remove directors;

           .    stockholders cannot call a special meeting of stockholders; and

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

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

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

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

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


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


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

None.

                                       28
<PAGE>

                                    PART III

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

      The following table provides information  concerning each of our directors
and executive officers:

                                  DIRECTOR
              NAME        AGE       SINCE             POSITION OR OFFICE
           ----------    ------   ---------          --------------------
John S. Foster             43        n/a      Chief Operating Officer
Peter T. Altavilla         48        n/a      Corporate Controller and Secretary
Harold R. Frank            76        1957     Chairman Emeritus and Director
Herbert M. Dwight, Jr.     70        1989     Director
Jerry E. Goldress          70        1995     Director
R.C. Mercure, Jr.          69        1982     Director

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

      Dr.  Foster  became  our  employee  in 1993.  He has served in a number of
management  positions for us, including  Managing  Director of our operations in
Penang, Malaysia and our Vice President of Worldwide Operations.  Dr. Foster was
appointed Chief  Operating  Officer on February 26, 1999. Dr. Foster has over 13
years of experience in the magnetic recording head industry.

      We have  employed  Mr.  Altavilla  since  1987.  He  served  as  Assistant
Controller  until August 1, 1994, when he was elected to his present position as
Corporate Controller. Mr. Altavilla was elected Secretary on February 9, 1996.

      Mr.  Frank,  our founder,  was named our Chairman  Emeritus on November 3,
1995. He is also director of Circon  Corporation,  a producer of endoscopes  and
ultra  miniature  color video cameras for medical and  industrial  applications,
Trust Company of the West, a financial institution,  and Key Technology, Inc., a
manufacturer of automated food processing systems.

      Mr.  Dwight  is, and for more than five  years has been,  Chairman  of the
Board of Directors of Optical Coating Laboratory,  Inc., which is engaged in the
design, development and production of precision optical thin film components. He
is also a director of Applied  Materials,  Inc., a wafer  fabrication  equipment

                                       29
<PAGE>

manufacturer,  and Advanced  Fiber  Communications,  Inc., a company  engaged in
providing telecommunications systems for local access.

      Mr.  Goldress is, and for more than five years has been,  Chief  Executive
Officer of Grisanti,  Galef & Goldress,  Inc. Mr. Goldress is also a director of
K2,  Inc.,  a  manufacturer  of snow skis and  fishing  tackle.  For  additional
information concerning the relationship between Grisanti, Galef & Goldress, Inc.
and us see "Certain Relationships and Related Transactions".

      Dr.  Mercure has since 1996 been Chairman and Chief  Executive  Officer of
CDM Optics,  Inc., a manufacturer  of optical  components and systems.  Prior to
1996 he was Professor and Director of the Engineering  Management Program at the
University of Colorado at Boulder. Dr. Mercure has been our Director since 1982.
He is also a director of Ball  Corporation,  a manufacturer of metal and plastic
containers.

      SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

ITEM 10 - EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

         The following table shows, as to the past acts in his capacity of chief
executive  officer and our only other executive  officer whose salary plus bonus
exceeded  $100,000 during the fiscal year ended September 29, 2001,  information
concerning  compensation  paid for services to us in all capacities  during that
fiscal year, as well as the total  compensation  paid to each such individual in
each of our preceding  two fiscal years (if such person was the Chief  Executive
Officer or an  executive  officer,  as the case may be,  during any part of such
fiscal year).
<table>
<caption>
                                                         Annual Compensation                 Long-Term Compensation
                                                  ----------------------------------------------------------------------------------
                                                                                            Awards           Payouts
                                                                                    --------------------------------------
                                                                         Other                   Securities
                                                                         Annual     Restricted   underlying               All Other
                                                                         Compen-       Stock        Options/   LTIP       Compen-
                                                   Salary    Bonus (3)   sation (1)  Awards (8)    SARs (3)   Payouts (3) sation (4)
   Name and Principal Position       Year            ($)        ($)         ($)          (#)        ($)       ($)            ($)
 -------------------------------- -------------- ----------- ----------- ---------- -----------  -----------  ----------- ----------
<S>                                    <C>        <C>                                                                        <C>
 John S. Foster                        2001       265,000
 Chief Operating Officer (2)           2000       265,000                                                                    47,587
                                       1999       164,000
------------------------------------------------------------------------------------------------------------------------------------
 Peter T. Altavilla                    2001       135,000
 Controller and Secretary              2000       135,000                                                                     6,524
                                       1999       135,000                                                                    36,417
------------------------------------------------------------------------------------------------------------------------------------
</table>

                                       30
<PAGE>

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

(2)   Acts as the Company's chief executive officer.

(3)   None granted.

(4)   Payments made for accrued vacation pay.

EMPLOYMENT AGREEMENTS

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

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

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

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

      Dr.  Foster and Mr.  Altavilla are parties to  indemnification  agreements
with the Company. These agreements provide, among other things, that the Company
shall (i) indemnify them against certain liabilities that may arise by reason of
their status as executive  officers  provided  they acted in good faith and in a
manner reasonably  believed to be in the best interests of the Company and, with
respect to any  criminal  action,  had no cause to  believe  their  conduct  was
unlawful,  (ii) to advance the expenses  actually and  reasonably  incurred as a
result of any proceeding  against them by third parties or by or in right of the

                                       31
<PAGE>

Company,  where the  indemnitee  acted in good faith in a manner the  indemnitee
believed to be in the best  interest of the Company  (subject to repayment if it
is determined that the indemnitee is not entitled to indemnification); and (iii)
to make a good faith attempt to obtain directors' and officers' insurance. There
is no  action  or  proceeding  pending  or,  to the  knowledge  of the  Company,
threatened  which may  result in a claim for  indemnification  by any  director,
officer, employee or agent of the Company.

COMPENSATION OF DIRECTORS

      No compensation was paid to directors during fiscal 2000 or fiscal 2001.

      The Company  pays to each  director  who is not employed by the Company an
annual retainer of $15,000 and $1,250 for each meeting of the Board of Directors
they attend. The Directors received no compensation for their services in fiscal
2000 or 2001.  Directors  who serve on  committees of the Board of Directors are
entitled to be paid $1,250 for attendance at meetings of such committees if they
occur on days other than on a regularly  scheduled board meeting day.  Directors
are also  reimbursed  for all expenses  incurred by them in their  capacity as a
director of the Company.  Directors  are not  compensated  for meetings  held by
teleconferencing facilities. The Board of Directors may modify such compensation
in the future.  In addition,  each  director  not employed by the Company,  upon
joining the Board of Directors,  receives an option to purchase  5,000 shares of
the Common Stock of the Company  and,  thereafter,  an option to purchase  5,000
shares of Common  Stock on the date of each annual  meeting at which such person
is  reelected to serve as a director.  Such options will have an exercise  price
equal to the fair  market  value of such  shares  on the date of  grant,  become
exercisable in two equal annual installments commencing on the first anniversary
of the grant thereof,  and expire on the tenth anniversary of the date of grant.
The Directors received no stock option grants in fiscal 2000 or fiscal 2001.



























                                       32
<PAGE>

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           SECURITY OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND
                                   MANAGEMENT

      The following  table contains  certain  information  regarding  beneficial
ownership of our common  stock as of September  29, 2001 by (a) each person that
we know owns  beneficially  more than 5% of our  common  stock,  (b) each of our
directors,  (c) our  Chief  Executive  Officer  and our two  other  most  highly
compensated  executive  officers  and (d)  all of our  directors  and  executive
officers as a group:
<table>
<caption>
                                                                        SHARES BENEFICIALLY     PERCENT OF
                             NAME                                               OWNED           CLASS (1)
<S>                                                                         <C>        <C>          <C>
Non-Employee Directors
     Herbert M. Dwight, Jr.                                                     40,000 (2)            0.1%
     Harold R. Frank.                                                          308,906 (2)(3)         0.4%
     Jerry E. Goldress.                                                         35,000 (2)            0.0%
     R.C. Mercure, Jr                                                           45,533 (2)            0.1%
Executive Officers:
     Craig Crisman                                                             119,643 (4)            0.2%
     John S. Foster                                                             23,256 (5)            0.0%
     Peter T. Altavilla                                                          7,858 (6)            0.0%
All Directors and Named  Executive  Officers as a Group (seven
     persons).                                                                 580,196 (7)            0.8%
Five Percent Stockholders:
     Kennilworth Partners II LP                                             50,345,898 (8)          45.26%
     The Chase Manhattan Bank, as Trustee for First Plaza                    5,123,797 (9)            7.3%
         Group Trust
     Guardian Life Insurance Co. of America                                  7,000,000                9.9%
------------------------------------------------------
</table>
(1)   Calculation  is based  upon the  number  of  shares  of our  common  stock
      outstanding on September 29, 2001, 70,574,306.

(2)   Includes, as to each of Messrs. Dwight and Mercure,  options,  exercisable
      within 60 days, to purchase 40,000 shares, and as to each of Messrs. Frank
      and Goldress,  options,  exercisable  within 60 days,  to purchase  35,000
      shares, in each case under our 1994  Non-Employee  Directors' Stock Option
      Plan.

(3)   Does not include 233,807 shares held by Wilmington Trust Company,  as sole
      Trustee under irrevocable  trusts for three of Mr. Frank's  grandchildren,
      as to all of which he disclaims any  beneficial  interest.  Includes 1,558
      shares  held by Mr.  Frank  as  custodian  under  the  California  Uniform
      Transfers to Minors Act, as to which shares he  disclaims  any  beneficial
      interest. Includes options, exercisable within 60 days, to purchase 35,000
      shares under the 1994 Non-Employee Directors' Stock Option Plan.

(4)   Includes options, exercisable within 60 days, to purchase 119,643 shares.

                                       33
<PAGE>

(5)   Includes  options  granted under  employee  stock option plans to purchase
      19,681 shares exercisable within 60 days.

(6)   Includes options, exercisable within 60 days, granted under employee stock
      option plans to purchase 5,000 shares.

(7)   Includes options, exercisable within 60 days, to purchase 294,324 shares.

(8)   Includes  options,  exercisable  within  60 days,  to  acquire  40,798,226
      shares.



      As of September 29, 2001, our stock is held of record by 1,847 persons.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.


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

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

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

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

         3.1     Amended and Restated Certificate of Incorporation.*

         3.2     Amended and Restated  Bylaws of  Innovative  Micro  Technology,
                 Inc.*

         4.1     Form of Warrant  Agreement  between  the  Company  and  Certain
                 Claimants Under the Plan of Reorganization.*

         4.2     Warrant  Agreement  between the Company and L-3  Communications
                 Corporation, dated August 1, 2002 (incorporated by reference to
                 Exhibit 4.1 to the Company's  Current  Report on Form 8-K filed
                 August 13, 2002).

         10.1    Change  in  Control  Agreement  between  the  Company  and John
                 Foster, dated April 15, 2002.*

         10.2    Change in Control  Agreement  between  the Company and Peter T.
                 Altavilla, dated April 15, 2002.*


                                       34
<PAGE>


         10.3    Form of Indemnification Agreement for directors and officers.*

         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.*

         10.6    Form of Stock Option Agreement under 2001 Stock Incentive
                 Plan.*

         10.7    Form of Restricted  Stock  Agreement under 2001 Stock Incentive
                 Plan.*

         10.8    Fixed  Rate Note of the  Company,  payable  to Owens  Financial
                 Group, Inc., dated December 20, 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.*

         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).

*Filed with this report.



          (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.

                                          INNOVATIVE MICRO TECHNOLOGY, INC.

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

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

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

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

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

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

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

                                       36
<PAGE>
                        Innovative Micro Technology, Inc.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Related Information


Financial Statements:

Independent Auditor's Report                                              F-2

Balance Sheet as of September 29 2001                                     F-3

Statements of Operations for the years ended September 29, 2001
and September 30, 2000                                                    F-4

Statements of Shareholders' Deficiency for the years ended
September 29, 2001 and September 30, 2000                                 F-5

Statements of Cash Flows for the years ended September 29, 2001
and September 30, 2000                                                    F-6

Notes to Financial Statements                                             F-7






















<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  balance sheet of Innovative Micro  Technology,
Inc.  (Debtor-in-Possession)  ("The  Company") as of September 29, 2001, and the
related  statements of operations,  shareholders'  deficiency and cash flows for
the years ended  September  29, 2001 and  September  30, 2000.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the financial  position of Innovative  Micro  Technology,  Inc. as of
September 29, 2001, and the results of its operations and its cash flows for the
years  ended  September  29, 2001 and  September  30,  2000 in  conformity  with
accounting principles generally accepted in the United States of America.

As discussed in Note 1, the Company has filed for  reorganization  under Chapter
11 of the Federal Bankruptcy Code. The accompanying  financial statements do not
purport  to  reflect  or  provide  for  the   consequences   of  the  bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as  to  assets,   their  realizable  value  on  a  liquidation  basis  or  their
availability  to satisfy  liabilities;  (b) as to prepetition  liabilities,  the
amounts  that may be  allowed  for  claims or  contingencies,  or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company;  or (d) as to operations,  the
effect of any changes that may be made in its business.

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.  Under the
plan of reorganization, the Company is required to comply with certain terms and
conditions as more fully described in Note 1.

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,  negative working capital,  and  shareholders'
deficiency  raise  substantial  doubt  about its  ability to continue as a going
concern.  Management's plans concerning these matters are also discussed in Note
1. The financial  statements do not include  adjustments  that might result from
the outcome of this uncertainty.

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

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

                                     ASSETS
<table>
<caption>
                                                                                 As of
                                                                           ---------------
                                                                             September 29,
                                                                                 2001
<S>                                                                        <C>      <C>
ASSETS
Current assets:
    Cash                                                                   $        1,697
    Accounts receivable, net of allowance for doubtful accounts of $11                733
    Inventories                                                                       454
    Prepaid expenses and other                                                        299
                                                                             -------------
Total current assets                                                                3,183
                                                                             -------------
Property, plant and equipment, at cost:
    Land                                                                            8,750
    Buildings                                                                      10,725
    Manufacturing equipment                                                         1,683
    Construction in progress                                                           23
                                                                             -------------
Total property, plant and equipment, at cost                                       21,181
    Less-accumulated depreciation and amortization                                 (1,215)
                                                                             -------------
Total property, plant and equipment                                                19,966
                                                                             -------------

Other assets                                                                        6,206
                                                                             -------------
Total assets                                                               $       29,355
                                                                             =============

LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
    Current portion of long-term debt                                      $        2,000
    Accounts payable                                                                  518
    Accrued payroll and benefits                                                      207
    Accrued audit and legal                                                         3,897
    Accrued property taxes                                                             63
    Deferred revenue                                                                  784
    Other current liabilities                                                          28
                                                                             -------------
Total current liabilities                                                           7,497
                                                                             -------------
Other long-term liabilities                                                           174
                                                                             -------------

Liabilities subject to compromise under reorganization proceedings                315,709

Shareholders' Deficiency:
    Preferred stock, $.10 par value, authorized 5,000,000 shares,
           none issued and outstanding                                                  -
    Common stock, $.10 par value, 120,000,000 shares authorized,
          70,574,306 shares issued and outstanding at September 29, 2001            7,057
    Paid-in capital                                                               345,100
    Accumulated deficit                                                          (644,601)
                                                                             -------------
                                                                                 (292,444)

  Treasury stock, at cost (130,552 shares at September 29, 2001)                   (1,581)
                                                                             -------------
Total shareholder's deficiency                                                   (294,025)
                                                                             -------------
Total liabilities and shareholder's deficiency                             $       29,355
                                                                             =============
The accompanying Notes to Financial Statements are an integral part of these statements.
</table>
                                      F-3
<PAGE>


                        Innovative Micro Technology, Inc
                            STATEMENTS OF OPERATIONS
                      (In Thousands, except per share data)
<table>
<caption>
                                                                For the Years Ended
                                                      -----------------------------------
                                                         September 29,    September 30,
                                                             2001             2000
                                                      ---------------    -------------
<S>                                                   <C>              <C>
Net sales
  MEMS and Other                                      $        2,498   $          452
  Rental income                                                  275                4
                                                       --------------    -------------
  Total                                                        2,773              456
Cost of sales
  MEMS and Other                                               6,303            4,027
  Rental income                                                  194               32
                                                       --------------    -------------
  Total                                                        6,497            4,059
                                                       --------------    -------------
   Gross loss                                                 (3,724)          (3,603)
                                                       --------------    -------------

Research and development expenses                                347              281
Selling, general and administrative expenses                   1,595            1,128
Impairment of long-lived assets                                2,465                -
                                                       --------------    -------------
   Loss from Operations                                       (8,131)          (5,012)
                                                       --------------    -------------

Interest income                                                   31                4
Interest expense                                              (1,472)          (4,582)
Gain on troubled debt restructuring bond conversion                -              882
                                                       --------------    -------------
   Other income (expense)                                     (1,441)          (3,696)

Reorganization Costs                                           2,255            2,008
                                                       --------------    -------------
  Loss from continuing operations before income taxes        (11,827)         (10,716)
Provision for income taxes                                         1                -
Discontinued operations, net                                       -          (23,048)
                                                       --------------    -------------

   Net loss                                           $      (11,828)  $      (33,764)
                                                       ==============    =============

Net loss per share:
   Loss from continuing operations per common share   $        (0.17)  $        (0.16)
   Discontinued operations, net                                 0.00            (0.33)
                                                       --------------    -------------
   Loss per common share - basic and diluted          $        (0.17)  $        (0.49)
                                                       ==============    =============

   Common shares - basic and diluted                          70,444           69,598
                                                       ==============    =============

The accompanying Notes to Financial Statements are an integral part of these statements.
</table>
                                      F-4
<PAGE>

                        Innovative Micro Technology, Inc
                     STATEMENTS OF SHAREHOLDERS' DEFICIENCY
                      (In Thousands, except share amounts)

<table>
<caption>
                                               Common Stock                                 Treasury Stock
                                      ---------------------------------              -------------------------------
                                                            Accumulated                                   Stock
                                       Number of             Paid-in     Accumulated  Number of        Subscription  Shareholders'
                                        Shares      Amount   Capital      Deficit      Shares   Amount   Receivable   Deficiency
                                      ------------ --------------------  ----------  ---------- ----------------------------------
<S>                                    <C>          <C>       <C>        <C>           <C>      <C>        <C>           <C>
Balance, October 2, 1999               65,026,634   $6,502    $333,927   $(599,009)    130,552  $(1,581)   $(1,200)      (261,361)
  Stock exchanged for 7% Convertible
      Debenture Bonds                   2,000,000      200       7,610                                                      7,810
  Stock exchanged for 14% Convertible
      Debenture Bonds                   3,547,672      355       1,645                                                      2,000
  Troubled debt restructuring bond
      conversion                                                 1,918                                                      1,918
  Net loss                                                                 (33,764)                                       (33,764)
                                      --------------------------------------------------------------------------------------------
Balance, September 30, 2000            70,574,306    7,057     345,100    (632,773)    130,552   (1,581)    (1,200)      (283,397)
                                      --------------------------------------------------------------------------------------------
  Stock Subscription Received                                                                                1,200          1,200
  Net loss                                                                 (11,828)                                       (11,828)
                                      --------------------------------------------------------------------------------------------
Balance, September 29, 2001            70,574,306   $7,057    $345,100   $(644,601)    130,552  $(1,581)   $    -       $(294,025)
                                      ============================================================================================

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

























                                      F-5

<PAGE>
                        Innovative Micro Technology, Inc
                            STATEMENTS OF CASH FLOWS
                                 (In Thousands)
<table>
<caption>
                                                                       For the Years Ended
                                                               -------------------------------
                                                                  September 29,  September 30,
                                                                     2001            2000
                                                                 --------------  -------------
<S>                                                            <C>             <C>
  Cash Flows from Operating Activities:
  Net loss                                                     $      (11,828) $      (33,764)
  Adjustments to reconcile net loss to net cash provided
    by operating activities:
      Loss from discontinued operations                                     -          23,048
      Gain on troubled debt restructuring bond conversion                   -            (882)
      Impairment of long-lived assets                                   2,465               -
      Depreciation and amortization                                     1,804             974
      Amortization of loan costs                                           24               -
      Gain on sale of  assets                                             (34)              -
      Bad debt provision                                                    4               -
      Non-cash interest                                                 1,427           4,576
      Non-cash property taxes                                             316             832
      Changes in assets and liabilities:
          Accounts receivable                                            (554)          1,021
          Inventories                                                    (454)              -
          Prepaid expenses and other                                      (75)            (44)
          Other assets                                                   (380)           (213)
          Accounts payable                                                294             224
          Accrued payroll and benefits                                     78            (671)
          Accrued property taxes                                           63               -
          Accrued audit and legal                                       2,160           1,609
          Deferred revenue                                                784               -
          Other current liability                                        (125)             69
          Other liabilities                                               174               -
----------------------------------------------------------------------------------------------
      Net cash flows used in continuing operations                     (3,857)         (3,221)
      Net cash flows used in discontinued operations                        -         (20,250)
----------------------------------------------------------------------------------------------
      Net cash flows used in operating activities                      (3,857)        (23,471)
----------------------------------------------------------------------------------------------
  Cash Flows from Investing Activities:
  Purchases of property, plant and equipment                             (103)         (3,102)
  Proceeds from sale of fixed assets                                    1,581           4,660
  Proceeds from sale of businesses                                          -           1,707
----------------------------------------------------------------------------------------------
      Net cash flows provided by investing activities                   1,478           3,265
----------------------------------------------------------------------------------------------
  Cash Flows from Financing Activities:
  Proceeds from note payable                                                -             100
  Repayment of note payable                                              (100)              -
  Proceeds from issuance of debt                                        2,000           7,625
  Debt issuance costs                                                     (84)              -
  Proceeds from issuance of convertible debentures                          -           5,000
  Expenses related to conversion of convertible debentures                  -            (190)
  Proceeds from stock issuance to investors                             1,200               -
----------------------------------------------------------------------------------------------
      Net cash flows provided by continuing operations                  3,016          12,535
      Net cash flows provided by discontinued operations                    -               -
----------------------------------------------------------------------------------------------
      Net cash flows provided by financing activities                   3,016          12,535
----------------------------------------------------------------------------------------------
Net increase (decrease) in cash                                           637          (7,671)
Cash at beginning of year                                               1,060           8,731
----------------------------------------------------------------------------------------------
Cash at end of year                                            $        1,697  $        1,060
----------------------------------------------------------------------------------------------
Supplemental Cash Flow Data:
Interest paid                                                  $            -               -
                                                                 =============   =============
Income taxes paid                                              $            1               -
                                                                 =============   =============
</table>
Supplemental Schedule of non-cash activities:

On October 7, 1999, the Company completed a private placement which provided the
Company with additional  financing of $5.0 million  through 2% convertible  debt
instruments.  This transaction also included conversion of $5M of 7% convertible
subordinated  debentures  due in  March  2006  with  an  adjusted  common  stock
conversion price of $16.15 to $2M of 2% convertible  debentures due in September
2004 with a common stock  conversion price of $1.00. The transaction was treated
as a troubled  debt  restructuring  under FAS 15  "Accounting  for  Debtors  and
Creditors for Troubled Debt  Restructurings".  The fair value  of the conversion
feature  of the newly  issues  debt was  calculated  as $1.9  million  using the
Black-Scholes  option pricing model;  assuming a  5.8% risk-free interest  rate,
anticipated  volatility  of 200%,  expected life  of 5 years  and zero  dividend
yield.  The $1.9 million was recorded as paid in capital. A gain of $0.9 million
was recorded on the exchange.

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

                                      F-6

<PAGE>

                        Innovative Micro Technology, Inc
                          NOTES TO FINANCIAL STATEMENTS

1.    Reorganization, Basis of Presentation

         Innovative Micro  Technology,  Inc. (the "Company") was incorporated in
California  in 1957 and was  reincorporated  in Delaware  in 1987.  Prior to the
commencement of the Chapter 11  Reorganization,  on January 7, 2000, the Company
operated in one industry segment namely,  components for the computer peripheral
industry  with one major  product  group,  recording  heads for hard disk drives
which are used in computer applications.

         The Company has incurred net losses and losses from operations for each
quarter since 1999. The Company filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code in January, 2000 and, on emergence from bankruptcy,  all of
the  previously  issued  and  outstanding  common  stock  was  canceled  without
consideration  to the holders.  The Company incurred net losses of $11.8 million
for the fiscal year ended  September  29, 2001.  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 Company exited its Chapter 11 Reorganization process on November 16,
2001  ("Effective  Date").  The  Company  will adopt 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 will be allocated to the Company's assets in
conformity  with the procedures  specified by SFAS No. 142,  "Goodwill and Other
Intangible Assets". As provided for under the Company's reorganization plan (the
"Plan"),  the Company will convert  approximately $185 million of debt discharge
and $131  million  of  trade  credit  and  operating  leases  to  equity  in the
reorganized entity.

         The  Company is in the  process of  implementing  the Plan.  One of the
steps of the Plan was the increase of a mortgage that is secured by the property
that the Company has for sale.  This loan was completed on January 3, 2002.  The
Company initially completed a short-term loan of $2.0 million in August 2001 and
increased  the amount to $5.4  million  as of  January 3, 2002.  The loan has an
annual  interest  rate of 12% and requires  interest  only monthly  payments for
three years. The loan is due on December 5, 2004 and is secured by the Company's
Hollister property.

        The  Company's  Malaysian  subsidiary  had credit  facilities  with five
Malaysian  Banks  ("Malaysian   Banks")  that  were  guaranteed  by  the  parent
corporation,  which provided them with a senior credit position to the Company's
note holders. Another provision of the Plan related to the treatment of these

                                      F-7

<PAGE>

subordinated  Note claims.  The  Company's  14% Note, 2% Notes and 7% Notes each
contain  subordination  provisions.  Pursuant to these  provisions the Malaysian
Banks,  the holder of the 14% Note, the holders of the 2% Notes, and the holders
of the 7% Notes have certain  Subordination Rights and Subordination Claims. The
Company  guaranteed  the bank  loans  for its  Malaysian  subsidiary.  A Warrant
Agreement  was developed to provide a method for the  subordinated  claimants to
participate in the  anticipated  future growth in value of the Company's  Common
Stock to be issued pursuant to the Plan ("New Common Stock").

         Pursuant to the Warrant Agreement, one million Warrants will be issued.
Each Warrant will represent the right:  (1) to purchase  0.946805  shares of New
Common Stock at a price per share of $20.00;  (2) to purchase 0.423822 shares of
New Common Stock at a price of $22.50 per share; (3) to purchase 0.509937 shares
of New Common Stock at a price of $27.50 per share;  and (4) to receive the Cash
Asset  Sale  Distribution,  as  defined  in the  agreement.  Each  Warrant  will
automatically vest upon issuance, and will be exercisable,  in whole or in part,
during the period of three (3) years from the Effective Date and will expire and
be of no  further  force and  effect  thereafter.  Each  Warrant  will be freely
transferable.  The total  number of new shares that the  warrants may convert to
during  this three year  period is  1,880,564.  Of the  4,500,000  shares of New
Common Stock to be issued under the Plan to the former creditors of the Company,
946,805  shares  will  have a  legend  identifying  them  as  being  subject  to
repurchase by the Company  during the three year period from the Effective  Date
by the Company at a price of $20.00 per share, 423,822 shares will have a legend
identifying  them as being  subject to  repurchase  during the three year period
from the  Effective  Date by the  Company  at a price of  $22.50  per  share and
509,937  shares  will  have a  legend  identifying  them  as  being  subject  to
repurchase  during the three year period from the Effective  Date by the Company
at a price of $27.50 per share.  The  shares  can be settled  with cash,  if the
Company is acquired by an independent third party. An additional  231,600 shares
will have a legend identifying them as being subject to repurchase at a price of
$0.01 per share in connection with a cash sale of the Company.  The Company will
be responsible for processing the Warrant  payment and the subsequent  mandatory
Call and  payment  for the  legend  shares.  This  process  does not  create any
additional  outstanding shares of stock for the Company.  The Company issues the
same number of new shares to the Warrant holders as it retires upon  transacting
the Call for the legend shares.

         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.

         Each  professional  person,  shall  receive on account of its  deferred
Allowed  Administrative  Claim (the  "Professional  Person's  Deferred Claim") a
convertible  note  for the  amounts  specified  in the  Plan:  monthly  interest
payments based upon 12% per annum,  simple  interest and payment on the two year
anniversary of the Effective  Date of an amount equal to the remaining  balance;
adjusted  by any  amount  converted  to the  Company's  new  common  stock.  The
convertible  note is  secured  by a lien on the  Company's  equipment  and  real
property.

                                      F-8

<PAGE>

         Pursuant to the Plan,  for a period  through the second  anniversary of
the  Effective  Date,  a  Professional  Person may elect to convert  its note to
shares of New Common  Stock based on the  Bankruptcy  assigned  entity  value of
$8.20 per share ($41 million valuation divided by 5 million shares of new common
stock).  The $41 million valuation was prepared by a third party, at the request
of the creditor committee.

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

         The Company's  three  additional  lines of business are: "Santa Barbara
Tool and Die,"  "Insight  Analytical"  and leasing of excess  space in its owned
facility  under  long-term  lease  contracts.   Santa  Barbara  Tool  and  Die's
technology permits high precision manufacturing of tooling, and the organization
features  electron-discharge  machining (EDM) which includes metals and ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal
properties.  Santa  Barbara Tool and Die and Insight  Analytical  are  strategic
parts of the  core  company  in that  their  services  are used to make the core
business  more  competitive  and both use the  capacity  that  exceeds  internal
Company  needs to  provide  services  to  outside  customers.  The  Company  has
approximately  51,000 square feet of building  space  available to lease.  As of
September 29, 2001,  approximately 34,000 square feet were under long-term lease
arrangements.

2.    Summary of Significant Accounting Policies

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

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

         Depreciation and Amortization Policies:  Property,  plant and equipment
are accounted for on a historical  cost basis and are  depreciated  or amortized
over their  estimated  useful lives using the  straight-line  method  except for
leasehold  improvements  which are  amortized  over the shorter of the estimated
useful life or the life of the lease.

                                      F-9

<PAGE>


Estimated useful lives are as follows:

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

         Depreciation  and  amortization  expense  from  continuing   operations
amounted to $1.8 million and $1.0 million in 2001 and 2000, respectively.

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

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

         Reorganization  Costs:  Expenditures directly related to the Chapter 11
filing are  classified  as  reorganization  costs and were expensed as incurred.
These  expenses   primarily   consist  of   professional   fees.  See  "Note  10
Reorganization Costs."

         Inventories:  Inventories  are  stated at the lower of cost  (first-in,
first-out  method)  or  market.  Market for  purchased  parts and  manufacturing
supplies is based on replacement  costs and for other inventory  classifications
on net realizable value. Inventory at September 29, 2001 was all work in process
of $0.5 million related to capitalized  cost under completed  contract method of
accounting as described below.

         Revenue  Recognition  and  Warranty  Policies:  The  Company  uses  the
completed contract method of accounting for its product development projects due
to  the  inability  to  accurately  estimate  percentage  of  completion  during
performance  of the  contract.  Costs are  capitalized  during  the  project  as
inventories  and  expensed  at its  completion  along  with the  recognition  of
revenue.  Santa Barbara Tool and Die delivers a finished product to the customer
and revenue is  recognized  at the time the product is shipped and title passes.
Insight  Analytical has service  related  revenue and this revenue is recognized
upon completion of the service for the customer.  The Company's MEMS development
contracts  do not have any  rights of  return.  Santa  Barbara  Tool and Die and
Insight  Analytical  did not have any sales returns in fiscal 2001 or 2000.  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.

                                      F-10

<PAGE>

         A portion of the  Company's  facilities  are  leased to  tenants  under
long-term  contracts.  The terms of the leases expire within the next five years
with  renewal at the  option of the  tenant.  Future  minimum  lease  income for
agreements as of September 29, 2001 are as follows (in thousands):



                                        Rental
                                        Income
                                        ------

2002                                 $   493
2003                                     493
2004                                     493
2005                                     493
Thereafter                               462
                                        ------
Total minimum income
                                        2,434
                                        =====

        Fair Value of Financial  Instruments:  The carrying  amounts of cash and
cash equivalents, customer receivables, trade accounts payable and other accrued
liabilities  approximate their fair value because of the short maturity of these
financial  instruments.  As  a  result  of  the  Company's  Chapter  11  filing,
instruments  included as liabilities subject to compromise are recorded at their
historical value,  however,  the liabilities will not be settled at this amount.
The  liabilities  not  under  compromise  approximate  fair  value  due to their
short-term nature or market rate of interest.

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

        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

                                      F-11

<PAGE>

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 accrued  liabilities,  valuation
allowances,  depreciation  and  amortization,  and state  franchise  taxes.  The
valuation allowance is reviewed periodically to determine the amount of deferred
tax asset considered realizable.

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

        During July 2001, SFAS No. 142, "Goodwill and Other Intangible  Assets,"
was issued by the Financial  Accounting Standards Board. SFAS 142 applies to all
acquired  intangible assets whether acquired singly, as part of a group, or in a
business  combination.  SFAS 142 specifies  that goodwill and  indefinite  lived
intangible  assets will no longer be  amortized  but instead  will be subject to
periodic impairment  testing.  Intangible assets with a determinable useful life
will  continue to be  amortized  over their  expected  lives.  The Company  will
implement  SFAS 142 beginning in its fiscal year 2003 and it has not  determined
the impact,  if any, that this statement will have on its financial  position or
results of operations.

        In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets",  was issued by the Financial  Accounting Standards Board.
SFAS 144  addresses  the  financial  accounting  and  reporting  issues  for the
impairment or disposal of long-lived assets. This statement  supersedes SFAS 121
but  retains  the  fundamental  provisions  for (a)  recognition/measurement  of
impairment  of  long-lived  assets  to be held and used and (b)  measurement  of
long-lived  assets to be disposed of by sales.  It is effective for fiscal years
beginning  after  December 15,  2001,  and interim  periods  within those fiscal
years. The Company is currently evaluating the provisions of SFAS 144 and it has
not  determined  the  impact,  if any,  that  this  statement  will  have on its
financial position or results of operations.

        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 Financial  Accounting Standards Board. The statement rescinds FASB
No. 4,  "Reporting  Gains  and  Losses  from  extinguishment  of  Debt,"  and an
amendment  of that  statement,  FASB No.  64,  "Extinguishments  of Debt Made to
Satisfy  Sinking  Fund  Requirements."  As  a  result,  gains  and  losses  from
extinguishment  of debt  will no  longer  be  aggregated  and  classified  as an
extraordinary  item,  net of related  income tax  effect,  in the  statement  of
operations.  Instead,  such gains and losses will be classified as extraordinary
items only if they meet the criteria of unusual or infrequently occurring items.
SFAS No. 145 also  requires  that gains and  losses  from debt  extinguishments,
which were classified as extraordinary  items in prior periods,  be reclassified
to  continuing  operations  if they do not meet the criteria  for  extraordinary
items.  The provisions  related to this portion of the statement are required to
be  applied  in  fiscal  years  beginning  after  May  15,  2002,  with  earlier
application encouraged. The Company is currently evaluating the provisions of

                                      F-12

<PAGE>

SFAS 145 and it has not determined the impact,  if any, that this statement will
have on its financial position or results of operations.

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

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

        The table below shows the sales by customer and indicates  that Fidelica
Microsystems,  Inc.  represented  34% and 19% of  fiscal  2001 and  2000  sales,
respectively.  The Company had accounts  receivable  from this same  customer of
approximately $0.3 million that represented  approximately 34% of total accounts
receivable at September 29, 2001.

Sales by Customer:
                                         For the Years
                                            Ended:
                                      -------------------- -- ------------------
                                            September 29,          September 30,
(As a percentage of sales)                   2001                    2000
                                      --------------------    ------------------
Fidelica Microsystems, Inc.                           34%                    19%
All Others                                            66%                    81%
                                      --------------------    ------------------
Total                                                100%                   100%
                                      ====================    ==================

        Prepaids and Other Current Assets:  The major components of prepaids and
other current assets include prepaid insurance of $0.1 million,  current portion
of deferred rent and realtor  commissions of $0.1 million  related to one of our
tenant  agreements  and $0.1 million of debt issuance  costs related to the $2.0
million short-term loan secured by the Company on September 5, 2001.

                                      F-13
<PAGE>

         Other Assets:  Other assets includes the following:

                                            Other
                                            Assets
                                           ($000's)

         Building held for sale             $ 5,500
         Deferred rent                          184
         Lease commission                       110
         Equipment deposit                       95
         Employee loans                          91
         Letter of credit                        87
         Insurance premium                       81
         Other                                   58
                                       ------------
         Total                              $ 6,206
                                       ============

        The building held for sale was initially  offered for sale in the summer
of 1999. The Company entered into a sale agreement with a buyer with the plan of
raising additional working capital, but the transaction was cancelled before the
end of 1999.  However,  shortly  after the Chapter 11 filing on January 7, 2000,
the Company  placed the building for sale again.  The Company is  continuing  to
market its Hollister  property for sale.  The asset is held in the MEMS business
segment.  The Company adjusted the carrying value to the expected sales price of
$5.5 million in fiscal 1999.  The Company  recognized a loss of $13.2 million in
fiscal 1999 due to this adjustment.

        Advertising:  The  Company  expenses  advertising  costs when  incurred.
Advertising expense was immaterial for both fiscal 2001 and 2000.

        Fiscal Year: The Company's  fiscal year ends on the Saturday  closest to
September  30.  Fiscal  years  2001 and 2000  ended on  September  29,  2001 and
September 30, 2000, respectively.

        Both fiscal year 2001 and 2000 included 52 weeks. References to years in
this annual report relate to fiscal years rather than calendar years.

3.    Segments of Business

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

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

                                      F-14
<PAGE>

in the  United  States  and 100% of the sales for  fiscal  2001 and 2000 were to
customers located in the United States.

        MEMS is an acronym for micro-electro-mechanical system, and MEMS devices
are  sometimes  referred to as  "micromachines."  Santa  Barbara  Tool and Die's
technology permits high precision manufacturing of tooling, and the organization
features  electron-discharge  machining (EDM) which includes metals and ceramics
capabilities.  Insight  Analytical's  laboratory  technology  includes  electron
microscopy  in a variety of forms and  features  operation of a focused ion beam
tool which can  precisely  make  three-dimensional  cuts in  samples  and reveal
detailed  information as to dimension,  material  makeup,  and material  crystal
properties.  The Company has approximately  51,000 square feet of building space
available to lease. As of September 29, 2001,  approximately  34,000 square feet
were under long-term lease arrangements. The Company is continuing to market its
Hollister property for sale.

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

        The following table  represents net sales,  gross profit (loss) and long
lived assets by segment (in thousands):
<table>
<caption>
($000's)                               Santa Barbara  Insight     Rental
                                MEMS   Tool and Die   Analytical  Income            Total
                        ---------------------------------------------------------------------
<S>                        <C>         <C>            <C>         <C>         <C>
2001

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

2000
Net sales                  $     195   $       234    $      27   $      -    $       456
                        =====================================================================
Intercompany Sales         $       9   $        48    $      74   $      -
                        =====================================================================
Gross (loss)               $  (3,541)  $       (43)   $     (19)  $      -    $    (3,603)
                        =====================================================================
Long Lived Assets          $  23,872   $       119    $     275   $      -    $    24,266
                        =====================================================================
</table>

        Capital  additions  for fiscal 2001 and 2000 were $0.1  million and $3.1
million,  respectively.  The fiscal  2001  additions  were  related to the Santa
Barbara Tool and Die portion of the business and the fiscal 2000  additions were
predominantly  related to the MEMS portion of the business with $0.2 million for
Insight Analytical.

                                      F-15
<PAGE>

        The  Company did not have any sales to  customers  outside of the United
States in fiscal 2001 or 2000.

4.    Income Taxes

        The provision for income taxes for the following  fiscal years  consists
of (in thousands):
<table>
<caption>
                                                                2001             2000
                                                            ------------     ------------
<S>                                                          <C>              <C>
Federal Income Taxes
   Current                                                   $        -       $        -
   Deferred                                                           -                -
State Income Taxes
   Current                                                            1                -
   Deferred                                                           -                -
                                                             ----------------------------
                                                             $        1             $  -
                                                             ============================
</table>
        Reconciliation  of the actual  provisions for income taxes to the income
tax calculated at the United States Federal rates for operations were as follows
(in thousands):
<table>
<caption>
                                                                2001             2000
                                                            ------------     ------------
<S>                                                          <C>              <C>
Income tax benefit at the United States federal
income tax rate                                              $   (4,022)      $   (2,785)
State income taxes, net of federal income tax benefit              (708)            (492)
Change in valuation allowance                                     4,731            3,277
                                                             ----------------------------
                                                             $        1      $         -
                                                             ============================
</table>
         The  components  of deferred  income  taxes at  September  29, 2001 and
September 30, 2000 are as follows (in thousands):
<table>
<caption>
                                                                2001             2000
                                                            ------------     ------------
<S>                                                          <C>              <C>
Net operating loss carryforwards                             $    6,708       $    3,277
Basis difference in property, plant and equipment                   986                -
Deferred revenue                                                    314                -
                                                             ----------------------------
     Subtotal                                                     8,008            3,277
Valuation allowance                                              (8,008)          (3,277)
                                                             ----------------------------
Total net deferred tax asset (liability)                     $        -       $        -
                                                             ============================
</table>
      SFAS 109 requires that all deferred tax balances be  determined  using the
tax rates and limitations  expected to be in effect when the taxes will actually
be paid or recovered.  Consequently,  the income tax provision  will increase or
decrease in the period in which a change in tax rate or  limitation  is enacted.
As of  September  29,  2001,  the Company had total  deferred tax assets of $8.0
million  compared  to $3.3  million at the end of fiscal 2000 for an increase of
$4.7 million.  The Company recorded a valuation  allowance in the amount of $8.0

                                      F-16
<PAGE>

million  and $3.3  million  at  September  29,  2001  and  September  30,  2000,
respectively,  against the amount by which  deferred tax assets exceed  deferred
tax  liabilities.  The change in valuation  allowance  was $4.7 million and $3.3
million for 2001 and 2000, respectively.  The valuation reserve at September 29,
2001 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.

        Under  the  terms  of the  bankruptcy,  the  Company  may not be able to
receive any benefit from previously accumulated net operating loss carryforwards
prior to the bankruptcy. Portions of the Company's pre-bankruptcy tax losses may
be eligible for use in future periods. The Company is currently evaluating these
amounts.  Since January 7, 2000, the Company has  accumulated net operating loss
carryforwards of  approximately  $16.8 million for federal tax purposes and $8.4
million for state tax  purposes as of September  29, 2001.  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  29,  2001,  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.    Liabilities Subject to Compromise:

        Liabilities   subject  to  compromise  consists  of  the  following  (in
thousands):

                                                                     As of
                                                                ----------------
                                                                 September 29,
                                                                      2001
Secured Liabilities:
Property Mortgage                                               $         10,375
Property taxes                                                             1,575
                                                                ----------------
                                                                          11,950
                                                                ----------------
Unsecured Liabilities:
Accounts payable trade                                                    10,661
Borrowings outstanding under:
         Offshore guaranteed bank loans                                   59,961
Accounts payable offshore subsidiary                                      45,582
7% convertible subordinated debentures                                    87,891
14% convertible debenture                                                 24,711
2% convertible debenture                                                  12,262
Operating leases                                                          55,217
Other accrued expenses                                                     7,474
                                                                ----------------
                                                                         303,759
                                                                ----------------
Total                                                                    315,709
                                                                ================

                                      F-17
<PAGE>

        The aggregate  principal  payments of secured  liabilities for the years
subsequent to September  29, 2001 is: 2002 - $0.8 million,  2003 and 2004 - $0.2
million, 2005 - $0.2 million, 2006 - $10.6 million.  These amounts relate to the
property tax and a property  mortgage,  which are secured by the two  California
properties  owned by the  Company.  The Plan calls for the  unsecured  liability
amounts  to be  converted  to New Common  Stock of the  Company.  The  long-term
liabilities of $0.2 million relate to the deposits the Company  received as part
of the lease arrangements with its tenants.

        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 $7.2 million in fiscal
2000 and $10.1 million in fiscal 2001.

6.    Debt

        In the first  quarter of fiscal  2000,  $5.0  million of 7%  convertible
subordinated  debentures  due in  March  2006  with  an  adjusted  common  stock
conversion  price of $16.15 were  converted  to $2.0  million of 2%  convertible
debentures due in September 2004 with a common stock  conversion price of $1.00.
The  transaction  was  treated as a  troubled  debt  restructuring  under FAS 15
"Accounting  for Debtors and Creditors for Troubled  Debt  Restructurings".  The
fair value of the conversion  feature of the newly issued debt was calculated as
$1.9 million  using the  Black-Scholes  option  pricing  model;  assuming a 5.8%
risk-free  interest  rate,  anticipated  volatility of 200%,  expected life of 5
years and zero dividend yield. The $1.9 million was recorded as paid-in capital.
A gain of $.9 million was  recorded on the  exchange.  The gain had an impact of
$.01 on earnings per share for fiscal 2000.

        On  September  5, 2001 the Company  completed a mortgage of $2.0 million
secured by one of its  California  properties.  The loan had a three  month term
with the ability to extend it for an additional  nine months.  The loan requires
interest-only  monthly  payments  at 12%  annual  interest  rate.  The loan also
provided an option for the Company to borrow an  additional  $3.4 million at 12%
annual  interest  rate with a three year term for the entire $5.4  million.  The
Company exercised this option in December of 2001 (see footnote 10).

7.    Commitments and Contingencies


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

                                      F-18
<PAGE>

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

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

        Purchase  commitments  associated  with capital  expenditures  were $0.4
million at September 29, 2001.

8.    Discontinued Operations

        In January 2000, the Company  developed  plans to  discontinue  its core
business of manufacturing  magnetic recording heads for hard disk drives used in
computer  applications.  After the  Company  filed for  Chapter  11,  plans were
developed and approved by the creditor's  committee to retain and use the assets
based in the United States for the manufacture of MEMS. 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  recorded a charge for  discontinued  operations of $23.0
million in the first fiscal quarter of 2000.  Discontinued  operations  included
approximately  $7.6 million of revenue and $30.6 million of expenses  associated
with the Company's former business of the manufacture of components for the disk
drive industry.

        During  fiscal  2000,  the  Company  completed  the sale of its  Applied
Magnetics  Korea,  LTD.  subsidiary to a private  group of investors.  The sales
proceeds  from  this   transaction   were  $1.7  million.   The  sales  proceeds
approximated  the  carrying  value of the assets  sold.  The  Company's  Applied

                                      F-19
<PAGE>


Magnetics (Malaysia) SDN. BHD. subsidiary was submitted to receivership in March
of 2000 and KPMG Corporate Services SDN. BHD. was appointed liquidator.

9.    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
matches one half of the first five percent of an employee's contributions.  This
matching  contribution  was less than $.1  million in both fiscal 2000 and 2001.
The  Company's  401(k) Plan has a provision  that  provides  management  with an
option  to make a  discretionary  contribution  to the plan.  Additionally,  the
Company has a profit sharing plan, in which all eligible employees  participate.
There was no  compensation  expense  recorded under the cash profit sharing plan
and the Company made no discretionary  401(k)  contributions  during fiscal 2000
and fiscal 2001 under this plan.

10.   Stock, Stock Option and Financing Transactions

        Restricted  Stock and Option  Program:  The  Company's  stock option and
long-term   incentive   plans  were   cancelled   as  part  of  the  Chapter  11
Reorganization Plan ("Plan").  The Company had approximately 3.8 million options
outstanding  as of the  Petition  Date.  The  Plan  provided  for  future  stock
incentives for the employees and directors of the Company.  Pursuant to the Plan
the Company, as of the Effective Date, adopted the Employee Restricted Stock and
Option  Program,  authorizing  the grant of  Employee  Restricted  Stock and New
Options to purchase  shares of New Common  Stock to employees as provided for in
the Employee  Restricted  Stock and Option  Program.  Pursuant to the Plan,  the
Company  will  issue as of the  Effective  Date,  from  time to  time,  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 are reserved
for the Employee  Restricted  Stock and the New Options to be issued pursuant to
the New  Employee  Restricted  Stock  and  Option  Agreement  and  the  Employee
Restricted  Stock and Option  Program.  There will be issued  500,000  shares of
Employee  Restricted  Stock and each class of New Options  shall  represent  the
right to purchase,  in the aggregate,  that number of shares of New Common Stock
as follows:

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

                                      F-20
<PAGE>

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

        Financing  transaction:   The  Company  completed  an  equity  financing
transaction with a strategic  investor on August 2, 2002 for $5 million in cash.
The Company  issued the investor  935,000  shares of common stock along with two
warrants.  The first  warrant has a term of eighteen  months and is  convertible
into 167,000  shares of common  stock at a price of $5.35 per share.  The second
warrant has a term of thirty six months and is  convertible  into 700,000 shares
of common stock at a price of $7.29 per share.

11.   Impairment of long lived assets.

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





















                                      F-21
<PAGE>

12.   Summarized Quarterly Financial Data (Unaudited)
<table>
<caption>
(In thousands, except per share data)
                                                                   Three months ended
                                                  December 30       March 31          June 30       September 29
                                              -------------------------------------------------------------------
<S>                                           <C>               <C>                <C>          <C>
Fiscal 2001
Net sales                                     $           446  $          730     $       770  $             827
Gross loss                                               (975)           (836)           (947)              (966)
Net loss                                               (2,168)         (2,287)         (2,200)            (5,173)

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

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

<caption>
                                                                   Three months ended
                                              -------------------------------------------------------------------
                                                   January 1         April 1           July 1       September 30
<S>                                           <C>               <C>                <C>          <C>
Fiscal 2000
Net sales                                     $              0  $          14     $       189  $             253
Gross loss                                                   0           (960)         (1,333)            (1,310)
   Loss  from continuing operations                    (2,524)         (2,495)         (2,894)            (2,803)
   Loss from discontinued operations                  (23,048)
Net loss                                              (25,572)         (2,495)         (2,894)            (2,803)

Net loss per share:
   Loss from continuing operations per
common share                                  $         (0.04)  $       (0.04)     $    (0.04)  $          (0.04)
   Discontinued operations, net                         (0.33)           0.00            0.00              (0.00)
   Loss per common share - basic and diluted            (0.37)          (0.04)          (0.04)             (0.04)

Weighted average number of common shares
outstanding:
   Common shares - basic and diluted                    66,976          70,444          70,444             70,444
</table>
















                                      F-22
<PAGE>
13. Unaudited Proforma balance Sheet

Innovative Micro Technology, Inc.

This schedule  displays the changes required to the Company's  balance sheet due
to the  confirmation  of the Company's  bankruptcy plan of  reorganization.  The
Company's plan of reorganization became effective on November 16, 2001.

Proforma Balance Sheet

 (In  thousands, except share and par value data)
<table>
<caption>
                                                          Pre       Exchange    Debt    Exchange
                                                       Confirmation  to Debt  Discharge of Stock  Fresh-Start  Adjusted
                                                       ----------------------------------------------------------------
<S>                                                   <C>           <C>       <C>       <C>       <C>        <C>
ASSETS
Current assets:
    Cash                                              $     1,697          -         -         -          - $  1,697
    Accounts receivable, net of allowance for doubtful
         accounts of $11                                      733          -         -         -          -      733
    Inventories                                               454          -         -         -          -      454
    Prepaid expenses and other                                299          -         -         -          -      299
                                                       ----------------------------------------------------------------
Total current assets                                        3,183          -         -         -          -    3,183
                                                       ----------------------------------------------------------------
Property, plant and equipment, at cost:
    Land                                                    8,750          -         -         -          -    8,750
    Buildings                                              10,725          -         -         - $   (1,215)   9,510
    Manufacturing equipment                                 1,683          -         -         -          -    1,683
    Construction in progress                                   23          -         -         -          -       23
                                                       ----------------------------------------------------------------
Total property, plant and equipment, at cost               21,181          -         -         -     (1,215)  19,966
    Less-accumulated depreciation and amortization         (1,215)         -         -         -      1,215        0
                                                       ----------------------------------------------------------------
Total property, plant and equipment                        19,966          -         -         -          -   19,966
                                                       ----------------------------------------------------------------
Other assets                                                6,206          -         -         -          -    6,206
                                                       ----------------------------------------------------------------
Total assets                                          $    29,355          -         -         -          - $ 29,355
                                                       ================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
    Current portion of long-term debt                 $     2,000 $      188         -         -          - $  2,188
    Accounts payable (1)                                      518      3,642         -         -          -    4,160
    Accrued payroll and benefits                              207          -         -         -          -      207
    Accrued audit and legal (2)                             3,897     (3,642)$    (127)        -          -      128
    Accrued property taxes (3)                                 63        635         -         -          -      698
    Deferred revenue                                          784          -         -         -          -      784
    Other current liabilities                                  28          -         -         -          -       28
                                                       ----------------------------------------------------------------
Total current liabilities                                   7,497        823      (127)        -          -    8,193
                                                       ----------------------------------------------------------------
Long Term Debt                                                  -     11,127         -         -          -   11,127
                                                       ----------------------------------------------------------------
Other long-term liabilities                                   174                    -         -                 174
                                                       ----------------------------------------------------------------
Liabilities subject to compromise under
reorganization proceedings  (4)                           315,709    (11,950) (303,759)        -          -        -

Shareholders' Deficiency:
    Preferred stock, $.10 par value, authorized
        5,000,000 shares, none issued and outstanding
        at September 29, 2001, no par value,
        2,500,000 shares authorized, none issued and
        outstanding "as adjusted for fresh start accounting."   -
    Common stock, $.10 par value, 120,000,000 shares
        authorized, 70,574,306 shares issued and
        outstanding at September 29, 2001, $.0001 par
        value, 25,000,000 shares authorized, 4,500,000
        to be issued "as adjusted for fresh start
        accounting."                                        7,057          -         - $  (7,057)         -        -
    Paid-in capital                                       345,100          -   303,886  (639,125)         -    9,861
    Accumulated deficit                                  (644,601)      (0.0)        -   644,601          -        -
                                                       ----------------------------------------------------------------
                                                         (292,444)      (0.0)  303,886    (1,581)         -    9,861
  Treasury stock, at cost (130,552 shares at
        September 29, 2001)                                (1,581)         -         -     1,581          -        -

Total shareholder's deficiency                           (294,025)      (0.0)  303,886         -          -    9,861

Total liabilities and shareholder's deficiency        $    29,355 $        - $       - $       - $        - $ 29,355
                                                       ================================================================
</table>
Notes:
(1) Professional fees associated with the Reorganization that were converted
      to a two year interest bearing convertible note in the second quarter of
      fiscal 2002.
(2) Secured county property taxes required to be paid in cash.
(3) Secured property mortgage required to be paid in cash per the terms
      of the original agreement.
(4) Unsecured liabilities that will be converted to equity and warrants in the
      reorganized Company.

                                      F-23