** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

| **ý**                                | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|-------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                      |
| **For the year ended December 31,  2002** |
|                                      |
| **OR**                                    |
|                                      |
| o                                         | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                      |                                                                                          |
|                                      | **Commission file number 0-22384**                                                            |

 

| **MICRO  COMPONENT TECHNOLOGY, INC.**                                      |
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| (Exact name of  registrant as specified in its charter)                    |
|                                                                       |   |   |
| **Minnesota**                                                              |   | **41-0985960** |
| (State or other  jurisdiction of  incorporation or organization)           |   | (I.R.S. Employer  Identification No.) |
|                                                                       |   |   |
|                                                                       |   |   |
| **2340 West County Road C, St. Paul,  Minnesota 55113**                    |
| (Address of principal  executive offices)                                  |
|                                                                       |
| Registrant’s telephone  number, including area code**(651) 697-4000** |
|                                                                       |   |   |
| Securities registered  pursuant to Section 12(b) of the Act: **None**      |
|                                                                       |
| Securities registered  pursuant to Section 12(g) of the Act:               |
| **COMMON STOCK, $.01 PAR VALUE**                                           |
| (Title of Class)                                                           |

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months, and (2) has been subject to such filing requirements for the past 90days.  Yes  ý No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§229.405 of this chapter) is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2). Yes o  No ý

 

The aggregate marketvalue of the common stock held by non-affiliates of the Registrant as of June28, 2002 (the business day of the Registrant’s most recently completed secondfiscal quarter), was $21.8 million based upon the closing price $2.498 on thatdate for the shares.

 

Number of shares outstanding of the Registrant’sCommon stock, as of****March 27, 2003****is 17,319,389.

 

DOCUMENTS INCORPORATED BYREFERENCE

 

Portions of the Registrant’s DefinitiveProxy Statement for the annual meeting of stockholders (the “Proxy Statement”)to be filed within 120 days after the Registrant’s fiscal year ended December31, 2002, are incorporated by reference into Part III.

 

 

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**MICRO COMPONENT TECHNOLOGY, INC.**

 

**TABLE OF CONTENTS**

 
| **PART  I**                                     |                                                                                              |
|-------------------------------------------------|---------------------------------------------------------------------------------------------------|
|                                            |                                                                                              |
| ITEM 1.                                         | Business                                                                                          |
|                                            |                                                                                              |
| ITEM 2.                                         | Properties                                                                                        |
|                                            |                                                                                              |
| ITEM 3.                                         | Legal Proceedings                                                                                 |
|                                            |                                                                                              |
| ITEM  4.                                        | Submission  of Matters to a Vote of Security Holders                                              |
|                                            |                                                                                              |
| **PART II**                                     |                                                                                              |
|                                            |                                                                                              |
| ITEM  5.                                        | Market  for Registrant’s Common Stock and Related Stockholder Matters                        |
|                                            |                                                                                              |
| ITEM 6.                                         | Selected Consolidated  Financial Data                                                             |
|                                            |                                                                                              |
| ITEM  7.                                        | Management’s  Discussion and Analysis of Results of Operations and Financial Condition       |
|                                            |                                                                                              |
| ITEM  7A.                                       | Quantitative  and Qualitative Disclosures About Market Risk                                       |
|                                            |                                                                                              |
| ITEM  8.                                        | Consolidated  Financial Statements and Supplementary Data                                         |
|                                            |                                                                                              |
| ITEM  9.                                        | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure             |
|                                            |                                                                                              |
| **PART III**                                    |                                                                                              |
|                                            |                                                                                              |
| ITEM  10.                                       | Directors  and Executive Officers of the Registrant                                               |
|                                            |                                                                                              |
| ITEM 11.                                        | Executive Compensation                                                                            |
|                                            |                                                                                              |
| ITEM  12.                                       | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholders Matters |
|                                            |                                                                                              |
| ITEM  13.                                       | Certain  Relationships and Related Transactions                                                   |
|                                            |                                                                                              |
| ITEM 14.                                        | Controls and  Procedures                                                                          |
|                                            |                                                                                              |
| ITEM 15.                                        | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                                 |
|                                            |                                                                                              |
| **Index to  Consolidated Financial Statements** |
|                                            |                                                                                              |
| Signatures and Certifications                   |

 

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**PART I**

 

This Form 10-Kcontains certain forward-looking statements. For this purpose, any statements contained in this Form 10-K that arenot statements of historical fact may be deemed to be forward-lookingstatements.  Without limiting theforegoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate”or “continue” or comparable terminology are intended to identifyforward-looking statements.  Thesestatements by their nature involve substantial risks and uncertainties, andactual results may differ materially depending on a variety of factors,including those set forth in the section below entitled “Risk Factors.”****

 

**ITEM1.  Business**

 

**General**

 

Unless the contextotherwise requires, references in this Report on Form 10-K to “MCT”, “ We”,“Us”, “Registrant” and the “Company” refer to Micro ComponentTechnology, Inc. and its consolidated subsidiaries. MCT was incorporatedin Minnesota on June 20, 1972, was reorganized as a Delaware corporationon June 28, 1983 and reorganized as a Minnesota corporation on November 6,1996.  MCT has three wholly owned activeoperating subsidiaries, Micro Component Technology Asia Pte. Ltd., (“MCTAsia”), MCT Asia (Penang) Sdn. Bhd., (“Penang”), and MCT Philippines, Inc(“Philippines”).  Our principalexecutive offices are located at 2340 West County Road C, St. Paul, Minnesota55113 and our telephone number at that location is (651) 697-4000.

 

Our trademarksused in this Form 10-K are:  MCT,Infinity Systems, Aseco, ***Tapestry***®, Smart Solutions, SmartMark, SmartSort,SmartTrak, Isocut, MCT 5100, MCT 7632, S-170 and S-130.  All other trademarks or trade names referredto in this Form 10-K are the property of their respective owners.

 

**Background**

 

On October 18, 1993, wecompleted an initial public offering of 2,200,000 shares of common stockresulting in net proceeds to us of $21.7 million.

 

On June 29, 1999,we acquired certain assets and assumed certain liabilities of the SystemsIntegration unit of FICO America, Inc., forming the Infinity Systems Divisionto develop and implement Manufacturing Execution Systems, and factory controlsystems to customers in the semiconductor industry.

 

On January 31,2000, we completed our acquisition of Aseco Corporation, a Massachusetts basedmanufacturer of handling equipment.  Theacquisition was structured as a stock-for-stock purchase and was accounted forusing the purchase method of accounting. The purchase price totaled $24.0 million, consisting of 2.6 millionshares of MCT common stock valued at $22.5 million issued to former Asecoshareholders and $1.5 million of acquisition-related costs.

 

On April 11, 2000, ourBoard of Directors elected to change our fiscal year end to a year ending onDecember 31, effective December 31, 1999. Our interim thirteen-week quarters each end on a Saturday.

 

On August 16, 2000, weissued 3,000,000 shares of common stock, and on September 18, 2000, we issued290,000 shares of common stock in a public stock offering.  Proceeds from the offering totaled $19.7 million.

 

On December 24, 2001, we issued $10.0 million of 10%Senior Subordinated Convertible Notes due in 2006 to a group of accreditedinvestors .  These Notes are convertibleinto MCT common stock at a conversion price equal to $2.60 per share.  The Notes are redeemable by MCT at any timeafter January 3, 2004 as long as the market price of our common stock equals orexceeds $3.90 per share.  Proceeds ofthe Notes, net of debt issuance costs, totaled $9.2 million.  Holders of the Notes have standardregistration rights if they convert the Notes to common stock.

 

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**Introduction**

 

We are a leading supplier of integrated automationsolutions for the global semiconductor test and assembly industry.  We offer complete and comprehensiveequipment automation solutions for the test, laser mark handling equipment,mark inspect, singulation, sort, and packaging for shipment portions of theback-end of the semiconductor manufacturing process that significantly improveour customers’ productivity, yield and throughput.  Our solutions include our series of integrated Smart Solutions,automated test handlers, factory automation software and equipment integrationservices.  Our customers include manyleading semiconductor companies such as Analog Devices, National Semiconductor,Agere, Phillips Semiconductor, Cypress Semiconductor and ST Microelectronics andmany of the leading back-end contract test and assembly companies includingAmkor and NS Electronics Bangkok.  Webelieve we have one of the world’s largest installed bases of handlers used totest semiconductor devices.

 

Semiconductor devices are becoming more complex andare characterized by shrinking semiconductor device sizes, miniaturizedpackaging, increased circuitry and larger wafer sizes.  These trends have led manufacturers to seeknew tools and new solutions to meet their demanding requirements.  We believe that our complete offering ofequipment automation products and services allows manufacturers to effectivelyaddress evolving process technologies and packaging formats, such as QFN (quadflat packages with no external leads) and miniaturized packaging.

 

Beginning in 1999, we broadened our strategy from thatof a test handler manufacturer to one of becoming a provider of comprehensiveequipment automation solutions for the back-end of the semiconductor manufacturingprocess.  Consistent with this newstrategy, we completed two acquisitions. Our acquisition of Infinity Systems in June 1999, a company involved inthe development of factory automation software, was integral to the developmentof our integrated equipment Smart Solutions product suite.  In January 2000, we completed our acquisitionof Aseco, which provided us with increased machine vision and roboticsengineering technology critical to the handling of strips and wafers.

 

**IndustryOverview**

 

The semiconductor device industry has growntremendously over the last decade. This growth has been driven by traditionalsemiconductor markets like personal computers and data processing, and morerecently by the proliferation of semiconductor devices in telecommunications,wireless communications, and consumer electronics, as well as Internetinfrastructure equipment.  However, thesemiconductor capital equipment market, in which we compete, has historicallybeen subject to cyclical periods of high growth and contraction.  In the latter part of 2000, thesemiconductor capital equipment market went into a deep and prolonged downturn,which has continued through 2002. Although the market appears to have stabilized, there are no assurancesthat it will return to its historical growth rates.

 

The process of semiconductor manufacturing is one ofthe most complicated and logistically challenging manufacturing processes inthe world.  An advanced semiconductordevice can travel thousands of miles and undergo as many as 500 productionsteps before completion.  Thesemiconductor device manufacturing process is traditionally divided into twoparts: the front-end, which includes wafer fabrication from raw materials to afinished wafer; and the back-end, which includes semiconductor device test,assembly and packaging.  Front-end andback-end manufacturing facilities are expected to run 24 hours a day, 7 days aweek to provide the productivity needed to meet the requirements of the market.

 

Initially, semiconductor manufacturers concentratedtheir efforts on improving the more expensive front-end wafer fabrication process.  They improved the front-end by firstautomating the individual production tools and more recently by integrating thevarious production tools through factory automation software.  Tool automation was significant because itreplaced most human handling of the wafers with robotics, resulting in dramaticallyincreased yields.  Factory automationsoftware is significantly improving productivity, yield and

 

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throughput in the front-end by utilizing powerful productionscheduling, materials handling and process tool control software.

 

Automation of back-end tools and facilities isseverely lagging the front-end.  Onlyrecently have manufacturers begun to seek automation solutions for the back-endproduction process.  This is because,historically, the cost of back-end assembly and test processes was only a smallportion of the total semiconductor device cost and traditional processes wereable to provide adequate throughput. Today the cost of back-end assembly and test per semiconductor deviceoften equals or exceeds the wafer fabrication cost per semiconductor device.  We believe that as manufacturers seek toraise the standards of yield, productivity, throughput and cost reduction inthe back-end, the growth rate of the newly developing back-end automationmarket could increase rapidly.

 

**TraditionalSemiconductor Manufacturing Process**

 

Semiconductor devices arrive for test in strip orwafer format, with each strip or wafer containing multiple individualdevices.  Until recently, mostsemiconductor manufacturers believed it was necessary to test individualsemiconductor devices after they were singulated, or cut from the strip orwafer, because singulation could result in damage or contamination to thesemiconductor devices.  However, as semiconductordevice and package sizes have shrunk, they have become extremely difficult tohandle individually.  For example,manufacturers’ chip scale packages, or CSPs, are nearly the same size as thedie they package.  Traditional handlingtools do not have the precision to adequately address the various semiconductordevice size and chip-scale packaging technologies demanded bymanufacturers.  As a result, handlingtools designed for singulated processes have become a bottleneck to throughput.

 

Manufacturers now acknowledge that post-testsingulation can be done, in certain package formats, without damage to thedevice.  This understanding permitsmanufacturers to process, handle, and test multiple devices while still instrip or wafer format.  Strip handlingincreases process flexibility by permitting the handling and testing of avariety of packages, substrates and semiconductor device sizes. In addition,strip handling significantly increases throughput by reducing the number ofprocess steps and by allowing the tester to easily test multiple semiconductordevices in parallel.  We believe that asmanufacturers seek to increase productivity, yield and throughput, they willincreasingly adopt strip test processing. Consequently, we believe strip test processing technology will becritical to any back-end automation strategy and will facilitate re-tooling ofmany back end processes.

 

In implementing broader automation strategies in theback-end, manufacturers face other significant challenges besides the developmentof strip processing tools.  For example,production tools in the back-end historically have not communicated well withone another, if at all, and the transitions between production steps have notbeen integrated.  This lack ofcommunication and integration has prevented back-end manufacturers fromrealizing many of the benefits of factory automation and has prevented thecollection of critical process data.

 

**OurSolution**

 

We seek to provide ourcustomers comprehensive equipment automation solutions for their test and assemblyprocesses.  By deploying our productsand services, our customers are able to improve their production yields,factory throughput, tool productivity and utilization while reducing productcost.  The key components of oursolution are:

 

• Tapestryseries automated strip handler,

• SmartSolutions integrated equipment product series,

• InfinitySystems factory automation software and equipment integration services; and

• Completeline of traditional test handlers for singulated processes.

 

Our solution provides the following benefits to our customers:

 

 

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***Flexibility to address new form factors, including wafersand strips.***  Webelieve that our Tapestry handler is one of the first handlers capable ofprocessing semiconductor devices in strip or wafer formats.  Tapestry provides increased flexibility,permitting the handling and testing of a variety of packages, substrates andsemiconductor device types.  Dependingon the application, we believe that our Tapestry handler’s throughput capabilityis three to ten times greater than existing singulated handling optionsavailable today.

 

***Ability to collect critical process data. ***Our Smart Solutionsequipment products utilize our factory automation software to provide both thehardware and software necessary to accurately track important yield events inthe test and assembly portion of the back-end process.  We use state-of-the-art machine visiontechnology to accurately track all semiconductor devices as they travel throughthe test and assembly processes.  Thistechnology is not only critical to the precise positioning of strips, but alsoenables our software to generate critical process data.  This information, together with yieldinformation obtained in the assembly process and the front-end facility, canprovide real-time data on the entire semiconductor manufacturing process foreach wafer, giving manufacturers the information they need to improve theirprocesses and increase their yields.

 

***Deployment of integrated, comprehensive solutions.***  Our suite of equipment automation tools,software products and services addresses the varied automation needs ofindividual back-end manufacturing facilities. Our factory automation software has the ability to integrate productiontools from various manufacturers into one total solution.  This allows our customers to fulfill asignificant portion of their test and assembly automation needs through asingle supplier, thereby simplifying training, maintenance, capacity expansionand supplier accountability.

 

***Worldwide service and support engineering.***  We provide worldwide service and supportengineering to our customers as part of the purchase of all of our products,which includes comprehensive installation support. As our products haveexpanded to offer greater functionality, we have provided applicationengineering support so that our customers can take advantage of these advancesto improve their processes.

 

**Strategy**

 

Our objective is to bethe leading supplier for the newly developing market of automated solutions forthe semiconductor test and assembly market. Key elements of our strategy include:

 

***Providing comprehensive automated solutions.***  Today, we provide equipment automationsolutions for the test and assembly portion of the semiconductor manufacturingprocess, including test, laser mark handling products, mark inspect,singulation, sort, and packaging for shipment. In addition, we are expanding our automation solutions to includeequipment integration solutions compatible with products from a greater numberof other equipment manufacturers such as trim, form and singulation systemproviders.  We have enhanced thesoftware component of our automation solutions by adding data analysis andreport generating capabilities to increase our customer’s ability to improvetheir manufacturing process.  In thefuture we plan to expand the Smart Solution suite of products to handle otherprocesses within the semiconductor test and assembly area.

 

***Capitalizing on emerging chip scale packaging, or CSP,process development.*** Our Smart Solutions and Tapestry products already meet initial chipscale package process requirements through strip handling.  However, the vast numbers of new chip scalepackages, recently introduced, have imposed additional requirements onsemiconductor test and assembly processes, including the ability to performmulti-pass testing and stacked die testing. As a leader in providing equipment automation solutions that addresschip scale packaging technologies, we are continuing development ofnext-generation handling and equipment automation solutions for advancedsemiconductor device packaging.

 

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***Strengthening key customer relationships.***  Our customers include many of the world’sleading providers of semiconductor devices as well as major third-party testand assembly companies.  We expect thatour customers will look to us to help resolve their process as well asautomation problems throughout the back-end.  As we solve our customers’ diverse needs, we will deepen our present customerrelationships and also build our knowledge base so that we can develop similarrelationships with others in the semiconductor manufacturing industry.

 

***Leveraging our strong sales and service capability.***  We predominantly sell our products throughour direct sales force and have established sales and service offices in theworld’s major centers of semiconductor manufacturing including Penang, Malaysiaand in the Philippines.  In addition toour sales and service engineers, we have several applications engineers in keycustomer support locations.  We haveplaced software engineers in several Asian locations to directly supportInfinity Systems’ pursuit of factory automation software sales.

 

***Continuing to develop and support existing singulated testhandling solutions and products.***  We believe that we have one of the largestinstalled bases of traditional test handlers in the world.  We intend to support our customers who usesingulated test handling with new product introductions for specialtyapplications.

 

# **Products**

 

***AutomationProducts***

 

Our Smart Solutionsequipment suite of products, once integrated with a tester, are designed toautomate the entire test process from the point where the semiconductor deviceshave been packaged, through test, laser mark, inspection, singulation and sort,to the point of shipment to the customer. Our Smart Solutions product family offers semiconductor manufacturersgreater flexibility, yield and throughput. These products are designed to meet the back-end semiconductormanufacturer’s demand for greater production efficiency, lower cost of test andmanufacturing flexibility.  Thefollowing table sets forth our key automation product offerings by category,date introduced and application.

 
| **Automation Product Category** |   | **Product  Name**                   |   | **Introduced**        |   | **Applications**                                                                                                                                                                           |
|---------------------------------|--------|-------------------------------------|--------|-----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |   |                                |   |                  |   |                                                                                                                                                                                       |
| Smart Solutions                 |   | Tapestry                            |   | February 1999         |   | A next generation handling system for semiconductor  devices that are in strip or wafer package formats.                                                                                   |
|                            |   | Isocut                              |   | May 2000              |   | Automated system to partially singulate chip scale  packages in strip format, electrically isolating the semiconductor devices to  accommodate test.                                       |
|                            |   | SmartMark                           |   | May 2000              |   | An automated high-speed laser marker for integration  with strip handling or for marking strips with 2D codes.                                                                             |
|                            |   | SmartSort                           |   | May 2000              |   | A high speed sorter for offloading chip scale  packages when integrated with singulation function.                                                                                         |
|                            |   | SmartTrak                           |   | May 2000              |   | Software management system providing a map with information  about each semiconductor device in the strip.                                                                                 |
|                            |   | Input/Output Module (Slotted)       |   | February 1999         |   | Automatic loading and unloading module of strips  contained in a slotted magazine assembly.                                                                                                |
|                            |   | Input/Output Module (Stacked)       |   | May 2000              |   | Automated loading and unloading of strips contained  in a stacked magazine assembly.                                                                                                       |
| Automation Software             |   | Infinity Systems Software Solutions |   | Acquired in June 1999 |   | Manufacturing software control systems for  semiconductor assembly and test plants including equipment integration  through overall factory and corporate information systems integration. |

 

***Smart Solutions****.*  Our Smart Solutions equipment product family was introduced tomeet the anticipated evolution of back-end manufacturing from singulatedhandling to strip processing through the final stages of assembly andelectrical test.  Additionally, ourSmart Solutions products are designed with electronic strip

 

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mapping capability as a cornerstone. As high-density semiconductor strips with tiny chip scale packagesbecome the standard, electronic strip mapping addresses the problem of manuallytracking individual semiconductor devices within the strip.  The new Smart Solutions systems providecustomers enhanced performance in either stand-alone or integrated assemblylines.  The current average sellingprice for Smart Solutions products vary from $300,000 for a single module toapproximately $1.5 million for a system that includes all of the components.

 

Tapestry, our strip handling system introduced inFebruary 1999, is the flagship of the Smart Solution product family.  Tapestry is a versatile, high volume,parallel test handling and thermal conditioning system for semiconductordevices that are in strip format. Thermal conditioning is required to ensure that a semiconductor devicecan operate normally in a wide range of temperatures.  Tapestry can condition devices at temperatures ranging from –40degrees centigrade to +130 degrees centigrade. The system is capable of handling fine pitch chip scale packages as wellas traditional leaded semiconductor devices in strip format.  Using standard industry interfaces, thesystem is designed to function as a stand-alone system, or can be integratedinto an in-line process with our other Smart Solution products or equipment ofother manufacturers.

 

SmartMark, our intelligent laser marking system,offers customers a method for marking individual semiconductor devices uniquelywithin strip according to their corresponding electronic strip map.  SmartMark utilizes a commercial laser systemand two-dimensional reader.  We alsoprovide an optional vision system for post-mark inspection.

 

SmartSort, our high-speedintelligent sorting system, allows customers to sort devices from a strip accordingto the electronic strip map and place semiconductor devices in a variety offinal packaging media for shipment to customers.  This new capability is especially critical for smallsemiconductor devices such as chip scale packages due to their size anddifficulty in handling.  SmartSortutilizes an innovative multi-site device picking approach, which providesincreased throughput advantages as compared to existing sorting methods.  Off-load options for SmartSort include bulk,tray, tube or tape.  Other optionsinclude vision inspection and wash and dry for the saw based system.

 

Our suite of SmartSolution equipment products includes additional modules to assist companies inautomating the back-end of the semiconductor manufacturing process using thenew strip format.  These include theIsocut module for electrical isolation of semiconductor devices in order toallow them to be tested in strip form. We also have input/output devices for both slotted and stacked magazinesused with strips.

*** ***

***Automation Software. **** *InfinitySystems Software Solutions provide highly sophisticated systems integrationservices to the semiconductor test and assembly industry.  Infinity Systems’ solutions assist customersin creating either new manufacturing environments or implementing new methodsand control systems in existing ones. These installations allow previously isolated stand-alone equipment toexchange information with other equipment and provide for remote monitoring andcontrol of these systems.  Ourengineering experience, efficient software development process, strong projectmanagement and our understanding of semiconductor handling systems allow us toassist customers in specifying equipment behavior and software interfaces as aproactive component of the design and procurement process.

 

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***Singulated HandlingProducts***

 

We also provide more traditional singulated handlingproducts utilizing both pick-and-place and gravity-feed technology.  As a result of our shift in product strategyto strip-based solutions,  we will buildour singulated products only when a sales order exists and if technologypermits.  We continue to support theseproducts for our installed base of systems for consumable and spare parts.

 
| **Singulated Handling Products** |   | **Product  Name** |   | **Introduced** |   | **Applications**                                                                                                                                                                           |
|----------------------------------|--------|-------------------|--------|----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Pick and Place                   |   | 7632              |   | May 1997       |   | Multiple site test handler for a wide variety of semiconductor  devices, able to present up to 32 semiconductor devices for test  simultaneously, utilizing tray or tube input and output. |
| Gravity Feed                     |   | 5100              |   | December 1996  |   | High-speed dual site test handler for small outline  surface-mount packages, utilizing tube input and output.                                                                              |
|                             |   | 5105              |   | July 2002      |   | Optimized system for testing RF devices based on the  5100 design.                                                                                                                         |
|                             |   | S-170             |   | September 1997 |   | Single site test handler for large surface-mount packages,  utilizing tray input and output.                                                                                               |
|                             |   | S-130             |   | January 1987   |   | Single site test handler for small outline  surface-mount packages, utilizing tube input and output.                                                                                       |
|                             |   | 4610              |   | April 1985     |   | Dual site test handler for large surface-mount packages,  utilizing tube input and output.                                                                                                 |

 

We continue to supportour pick and place handling systems that are in place at customer sites;however, we do not design new systems for shipment.  Spare products associated with these lines continue to bemaintained.

 

Our gravity-feedhandling products are designed for test handling of surface mount semiconductordevices that are transported in bulk or in plastic tubes.  Our handlers rely on gravity to moveuntested semiconductor devices from the top of the handler, where thetemperature of the semiconductor device is modified to temperatures ranging from–55 degrees centigrade to +155 degrees centigrade, depending on the handler, tothe test site and then to the output bins based on the quality of thesemiconductor device.

 

Our 5100/5105 gravityfeed handlers are capable of testing one or two devices in parallel withthroughput of up to 14,400 devices per hour with an index time of only 0.5seconds.  It can be configured to handlea variety of devices with several different kits for varying customerrequirements.

 

***Other Products and Services***

 

We provide service and spare parts for all of ourcurrent and many of our discontinued products. We have also done significantbusiness in support services for a semiconductor device tester that is stillwidely used but that was last manufactured by us in 1993.

 

**Research and Development**

 

As an important elementof our business strategy, we work closely with our customers to develop newproducts and enhancements of existing products to meet the evolving needs ofthe test and assembly market, particularly with respect to emergingsemiconductor devices, while striving to provide the lowest cost of test.  These efforts, historically focused on testhandler products, have resulted in the successful introduction of several newproduct platforms including, our 5100, S-130 and S-170, the Tapestry striptesting and associated handling modules. In May 2000, we launched our SmartSort and SmartMark products, which areaimed at the automation of a number of the back-end processes and expand ourcapabilities beyond the core test handler markets.

 

Although we relyprimarily on our internal engineering capabilities to develop new products andenhance existing products, we also utilize contract services to enhance ourtechnical capabilities or temporarily expand our

 

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resources.  Inaddition, we work closely with several manufacturers of products that areincorporated into our products or are complementary to our products when webelieve a higher quality, lower cost product would result.

 

An ongoing goal of our research and developmentactivities is to reduce the time required to develop new products and bringthem to market.  As the back-end processbecomes increasingly automated and complex, the development of improvedsoftware for our products becomes increasingly important.

 

Ourresearch and development expenses were $4.2 million, $7.9 million, and $9.3million in the years ended December 31, 2002, 2001 and 2000, respectively.  Our combined resources totaled 27employees and contractors in research and development, or approximately 24% ofour entire workforce, at December 31, 2002.

 

**Customers**

 

Our customers include many of the leadingmanufacturers of semiconductor devices, as well as test and assembly companiesin the United States, Europe and Asia. In recent years, our significant customers have shifted from the majorsemiconductor manufacturers to test and assembly companies, corresponding tothe increased utilization of test and assembly companies by the major semiconductormanufacturers.  Analog Devices andNational Systems accounted for 16% and 15% of our shipments, respectively, inthe year ended December 31, 2002.  Amkor Technology, Inc. accounted for 17%, AnalogDevices 13% and Phillips Semiconductor 11% of our shipments in the year endedDecember 31, 2001, respectively.  AmkorTechnology, Inc. accounted for 14% of our shipments in the year ended December31, 2000.

 

Our customers tend to limit the number of qualifiedequipment vendors they purchase from in order to gain the efficiencies of standardizationacross their production process.  Wetherefore expend substantial efforts to maintain our relationships with ourexisting major customers to increase the likelihood that they will continue toselect our products for their future generations of semiconductor devices.  However, when a customer develops a new typeof semiconductor device or the customer changes the size or package for asemiconductor device, the customer is more willing to consider purchasing testhandling equipment and other automation equipment from a new source.

 

**Marketing,Sales and Worldwide Support**

 

We market our products primarily to semiconductormanufacturers and third party test and assembly companies through our own salesforce and in selected markets through independent sales representatives anddistributors.  Our automation solutions,however, are marketed directly by our employees to the key personnel at customersand potential customers who are in charge of capital equipment for the entireback-end.  These sales frequentlyinvolve major decisions by the customer as to the configuration and operationof its entire back-end operation. Although in some situations the sales cycle for Smart Solutions productsmay be longer than for our traditional handler products and the average orderamount is generally larger.

 

We augment our sales efforts with direct customersupport/service engineers and application engineers based in the field.  These engineers are specialists in ourproduct portfolio and partner with our customers to help determine productrequirements.  Our service engineersinstall our equipment and train the customers’ operators and maintenancetechnicians on the proper use and care of our equipment.  Our application engineers help identifyemerging markets for new products.

 

We established a presence in Asia more than 20 yearsago, where we operate through our subsidiaries with offices in Singapore andPenang, Malaysia.  To supplement theregion’s sales and service coverage, we use sales representative companies anddistributors in Korea, Taiwan and China. We also established an office in the Philippines to provide better salesand service support and the establishment of a software development group.  We have stationed service engineers inSingapore, Malaysia, Thailand and the Philippines for rapid response tocustomer needs in Asia.

 

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**Manufacturingand Suppliers**

 

In 2002, we began the transition of our high volumemanufacturing operations from our St. Paul, Minnesota facility to Penang, Malaysia.  It is our belief that our new Malaysianoperations will provide cost savings as well as an increased presence in ourprime sales geographical area.  Wecombine proprietary software and components developed in our facilities withcomponents and subassemblies obtained from outside suppliers.  We have established relationships withsuppliers in Malaysia which allow us to out-source manufacturing of our componentsto a number of different suppliers. We do not maintain any long-term supplyagreements with any of our key suppliers.

 

**Competition**

 

The semiconductor device testing and assemblyequipment industry is highly competitive, and the market for our automation productsand services is expected to become more competitive.  We face substantial competition throughout the world primarilyfrom manufacturers in Asia, the United States and Japan.  The only companies that we are aware of thatcurrently offer a production grade strip handling solution comparable to ourTapestry product are Fico BV, ASM International, Tesec and Cohu, Inc., whoseproducts were introduced between 1995 and 2002.  Fico’s product line currently is used only for leadedsemiconductor devices.  However, we areaware that other companies are developing strip handling solutions, some haveshipped beta versions to customers, and we expect other companies will offerautomation systems for the back-end when strip testing technology becomes moreaccepted.  Our primary competitors inthe traditional handler market are Advantest Corporation, Aetrium Incorporated,Cohu, Inc., Multitest Electronics Systems GmbH, and Rasco AG.  Many of these competitors are considerablylarger and have considerably greater financial resources than we do.

 

The principal elements of competition in our marketsinclude throughput capability, quality, reliability, price, productperformance, customer service and support, financial strength, versatility andthe ability to deliver on schedule. Although we believe that we compete favorably with respect to each ofthese factors, new product introductions by our competitors could cause adecline in sales or loss of market acceptance of our existing products.  If competitors introduce moretechnologically advanced products, the demand for our similar products wouldlikely be reduced.

 

**IntellectualProperty Rights**

 

We attempt to protect the proprietary aspects of ourproducts with patents, trademarks and copyrights, as well as contractual andother trade secret protection strategies. We have six patents issued and active, three patent applications pendingin the U.S., and two patent applications pending within the internationalpatent treaty.

 

We have developed and are using a number oftrademarks, slogans and other commercial symbols to advertise and sell our products.  We own two federally registered trademarks,and have four trademark applications pending in the U.S. Patent and TrademarkOffice.  Our proprietary computerprograms are protected under federal copyright law as unpublished originalworks.  We also maintain the secrecy ofour software source codes through licensing and other restrictions.

 

We frequently review ourinventions and attempt to determine which inventions will provide substantialdifferentiation between our products and those of our competitors.  In certain cases, we may also choose to keepan invention or process a trade secret. Key employees are required to enter into nondisclosure and invention assignmentagreements, and customers, vendors and other third parties also must agree tonondisclosure restrictions prior to disclosure of our trade secrets or otherconfidential or proprietary information.

 

The intellectual property position of anymanufacturer, including us, is subject to uncertainties and may involve complexlegal and factual issues.  Allowedclaims for our existing or future patents issued may be challenged, invalidatedor circumvented, and any rights granted by those patents may not provide uswith

 

11

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adequate protection. Additionally, it may be possible for competitors or customers to copyaspects of our products or to obtain information that we may regard as a tradesecret.  Litigation may be necessary inthe future to enforce our patents and other intellectual property rights or todefend us against claims of infringement.

 

**Backlog**

 

At December 31, 2002,our backlog of unfilled orders for which a purchase order number has been assignedby the customer and for which a delivery schedule has been specified was $3.1million. At December 31, 2001 our backlog was $1.7 million.  Our backlog of unfulfilled orders was $10.6million at December 31, 2000.  Asignificant portion of the backlog at December 31, 2002, is expected to beshipped in the next two quarters.  Sincea large majority of the shipments made in a given quarter are usually madeduring the latter part of the quarter, and since a significant portion ofshipments in a given quarter are booked during that same quarter, backlog as ofa date in the middle of the quarter will typically be greater than backlog atquarter end.  All orders are subject tocancellation by the customer with limited charges.  Our backlog at a particular date is not necessarily indicative ofactual sales for that or any succeeding period and does not reflect the effectsof the SEC’s Staff Accounting Bulletin No. 101 (SAB 101) discussed in ourrevenue recognition policy in Note 1 of Notes to Consolidated FinancialStatements included elsewhere herein.

 

**Employees**

 

At December 31, 2002, we had a total of 109 employeesplus 3 contract personnel, in the following areas: 38 in manufacturing, 27 inengineering and research and development, 27 in sales, marketing, applicationengineering and service, and 20 in administration.  Our workforce declined approximately 25%, 7%, 30% and 8% in eachof the 2002 quarters at the time, respectively, due to staff reductions as aresult of the continued downturn in the semiconductor capital equipmentmarket.  These reductions were acrossall functional areas.  Many of ouremployees are highly skilled, and we believe our future success will depend inlarge part on our ability to attract and retain similar employees.  None of our employees are covered by acollective bargaining agreement, and we have experienced no work stoppages.  We consider our relationship with ouremployees to be good.

 

**Seasonalityin Quarterly Operating Results**

 

During each quarter, wecustomarily sell a relatively small number of systems that carry a high averageselling price.  Although we believe oursales are not seasonal in nature, a small change in the number of productsordered and/or shipped and accepted in a quarter can have a significant impacton results of operations for that particular quarter.  Moreover, production difficulties could delay shipments.  Accordingly, our operating results may varysignificantly from quarter to quarter and could be adversely affected for aparticular quarter if shipments and customer acceptances for that quarter werelower than anticipated.  Our quarterlyoperating results may also be affected by, among other factors, the timing ofnew product introductions, fluctuations in the semiconductor market and theactions of competitors.

 

**FinancialInformation about Foreign and Domestic Operations and Export Sales**

 

We operate in threegeographic areas.  Summarized data forour operations are included in Note 10 of Notes to Consolidated FinancialStatements, included elsewhere herein.

 

**ITEM 2.  Properties**

 

We occupy approximately 69,000 square feet of leasedspace in St. Paul, Minnesota, for our principal executive offices and researchand product development activities.  InMay 2000, we notified our landlord of our intent to exercise our one-timeoption to lease the remaining additional 11,000 square feet within the samebuilding, beginning twelve to twenty-four months later, at a date to bemutually determined.  This lease expiresin 2007.  In June 2001, we announced ourplans to transfer manufacturing operations from our St. Paul facility to ouroperations in Penang, Malaysia. Consequently, we are actively pursuing sub-letting the majority of spacein our

 

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St. Paul facility.  We occupyapproximately 54,000 square feet of leased space in Penang, Malaysia, which isutilized as a manufacturing center for our mature products.  This lease expires in June 2003, which webelieve we will be able to extend for a minimum of one year.  We operate our Infinity Systems division outof approximately 10,000 square feet of leased space in Tempe, Arizona, forsoftware and equipment automation systems development.  This lease expires in June 2003.  We believe that our current and committedfacilities are adequate to support our growth for at least the next twelvemonths.

 

**ITEM3.  Legal Proceedings**

 

There are no materialpending legal, governmental, administrative or other proceedings to which weare a party.

 

**ITEM4.  Submission of Matters to a Vote ofSecurity Holders**

 

There were no matterssubmitted to a vote of security holders during the quarter ended December 31,2002.

 

**PART II**

 

**ITEM5.  Market for Registrant’s Common Stockand Related Stockholder Matters**

 

On May 20, 2002, TheNASDAQ Stock Market, Inc. (“Nasdaq”) notified us that we failed to meet thestandards for continued listing of our common stock on the Nasdaq NationalMarket.  On August 8, 2002, we had ahearing before Nasdaq at which we presented a plan to meet those standards andrequested Nasdaq to suspend its action to give us time to complete theplan.  On September 5, 2002, in responseto this meeting, Nasdaq notified us of its decision to transfer the listing ofour securities to the Nasdaq SmallCap Market effective with the open ofbusiness on September 10, 2002. Further, certain financial covenants with respect to equity maintenancewere set forth that were required to be met by October 31, 2002 to maintain theNasdaq SmallCap Market listing.  We wereunable to meet those requirements.  OnNovember 6, 2002, Nasdaq notified us that effective November 7, 2002 oursecurities would be de-listed from the Nasdaq SmallCap Market and would begintrading on the OTC Bulletin Board under the symbol MCTI.  The following table sets forth, for theperiods indicated, the high and low closing sale prices per share of our commonstock, as reported by the OTC Bulletin Board, the Nasdaq SmallCap Market andthe NASDAQ National Market for the applicable periods.

 
|                           |   | **High** |   | **Low** |   |
|--------------------------------|--------|----------|--------|---------|--------|
| Year ended Decenber  31, 2002: |   |     |   |    |   |
| First Quarter                  |   | $        | 3.92   |    | $      | 2.50 |   |
| Second Quarter                 |   | 4.47     |   | 1.95    |   |
| Third Quarter                  |   | 2.49     |   | 0.50    |   |
| Fourth Quarter                 |   | 1.04     |   | 0.27    |   |
|                           |   |     |   |    |   |
| Year ended December  31, 2001: |   |     |   |    |   |
| First Quarter                  |   | $        | 5.25   |    | $      | 2.37 |   |
| Second Quarter                 |   | 4.40     |   | 2.12    |   |
| Third Quarter                  |   | 2.99     |   | 1.46    |   |
| Fourth Quarter                 |   | 2.98     |   | 1.50    |   |

 

The approximate number ofholders of record of our common stock as of December 31, 2002 was 251.

 

We have never declared orpaid any cash dividends on our common stock and do not anticipate paying anycash dividends in the foreseeable future. We currently intend to retain future earnings to fund the developmentand growth of our business.  Under theNote Purchase Agreement  associated withthe issuance of

 

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the 10% Senior Subordinated Convertiable Notes(discussed in Note 6 in Notes to Consolidated Financial Statements containedelsewhere herein)  we are prohibitedfrom paying dividends.

 

**ITEM6.  Selected Financial Data**

 

**SELECTED CONSOLIDATED FINANCIAL DATA**

 
|                                                 |   | **Years  Ended**                          |    | **Six Months  Ended** |       | **Fiscal Years Ended** |       |
|------------------------------------------------------|--------|-------------------------------------------|---------|-----------------------|------------|------------------------|------------|
|                                                 |   | **Dec. 31,  2002**                        |    | **Dec. 31,  2001**    | ** ** | **Dec. 31,  2000**     | ** ** | **Dec. 31,  1999** | ** ** | **Dec. 31,  1999** | ** ** | **Dec. 31,  1998** | ** ** | **June 26,  1999** | ** ** | **June 27,  1998** | ** ** |
|                                                 |   | **(in thousands, except per share data)** |    |                  |       |                   |       |   |   |   |   |
| **Consolidated  Statement of Operations Data:**      |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Net sales                                            |   | $                                         | 12,211  |                  | $          | 25,406                 |       | $ | 49,902 |   | $ | 19,839 |   | $ | 11,356 |   | $ | 6,688 |   | $ | 15,171 |   | $ | 16,975 |   |
| Cost of sales:                                       |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Product                                              |   | 7,604                                     |    | 15,832                |       | 26,905                 |       | 9,485 |   | 5,452 |   | 3,506 |   | 5,539 |   | 9,595 |   |
| Inventory  revaluation                               |   | 913                                       |    | 8,092                 |       | 3,979                  |       | — |   | — |   | — |   | 2,000 |   | — |   |
| Total cost of  sales                                 |   | 8,517                                     |    | 23,924                |       | 30,884                 |       | 9,485 |   | 5,452 |   | 3,506 |   | 7,539 |   | 9,595 |   |
| Gross profit                                         |   | 3,694                                     |    | 1,482                 |       | 19,018                 |       | 10,354 |   | 5,904 |   | 3,182 |   | 7,632 |   | 7,380 |   |
| Operating  expenses:                                 |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative                 |   | 8,556                                     |    | 10,864                |       | 16,177                 |       | 7,423 |   | 4,296 |   | 3,152 |   | 6,279 |   | 7,871 |   |
| Research and  development                            |   | 4,214                                     |    | 7,859                 |       | 9,271                  |       | 2,864 |   | 1,496 |   | 1,432 |   | 2,800 |   | 3,711 |   |
| Amortization of  intangible assets                   |   | —                                    |    | 2,632                 |       | 4,308                  |       | 10 |   | 10 |   | — |   | — |   | — |   |
| Write-down of  impaired intangible assets            |   | —                                    |    | 9,298                 |       | 3,405                  |       | — |   | — |   | — |   | — |   | — |   |
| Restructuring  charges                               |   | 207                                       |    | 2,444                 |       | —                 |       | — |   | — |   | — |   | — |   | — |   |
| Income (loss)  from operations                       |   | (9,283                                    | )       | (31,615               | )          | (14,143                | )          | 57 |   | 102 |   | (1,402 | ) | (1,447 | ) | (4,202 | ) |
| Other income  (expense)                              |   | (1,047                                    | )       | 196                   |       | (46                    | )          | (7 | ) | 19 |   | 7 |   | (19 | ) | 323 |   |
| Income (loss)  before income taxes                   |   | (10,330                                   | )       | (31,419               | )          | (14,189                | )          | 50 |   | 121 |   | (1,395 | ) | (1,466 | ) | (3,879 | ) |
| Income tax  provision                                |   | —                                    |    | —                |       | —                 |       | — |   | — |   | — |   | — |   | — |   |
| Net income  (loss) before cumulative effect          |   | (10,330                                   | )       | (31,419               | )          | (14,189                | )          | 50 |   | 121 |   | (1,395 | ) | (1,466 | ) | (3,879 | ) |
| Cumulative  effect of change in accounting principle |   | —                                    |    | —                |       | (1,264                 | )          | — |   | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |   | $                                         | (10,330 | )                     | $          | (31,419                | )          | $ | (15,453 | ) | $ | 50 |   | $ | 121 |   | $ | (1,395 | ) | $ | (1,466 | ) | $ | (3,879 | ) |
| Basic earnings  (loss) per share:                    |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                               |   | $                                         | (0.73   | )                     | $          | (2.24                  | )          | $ | (1.23 | ) | $ | 0.01 |   | $ | 0.02 |   | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.54 | ) |
| Cumulative  adjustment                               |   | —                                    |    | —                |       | (0.11                  | )          | — |   | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |   | $                                         | (0.73   | )                     | $          | (2.24                  | )          | $ | (1.34 | ) | $ | 0.01 |   | $ | 0.02 |   | $ | (0.19 | ) | $ | (0.20 |   | $ | (0.54 | ) |
|                                                 |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Diluted earnings  (loss) per share:                  |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Continuing  operations                               |   | $                                         | (0.73   | )                     | $          | (2.24                  | )          | $ | (1.23 | ) | $ | 0.01 |   | $ | 0.02 |   | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.54 | ) |
| Cumulative  adjustment                               |   | —                                    |    | —                |       | (0.11                  | )          | — |   | — |   | — |   | — |   | — |   |
| Net income  (loss)                                   |   | $                                         | (0.73   | )                     | $          | (2.24                  | )          | $ | (1.34 | ) | $ | 0.01 |   | $ | 0.02 |   | $ | (0.19 | ) | $ | (0.20 | ) | $ | (0.54 | ) |
|                                                 |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Proforma net  loss (1)                               |   | —                                    |    | —                |       | —                 |       | $ | (462 | ) | $ | (563 | ) | $ | (1,309 | ) | $ | (1,316 | ) | $ | (4,002 | ) |
|                                                 |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Proforma net  loss per share:                        |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |   | —                                    |    | —                |       | —                 |       | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.18 | ) | $ | (0.18 | ) | $ | (0.55 | ) |
| Diluted                                              |   | —                                    |    | —                |       | —                 |       | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.18 | ) | $ | (0.18 | ) | $ | (0.55 | ) |
|                                                 |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average  shares outstanding:                |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                |   | 14,125                                    |    | 14,027                |       | 11,531                 |       | 7,435 |   | 7,474 |   | 7,394 |   | 7,396 |   | 7,248 |   |
| Diluted                                              |   | 14,125                                    |    | 14,027                |       | 11,531                 |       | 7,682 |   | 8,144 |   | 7,394 |   | 7,396 |   | 7,248 |   |
|                                                 |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| **Selected  Balance Sheet Data:**                    |   |                                      |    |                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                           |   | $                                         | 1,560   |                  | $          | 11,086                 |       | $ | 12,047 |   | $ | 1,045 |   | $ | 1,045 |   | $ | 2,260 |   | $ | 1,927 |   | $ | 2,532 |   |
| Working capital                                      |   | 2,861                                     |    | 12,907                |       | 22,347                 |       | 6,386 |   | 6,386 |   | 6,199 |   | 6,255 |   | 7,385 |   |
| Total assets                                         |   | 7,753                                     |    | 21,341                |       | 51,023                 |       | 10,324 |   | 10,324 |   | 9,103 |   | 9,900 |   | 11,226 |   |
| Long -term debt                                      |   | —                                    |    | 33                    |       | 37                     |       | 70 |   | 70 |   | 58 |   | 33 |   | 83 |   |
| Convertible  notes                                   |   | 10,000                                    |    | 10,000                |       | —                 |       | — |   | — |   | — |   | — |   | — |   |
| Total  stockholders’ equity                     |   | $                                         | (5,794  | )                     | $          | 4,377                  |       | $ | 35,592 |   | $ | 7,256 |   | $ | 7,256 |   | $ | 7,005 |   | $ | 6,952 |   | $ | 8,400 |   |
|                                                      |        |                                           |         |                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Notes:

 

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(1)     Proforma amounts reflect theimpact of the adoption of SAB 101, which is discussed in Note 2 in Notes toConsolidated Financial Statements, included elsewhere herein.

 

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**ITEM7.  Management’s Discussion and Analysisof Results of Operations and Financial Condition**

 

*Thefollowing discussion of our results of operations and financial conditionshould be read together with the other financial information and consolidatedfinancial statements included in this document.  This discussion contains forward-looking statements that involverisks and uncertainties.  Our actualresults could differ materially from those anticipated in the forward-lookingstatements as a result of a variety of factors, including those discussed in“Risk Factors” and elsewhere in this document.*

 

**Overview**

 

We supply equipment automation solutions for theglobal semiconductor test and assembly manufacturing market.  Our solutions include automated testhandlers, factory automation software and our new integrated Smart Solutionsequipment product line.  We believe thatour products can significantly improve the productivity, yield and throughputof the back-end, or to the post-wafer manufacturing process, includingassembling, packaging, testing and singulating semiconductor devices.

 

Beginning in 1999 andcontinuing into 2000, we broadened our strategy from that of a test handler manufacturerto becoming a provider of comprehensive equipment automation solutions for theback-end of the semiconductor manufacturing process.  First, we developed and introduced in February 1999 our Tapestrystrip handler.  Tapestry combines striphandling capability with robotics, machine vision technology and criticalsoftware, enabling the testing and tracking of semiconductor devices in stripform and the generation of critical process data throughout the testprocess.  Second, in June 1999 weacquired the Infinity Systems division of Fico.  Infinity Systems has been involved in the development of factoryautomation software for the semiconductor manufacturing industry.  Infinity Systems’ software expertise wasintegral to the development of our integrated Smart Solutions equipment productline, introduced in May 2000.  Togetherwith a third party tester, our Smart Solutions equipment products including ourTapestry handler enable complete automation of the test, laser mark, markinspect, singulation, sort-and-tape and reel processes.

 

The demand for our products and services is dependentupon growth in the semiconductor industry and the increasing automation needsof semiconductor manufacturers and independent test and assemblyfacilities.  In the fourth quarter of2000, the semiconductor industry went into a sharp downturn, which intensifiedand continued through 2002, resulting in a significant adverse impact on ourbusiness.  Although worldwide semiconductorbookings are showing signs of stabilization, the return to market growth cannotbe predicted in the short term.  Asdisclosed in our Form 10-K for the year ended December 31, 2001 and each of ourForms 10-Q for the first three quarters of 2002, a continued or intensifiedmarket downturn might result in significant losses, charges for inventoryrevaluation, or asset impairment or restructuring charges.  Consequently, as a result of this downturn,in addition to the actions taken in 2001, we took the following steps in 2002:

* *

*Workforce and Facility Cost Reductions*

 

During the firstquarter, we reduced our workforce across all functional areas by approximately25% at the time, resulting in a restructuring charge of $323,000.  This charge reflected severance and otherbenefits costs associated with this reduction. This workforce reduction affected an additional 44 employees,principally in the areas of manufacturing, sales and marketing and engineering.

 

During the secondquarter, we further reduced our workforce by 7% at the time, resulting in arestructuring charge of $199,000.  Thischarge reflected severance and other benefit costs associated with the reduction,which affected 9 employees across all functional areas.  We also completed a lease settlementagreement related to our Marlborough, Massachusetts’ facility.  This agreement required us to pay $450,000or approximately 35% of the outstanding lease obligation, which was to runthrough April 2003.  As of December 31,2002, the full amount of this settlement has been paid.

 

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During the third quarter,as a result of the ongoing transfer of our core manufacturing operations to ourPenang, Malaysia facility, we incurred a restructuring charge of $345,000,representing severance and other benefit costs associated with furtherreductions to our workforce.  Thisreduction was implemented in the third and fourth quarters of 2002 and affecteda total of 38 employees or 30% of our workforce at the time, across allfunctional areas.

 

During the fourthquarter, we further reduced our workforce, resulting in a restructuring chargeof $14,000, representing severance and other benefit costs associated with thisreduction, which affected a total of 9 employees, or 8% of our workforce at thetime, primarily within sales and marketing.

 

Our totalworkforce as of December 31, 2002, was 109 employees compared to 173 employeesat December 31, 2001, for a net reduction of 64 positions or 37% of theDecember 31, 2001 positions.  As aresult of the transfer of our manufacturing to Penang, Malaysia, we haveincreased positions at that location to support those operations.  Our costs of labor in Penang, Malaysia is onaverage one-fifth of our historical labor cost in the United States.  As a result of this shift in labor forcesand the reductions in the United States we are expecting an overall decrease inlabor costs in 2003 relative to 2002 benefiting all functional areas of ourbusiness.

 

*Inventory Revaluation*

 

During the fourthquarter, we recorded a charge to our inventory of $913,000 to adjust ourinventory to the lower of cost or market. This adjustment related to our excess inventory of older singulatedtechnology, which has declined in usage as a result of the continued downturnin the semiconductor capital equipment market.

 

Most industryforecasts do not predict capacity-driven purchases of capital equipment torecover before late 2003 or early 2004. Therefore, we will continue to examine opportunities to further reduceour costs through the consolidation of operations, limiting capitalexpenditures, monitoring inventory purchases or additional strategicrestructuring initiatives.  Certain ofthese types of actions have the potential for further charges in futureperiods.  The continued contraction ofthe semiconductor capital equipment market has the potential to have a materialadverse effect on our financial condition, results of operations, and cashflows.

 

*Acquisition of Aseco Corporation*

 

On January 31, 2000, wecompleted the acquisition of Aseco Corporation, a Massachusetts-based manufacturerof singulated handling equipment for the back-end of the semiconductormanufacturing process.  The acquisitionwas structured as a stock-for-stock purchase and Aseco is now a wholly ownedsubsidiary of MCT.  The purchase pricetotaled $24.0 million, consisting of 2.6 million shares of our****commonstock valued at $22.5 million issued to former Aseco shareholders and $1.5million of acquisition-related costs.

 

The acquisition was accounted for using the purchasemethod of accounting.  The results ofoperations of Aseco are included in our consolidated financial statementsbeginning January 31, 2000.  Thepurchase price was allocated based on the estimated fair values of net assetsacquired at the date of acquisition. The excess of purchase price over net assets acquired, amounting to $9.7million, was allocated to goodwill, and was being amortized using astraight-line method over the estimated useful life of five years.  Other intangible assets, includingestablished workforce, customer list, and core and developed technology,totaling $9.9 million, were being amortized using the straight-line method overthe estimated useful lives of two to five years.

 

As a result of the industry downturn in the fourthquarter of 2000, we reduced the carrying values of goodwill by $2.5 million andpurchased intangible assets by $0.9 million, due to impairment of these assetsin the fourth quarter of 2000.  In thethird quarter of 2001, due to the continuing industry downturn and a shift inproduct strategy from singulated products to strip testing, we reduced theremaining carrying values of goodwill and purchased intangible assets by $4.4million and $4.9 million, respectively. This impairment charge reduced all amounts of goodwill and purchasedintangible assets associated with the Aseco acquisition to zero as of December31, 2001.

 

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**CriticalAccounting Policies**

 

*Revenue Recognition*

 

Under SAB 101, we recognizerevenue upon shipment, as our terms are FOB shipping point, for established equipmentproducts that have previously satisfied existing customer performance specificationsand that provide for full payment tied to shipment.  Revenue for products that have not previously satisfied customerperformance specifications or from sales where all or a portion of customerpayment is based upon acceptance are only recognized upon customeracceptance.  As such, in periods ofincreasing shipments, revenues will be deferred if the shipments are for newcustomers, new products or the payment terms are tied to acceptancecriteria.  Consequently, if theseconditions exist, we may report revenue levels that are not reflective ofactual shipment growth rates. Conversely, in periods of decreasing shipments, we potentially couldrecognize revenues related to shipments made in prior periods.  Consequently, if these conditions exist, wemay report revenue levels that are greater than actual shipments.

 

*Allowance for Doubtful Accounts*

 

We record a provision fordoubtful accounts based on specific identification of our accounts receivable.This involves a degree of judgment based on discussion with our internal salesand marketing groups, our customer base and the examination of the financialstability of our customers.  There canbe no assurance that our estimates will match actual amounts ultimately writtenoff.  During periods of downturn in themarket for semiconductor capital equipment or economic recession, a greater degree of risk exists concerning theultimate collectability of our accounts receivable due to the impact that theseconditions might have on our customer base. For the year ended December 31, 2002, we charged approximately $106,000against the allowance for accounts receivable write-offs that we deemed to beuncollectible.

 

*Valuationof Inventories*

 

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

 

Provisions to reduceinventories to the lower of cost or market are made based on a review of excessand obsolete inventories through an examination of historical componentconsumption, current market demands and shifting product technology.  Significant assumptions with respect tomarket trends and customer product acceptance are utilized to formulate ourprovision methods.  Sudden or continuingdownward changes in the semiconductor capital equipment market may cause us torecord additional inventory revaluation charges in future periods.  In the fourth quarter of 2002, we recorded a$913,000 charge reflecting an adjustment to our inventory to lower of cost ormarket based on these methods.  Thischarge represents excess inventory and relates to products with our older singulatedtechnologies.

 

*AccruedWarranty*

 

We provide a standardthirteen month warranty program for our equipment products. We recordprovisions for warranty claims for these products based upon historical claimperformance.  This approach has

 

17

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been applied since the inception of the warrantyprogram and involves a degree of subjectivity in that historical performance isused to estimate future warranty claims. At December 31, 2002, the warrantyaccrual was reduced to $200,000 from $400,000 at December 31, 2001, reflectingestimated furture claims.  Thisreduction is directly attributable to the decrease in net revenues of 51.9%from the year ended December 31, 2001 to the year ended December 31, 2002.  There can be no assurance that our estimateswill match the actual amount of future warranty claims.

 

**Resultsof Operations**

 

The following table setsforth, for the periods indicated, certain items in our statements of operationsas a percentage of net sales:

 
|                                                 |   | **Years Ended**    |   |
|------------------------------------------------------|--------|--------------------|--------|
|                                                 |   | **Dec. 31,  2002** |   | **Dec. 31,  2001** |   | **Dec. 31,  2000** |   |   |
| Net sales                                            |   | 100.0              | %      | 100.0 | % | 100.0 | % |   |
| Cost of sales                                        |   | 69.7               |   | 94.2 |   | 61.9 |   |   |
| Gross profit                                         |   | 30.3               |   | 5.8 |   | 38.1 |   |   |
| Operating expenses:                                  |   |               |   |   |   |   |   |   |
| Selling, general and  adminstrative                  |   | 70.1               |   | 42.8 |   | 32.4 |   |   |
| Research and  development                            |   | 34.5               |   | 30.9 |   | 18.6 |   |   |
| Amortization of  intangible assets                   |   | —             |   | 10.4 |   | 8.6 |   |   |
| Write-down of impaired  intangible assets            |   | —             |   | 36.6 |   | 6.8 |   |   |
| Restructuring charge                                 |   | 1.7                |   | 9.6 |   | — |   |   |
| Total operating  expenses                            |   | 106.3              |   | 130.3 |   | 66.4 |   |   |
| Loss from operations                                 |   | (76.0              | )      | (124.5 | ) | (28.3 | ) |   |
| Other income  (expense), net                         |   | (8.6               | )      | 0.8 |   | (0.1 | ) |   |
| Cumulative effect of  change in accounting principle |   | —             |   | — |   | (2.6 | ) |   |
| Net loss                                             |   | (84.6              | )%     | (123.7 | )% | (31.0 | )% |   |

 

***Year Ended December 31, 2002 versus YearEnded December 31, 2001***

 

*NetSales.*  Net sales forthe year ended December 31, 2002 decreased $13.2 million or 51.9% to $12.2 million, compared to net sales of $25.4million for the prior year.  Productacceptance requirements related to product and customer mix resulted in a netincrease to revenues of $2.6 million over shipments for the year ended December31, 2002, while these same factors caused a net increase to revenues of $6.8million over shipments in  2001.  Current year product sales, especiallycapacity-related singulated device handler products, continue to be severelyimpacted by the continued downturn in the semiconductor capital equipmentmarket.  Sales of our Tapestry and SmartSolutions strip-based products decreased $3.7 million or 41.7% over the prioryear period, while sales of singulated device handler products decreased $11.1million or 83.4% from the prior year period. Sales of our Tapestry and Smart Solutions strip-based product made up43.0% of our net sales for the year ended December 31, 2002 compared to 35.4%in the prior year period.  If the marketdownturn continues, it is likely that net sales could continue to be adverselyimpacted.

 

Net sales to Asiacomprised approximately 61.6% of our net sales for the year ended December 31,2002.  Net sales to customers in theUnited States represented approximately 29.0% and net sales to customers inEurope represented approximately 9.4% for year ended December 31, 2002.  Comparatively, net sales to customers inAsia comprised approximately 47.5% of our net sales for the year ended December31, 2001.  Net sales to customers in theUnited States represented approximately 45.8% and net sales to customers inEurope represented approximately 6.7% for year ended December 31, 2001.

 

*GrossProfit.*  For the yearended December 31, 2002, we recorded an inventory valuation charge of $0.9million compared to a similar charge of $8.1 million in the prior year, each ofwhich was included in cost of sales.

 

18

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Excluding these charges, gross profit in the current year perioddecreased by $5.0 million to $4.6 million or 37.7% of net sales from $9.6million or 37.6% of net sales in the prior year.  Inclusive of the inventory revaluation charges in both years,gross profit in the current year period increased by $2.2 million to $3.7million or 30.3% of net sales from $1.5 million or 5.8% of net sales in theprior year.  Exclusive of the inventoryrevaluation charges, the maintenance of our gross margin contribution resultedfrom the many cost reduction initiatives that we have undertaken in response tothe continued downturn in the semiconductor capital equipment market.  However, the continuation of the downturncould potentially negatively impact our gross margin contribution in future periods.This impact, if realized, would be offset to some degree by the expected costreductions from the transfer of our core manufacturing operations to Penang,Malaysia.

 

*Selling,General and Administrative Expense.*  Selling, general and administrative expense in 2002 was $8.6million, or 70.1% of net sales compared to $10.8 million, or 42.8% of net salesin the prior year.  The decrease inexpense for the current year is a result of the cost reduction measures that wehave performed throughout all of 2002. The increase in selling, general and administrative expense as a percentageof net sales in the current year is primarily attributed to the decreased netsales base.

 

*Researchand Development Expense*. Research and development expense in 2002 was $4.2 million, or 34.5% ofnet sales compared to $7.9 million, or 30.9% of net sales in 2001.  The decrease in expense for the current yearis a result of the cost reduction measures that we have performed throughoutall of 2002.  The increase in researchand development expense as a percentage of net sales in the current year isprimarily attributed to the decreased net sales base.

 

*Amortizationof Intangible Assets*.  Amortization expense was zero for the year ended December 31, 2002.  For the year ended December 31, 2001,amortization expense totaled $2.6 million, or 10.4% of net sales.  The decrease of amortization expense in thecurrent year is directly attributed to the write-downs of impaired goodwill andother intangible assets that were recorded in the fourth quarter of 2000 andthe third quarter of 2001.

 

*Write-downof Impaired Intangible Assets. *Asa result of the significant semiconductor industry downturn, which began in thefourth quarter of 2000 and has continued through 2002, we reduced the carryingvalue of certain intangible assets by $4.9 million and goodwill by $4.4million.  This write-down was recordedin the third quarter of 2001.  In thefourth quarter of 2000, also as a result of the industry downturn, we reducedthe carrying value of certain intangible assets by $0.9 million and goodwill by$2.5 million.  These charges represented36.6% and 6.8% of net sales for 2001 and 2000, respectively.

 

*Restructuring Charge. *In response to thecontinuing downturn in the semiconductor capital equipment market, we reducedour workforce throughout 2002.  Employeereductions in 2002 totaled 100 individuals or 57.8% of our our workforce as ofDecember 31, 2001 which resulted in a charge of $881,000 or 7.2% of net salesfor the year ended December 31, 2002. These reductions were across all functional areas and principallyrepresented separation and benefit costs. These charges were offset by the completion of a lease settlementagreement related to our Marlborough, Massachusetts facility.  This agreement required us to pay $450,000or approximately 35% of the outstanding lease obligation, which was to runthrough April 2003.  As of December 31,2002, the full amount of this settlement has been paid.  The settlement of this lease resulted in abenefit of $674,000, which was recorded in the second quarter of 2002.  For the year ended December 31, 2001,**weenacted a plan in the first qaurter of that year to consolidate our operationsand initiated other cost reduction measures, which resulted in a charge of $2.3million.  This charge principally representedemployee separation costs and costs related to idle facilities over theremaining lease term of the facility, which ran through April 2003.  In the third quarter of 2001, we furtherreduced our workforce resulting in a charge of $0.1 million for a totalrestructuring charge in 2001 of $2.4 million or 9.6% of net sales.

 

*OtherIncome (Expense).* Interest expense was $1.2 million or 9.6% of net sales for the yearended December 31, 2002 compared to $26,000 in the comparable prior yearperiod.  The increase is directlyattributable to the issuance of our 10% senior subordinated convertible debt,which was issued in December 2001 and includes charges associated with theamortization of debt issuance costs.  Interest income for the year ended

19

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December 31, 2002, was $102,000 compared to $227,000 in the prioryear.  This decrease resulted from thedecrease in interest-bearing cash and cash equivalents.

 

*IncomeTax Provision.*  Duringboth 2002 and 2001, we incurred minimal tax liabilities.  We have recorded valuation allowancesagainst all benefits associated with net operating loss carry forwards due to uncertaintyregarding their ultimate utilization.

 

*NetLoss.*  Net loss forthe year ended December 31, 2002 was $10.3 million, or $0.73 per diluted share,as compared to net loss of $31.4 million, or $2.24 per  diluted share for the comparable prior yearperiod.

 

***Year Ended December31, 2001 versus Year Ended December 31, 2000***

 

*NetSales.*  Net sales forthe year ended December 31, 2001 decreased $24.5 million or 49.1% to $25.4 million, compared to net sales of $49.9million for the prior year.  Productacceptance requirements related to product and customer mix resulted in a netincrease to revenues of $6.7 million over shipments for the year ended December31, 2001, while these same factors caused $6.0 million of revenue fromshipments in the year 2000 to be deferred into future periods.  Current year product sales, especiallycapacity-related singulated device handler products, continue to be severely impactedby the continued downturn in the semiconductor capital equipment market.  Sales of our Tapestry and Smart Solutionsstrip-based products increased $4.3 million or 90.6% over the prior yearperiod, while sales of singulated device handler products decreased $25.1million or 65.4% from the comparable prior year period.  We expect net sales to continue to be adverselyimpacted by the market downturn.

 

Net sales to Asia comprised approximately 47.5% of ournet sales for the year ended December 31, 2001.  Net sales to customers in the United States representedapproximately 45.8% and net sales to customers in Europe representedapproximately 6.7% for year ended December 31, 2001.  Comparatively, net sales to customers in Asia comprisedapproximately 52.9% of our net sales for the year ended December 31, 2000.  Net sales to customers in the United Statesrepresented approximately 44.3% and net sales to customers in Europerepresented approximately 2.8% for year ended December 31, 2000.

 

*GrossProfit.*  Gross profit,inclusive of the inventory revaluation charge, decreased by $17.5 million to$1.5 million or 5.8% of net sales from $19.0 million or 38.1% of net sales inthe prior year.  Exclusive of theinventory revaluation charge, gross profit decreased by $13.4 million to $9.6million or 37.7% of net sales from $23.0 million or 46.1% of net sales in theprior year.  The decrease in grossmargin in the current year period primarily resulted from the continuedunabsorbed excess production costs associated with the industry downturn and,in particular, excess production costs related to our singulated handling products.  Gross margin contribution improved on ourTapestry and Smart Solutions products as a result of their increased saleslevels over the prior year period.  Weexpect overall gross margins to continue to be adversely impacted by the marketdownturn, partially offset by the benefits of the consolidation ofmanufacturing operations and workforce reductions occurring in the first andthird quarters of 2001.

 

*Selling,General  and Administrative Expense.*  Selling, general and administrative expensein 2001 was $10.9 million, or 42.8% of net sales compared to $16.2 million, or32.4% of net sales in the prior year. The decrease in expense for the current year is a result of the costreduction measures initiated in the first and third quarter of 2001 and a decreasein direct selling costs related to the decrease in sales.  The increase in selling, general andadministrative expense as a percentage of net sales in the current year isprimarily attributed to the decreased net sales base.

 

*Researchand Development Expense*. Research and development expense in 2001 was $7.9 million, or 30.9% ofnet sales compared to $9.3 million, or 18.6% of net sales in 2000.  The decrease in expense for the current yearis a result of the cost reduction measures initiated in the first and thirdquarter of 2001.  The increase inresearch and development expense as a percentage of net sales in the currentyear is primarily attributed to the decreased net sales base.

 

20

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*Amortizationof Intangible Assets*.  Amortization expense totaled $2.6 million, or 10.4% of net sales for theyear ended December 31, 2001, versus $4.3 million or 8.6% of net sales in theprior year.  The decrease ofamortization expense in the current year is directly attributed to thewrite-downs of impaired goodwill and other intangible assets that were recordedin the fourth quarter of 2000 and the third quarter of 2001.

 

*Write-downof Impaired Intangible Assets. *Asa result of the significant semiconductor industry downturn, which began in thefourth quarter of 2000 and has continued through 2001, we reduced the carryingvalue of certain intangible assets by $4.9 million and goodwill by $4.4million.  This write-down was recordedin the third quarter of 2001.  In the fourthquarter of 2000, also as a result of the industry downturn, we reduced thecarrying value of certain intangible assets by $0.9 million and goodwill by$2.5 million.  These charges represent36.6% and 6.8% of net sales for 2001 and 2000, respectively.

 

*RestructuringCharge. *In the firstquarter of 2001, we enacted a plan to consolidate our operations and initiatedother cost reduction measures, which resulted in a charge of $2.3 million.  This charge principally represented employeeseparation costs and costs related to idle facilities over the remaining leaseterm of the facility, which runs through April 2003.  In the third quarter of 2001, we further reduced our workforceresulting in a charge of $0.1 million for a total restructuring charge in 2001of $2.4 million or 9.6% of net sales.

 

*OtherIncome (Expense).* Interest income in 2001 was $227,000 compared to $356,000 in the prioryear.  This decrease resulted from thedecrease in interest-bearing cash and cash equivalents.  Interest expense totaled $26,000 in 2001compared to $330,000 in 2000.  The decreasein interest expense is attributable to decreased borrowings under our lines ofcredit during 2001.

 

*IncomeTax Provision.*  Duringboth 2001 and 2000, we incurred minimal tax liabilities.  We have recorded valuation allowancesagainst all benefits associated with net operating loss carry forwards due touncertainty regarding their ultimate utilization.

 

*CumulativeEffect of Change in Accounting Principle.*  As a result of the adoption of SAB 101 inthe fourth quarter of 2000, and pursuant to APB No. 20, *Accounting Changes*, werecognized the cumulative effect of retroactive application of SAB 101,resulting in a charge to income of $1.3 million in 2000.

 

*NetLoss.*  Net loss forthe year ended December 31, 2001 was $31.4 million, or $2.24 per diluted share,as compared to net loss of $15.5 million, or $1.34 per  diluted share for the comparable prior yearperiod.

 

21

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***Quarterly Results***

 

The following tablespresent selected unaudited quarterly operating results for the eight fiscalquarters ended December 31, 2002, as well as the data expressed as a percentageof net sales.  We believe that allnecessary adjustments have been included to present fairly the quarterlyinformation when read in conjunction with our consolidated financialstatements.  The operating results forany quarter are not necessarily indicative of the results for any subsequentperiod.

 

(in thousands,except per share data)

 
|                                                               |   | **Quarter Ended**    |   |
|--------------------------------------------------------------------|--------|----------------------|--------|
|                                                               |   | **Dec. 31  2002(1)** |   | **Sept. 28  2002** | ** ** | **June 29  2002** | ** ** | **Mar.30  2002** | ** ** | **Dec. 31  2001** | ** ** | **Sept. 29  2001(2)** |   | **June 30  2001** | ** ** | **Mar. 31  2001** | ** ** |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  sales                                                         |   | $                    | 2,137  |   | 2,732 |   | $ | 3,879 |   | $ | 3,463 |   | $ | 4,287 |   | $ | 4,386 |   | $ | 7,404 |   | $ | 9,329 |   |
| Cost of sales                                                      |   | 2,318                |   | 1,558 |   | 2,454 |   | 2,187 |   | 2,929 |   | 11,105 |   | 4,220 |   | 5,670 |   |
| Gross  profit (loss)                                               |   | (181                 | )      | 1,174 |   | 1,425 |   | 1,276 |   | 1,358 |   | (6,719 | ) | 3,184 |   | 3,659 |   |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general and administrative                               |   | 1,760                |   | 2,092 |   | 2,438 |   | 2,266 |   | 2,360 |   | 2,347 |   | 2,863 |   | 3,294 |   |
| Research  and development                                          |   | 847                  |   | 1,012 |   | 1,049 |   | 1,306 |   | 1,497 |   | 1,459 |   | 2,015 |   | 2,888 |   |
| Amortization  of intangible assets                                 |   | —               |   | — |   | — |   | — |   | — |   | 874 |   | 879 |   | 879 |   |
| Write-down  of impaired intangible assets                          |   | —               |   | — |   | — |   | — |   | — |   | 9,298 |   | — |   | — |   |
| Restructuring  charge                                              |   | 14                   |   | 345 |   | (475 | ) | 323 |   | — |   | 113 |   | — |   | 2,331 |   |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss  from operations                                              |   | (2,802               | )      | (2,275 | ) | (1,587 | ) | (2,619 | ) | (2,499 | ) | (20,810 | ) | (2,573 | ) | (5,733 | ) |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other  income (expense)                                            |   | (273                 | )      | (264 | ) | (262 | ) | (248 | ) | 50 |   | 10 |   | 37 |   | 99 |   |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss                                                          |   | $                    | (3,075 | ) | $ | (2,539 | ) | $ | (1,849 | ) | $ | (2,867 | ) | $ | (2,449 | ) | $ | (20,880 | ) | $ | (2,536 | ) | $ | (5,634 | ) |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  loss per share: (3)                                           |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  and diluted                                                 |   | $                    | (0.22  | ) | $ | (0.18 | ) | $ | (0.13 | ) | $ | (0.20 | ) | $ | (0.17 | ) | $ | (1.48 | ) | $ | (0.18 | ) | $ | (0.40 | ) |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted  average common and common equivalent shares outstanding: |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |   | 14,153               |   | 14,152 |   | 14,115 |   | 14,077 |   | 14,074 |   | 14,062 |   | 14,018 |   | 13,952 |   |
| Diluted                                                            |   | 14,153               |   | 14,152 |   | 14,115 |   | 14,077 |   | 14,074 |   | 14,062 |   | 14,018 |   | 13,952 |   |

 

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|                                      |   | **Quarter  Ended** |   |
|-------------------------------------------|--------|--------------------|--------|
|                                      |   | **Dec. 31  2002**  |   | **Sept. 28  2002** | ** ** | **June 29  2002** | ** ** | **Mar. 30  2002** | ** ** | **Dec. 31  2001** | ** ** | **Sept. 29  2001** | ** ** | **June 30  2001** | ** ** | **Mar. 31  2001** | ** ** |
|                                      |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Percentage  of Net Sales:**             |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                 |   | 100.0              | %      | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Cost of sales                             |   | 108.5              |   | 57.0 |   | 63.3 |   | 63.2 |   | 68.3 |   | 253.2 |   | 57.0 |   | 60.8 |   |
| Gross profit (loss)                       |   | (8.5               | )      | 43.0 |   | 36.7 |   | 36.8 |   | 31.7 |   | (153.2 | ) | 43.0 |   | 39.2 |   |
| Operating expenses:                       |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative      |   | 82.4               |   | 76.6 |   | 62.9 |   | 65.4 |   | 55.1 |   | 53.5 |   | 38.7 |   | 35.3 |   |
| Research and  development                 |   | 39.6               |   | 37.0 |   | 27.0 |   | 37.7 |   | 34.9 |   | 33.3 |   | 27.2 |   | 31.0 |   |
| Amortization of  intangible assets        |   | —             |   | — |   | — |   | — |   | — |   | 19.9 |   | 11.9 |   | 9.4 |   |
| Write-down of  impaired intangible assets |   | —             |   | — |   | — |   | — |   | — |   | 212.0 |   | — |   | — |   |
| Restructuring  charge                     |   | 0.7                |   | 12.6 |   | (12.2 | ) | 9.3 |   | — |   | 2.6 |   | — |   | 25.0 |   |
| Loss from operations                      |   | (131.1             | )      | (83.2 | ) | (41.0 | ) | (75.6 | ) | (58.3 | ) | (474.5 | ) | (34.8 | ) | (61.5 | ) |
| Other income (expense)                    |   | (12.8              | )      | (9.7 | ) | (6.8 | ) | (7.2 | ) | 1.2 |   | 0.2 |   | 0.5 |   | 1.1 |   |
| Net loss                                  |   | (143.9             | )%     | (92.9 | )% | (47.8 | )% | (82.8 | )% | (57.1 | )% | (474.3 | )% | (34.3 | )% | (60.4 | )% |

 

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(1)   Includes a $913,000 inventory revaluationcharge included in cost of sales.

 

(2)   Includes charges totaling $8.1 million tocost of sales, adjusting inventories to lower cost of market.

 

(3)          The sum of loss pershare for the fiscal quarters may differ from annual loss per share due to therequired method of computing weighted average number of shares in therespective periods.

 

***Liquidity andCapital Resources***

 

The Company’sconsolidated financial statements are prepared and presented on a going concernbasis.  At December 31, 2002, theCompany had an accumulated deficit of $5.8 million and incurred a net loss of$10.3 million for the year then ended.

 

At December 31, 2002, wehad cash and cash equivalents of $1.6 million, working capital of $2.9 million,total assets of $7.8 million and total liabilities of $13.5 million.  During the first quarter of 2003, we haveused a substantial portion of the cash balances.  The restructuring activities that we have undertaken over thelast two years, coupled with the transfer of our core manufacturing to Penang,Malaysia, should significantly reduce our product and operating costs.  We expect to continue to expend cash andincur operating losses at least through the first half of 2003, and our abilityto generate cash and operating income is dependent on our ability to realizethe benefits of our restructuring efforts and continuing to be responsive tothe downturn in the semiconductor capital equipment market.  We are managing cash balances andobligations on a day-to-day basis.  Weare working with customers to incorporate advance payment structures in theirorders to offset the needed investment in inventories to satisfy thoseorders.  Vendor payment terms have beenextended and we are working closely with our vendors to assure the flow ofneeded materials. We are pursing the sub-letting of our St. Paul, Minnesotaoperations and will be exiting leases in several other of our facilitiespursuant to those lease terms to further lower our operating costs.

 

On March 7, 2003and March 26, 2003, pursuant to a private equity placement with a group ofaccredited investors, we issued a total of 3,166,869 shares of common stock,which resulted in net proceeds to us of approximately $1.2 million.  Stock issuance costs associated with thisoffering totaled approximately $145,000. As part of this offering, we also issued warrants to purchase 253,350shares of common stock that have a term of five years with an exercise price of$0.43 per share.

 

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We estimate thatwe will need to raise additional capital through debt or equity offerings, orby selling assets of the Company.  Webelieve that our ability to fund our operations and capital requirements for2003 and our ability to obtain financing, is dependent on the success of ourstrip product technology in the currently depressed semiconductor capitalequipment market and the realization of the cost benefits associated with ourrestructuring efforts, coupled with the transfer of our core manufacturing toPenang, Malaysia.  There is no assurancethat additional financing, if needed, will be available on terms and conditionsacceptable or favorable to us, if at all. If we are not successful in the realization of additional funding, thebenefits of our restructuring efforts, the transfer of our core manufacturingto Penang, Malaysia, and/or further impacts to our net sales as a result ofmarket conditions, our operations will be materially negatively impacted and wewill be required to take actions that will harm our business, includingpotentially ceasing certain or all of our operations.

 

The net loss wasthe primary use of cash in 2002.  Thenet loss and decrease in accounts payable were the primary uses of cash in2001.  The net loss and increases inaccounts receivable and inventories to support increased net sales were theprimary uses of cash in 2000.  Cash usedin operations was $9.5 million, $10.0 million and $6.8 million in 2002, 2001and 2000, respectively.

 

We record provisions fordoubtful accounts based on specific identification of our accountsreceivable.  As a result of this examination,no provisions were recorded for the year ended December 31, 2002; however, wewrote off approximately $106,000 which we deemed uncollectible.  We recorded a $225,000 and $143,000provision for doubtful accounts for the years ended December 31, 2001 andDecember 31, 2000, respectively.

 

Capital expenditures totaled $0.2 million, $0.3million and $0.5 million for the years ended December 31, 2002, 2001 and 2000,respectively.  Capital purchases for allperiods have been primarily for production and computer equipment and forleasehold improvements.  Cash used inthe acquisition of Aseco Corporation was $0.5 million in 2000.  As of December 31, 2002, we hadapproximately $0.5 million in committed purchase orders outstanding with ourvendors.

 

In December 2001, we issued $10.0 million of 10%Senior Subordinated Convertible Notes due in 2006 to a group of accredited investors.  These Notes are convertible into our commonstock at a conversion price equal to $2.60 per share.  The Notes are redeemable by us at any time after January 3, 2004as long as the market price of our common stock equals or exceeds $3.90 pershare.  Proceeds of the Notes, net ofdebt issuance costs, totaled $9.2 million. Holders of the Notes have standard registration rights if they convertthe Notes to common stock.

 

Our contractual obligations as of December 31, 2002are as follows:

 
|                                              |   | **2003** |    | **2004** |   | **2005** |   | **2006** |       | **2007** |   | **Thereafter** |   |
|---------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|------------|----------|--------|----------------|--------|
| Future  rental payments under nocancelable leases |   | $        | 742,000 |     | $      | 665,000  |   | $        | 519,000    |     | $      | 468,000        |   | $ | 463,000 |   | $ | 154,000 |   |
|                                              |   |     |    |     |   |     |   |     |       |     |   |           |   |
| Payments  due under long term debt agreements     |   | —   |    | —   |   | —   |   | $        | 10,000,000 |     | — |           | — |   |
|                                                   |        |          |         |          |        |          |        |          |            |          |        |                |        |  |  |  |  |  |  |

 

For the year ended December 31, 2002, we issuedapproximately, 0.1 million shares of common stock through the exercise of employeestock options and our stock purchase plan, which provided approximately $0.2million in cash to us.  For the yearended December 31, 2001 we issued approximately 0.1 million shares of

 

24

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common stock though the exercise of employee stock options and ourstock purchase plan, which provided approximately $0.2 million in cash to us.

 

We issued approximately 3.3 million shares of commonstock in a public offering in 2000, providing $19.7 million of cash, which wasused to reduce existing lines of credit totaling $1.8 million, and for generalworking capital needs.  In 2000, weissued approximately 0.5 million shares of common stock through the exercise ofemployee stock options and our stock purchase plan, which providedapproximately $0.9 million in cash to us.

 

At December 31, 2002, we had a current ratio of 1.81and working capital of $2.9 million.  AtDecember 31, 2001 we had cash and cash equivalents of $11.1 million, a currentratio of 2.9 and working capital of $12.9 million.

 

At December 31, 2001 and 2000, we maintained an unused$1.0 million secured line of credit with a bank.  Interest on the line, at our election, was based on either thebank’s prime rate (as defined) or Eurodollar rate (as defined).  The amount available for borrowing was calculatedas a percentage of eligible accounts receivable of Aseco, and borrowings weresecured by a certificate of deposit with the bank.  This borrowing facility expired in January 2002.

 

Our anticipated capital expenditure needs for 2003 areexpected to be less than $0.5 million and concentrated in scaling up our Penangmanufacturing facility to support the transfer of our core manufacturing operations.

 

**FederalTax Matters**

 

We paid only nominal federal and state income taxes inthe years ended December 31, 2002, 2001 and 2000.  At December 31, 2002, we had federal net operating losscarryforwards for tax reporting purposes of approximately $87.9 million, aportion of which is subject to annual limitation under Section 382 of theInternal Revenue Code.

 

**ITEM 7A.. Quantitative And Qualitative Disclosures About Market Risk**

 

The vast majority of our transactions are denominatedin U.S. dollars; as such, fluctuations in foreign currency exchange rates havehistorically had little impact on us.  Inflationhas not been a significant factor in our operations in any of the periodspresented, and it is not expected to affect operations in the future.  An increase in interest rates would notexpose us to market risk in that we have no debt tied to market interestrates.  At December 31, 2002, all of ouroutstanding long-term debt carried interest at a fixed rate.  There is no material market risk relating toour long-term debt.

 

**Impactof New Accounting Standards**

*** ***

***SFAS No. 143 – Accounting for Asset RetirementObligations*.**  InJune 2001, the FASB issued SFAS No. 143, *Accounting for Asset Retirement Obligations*.  SFAS No. 143 addresses financial accountingand reporting for obligations associated with the retirement of tangiblelong-lived assets and the associated asset retirement costs.  SFAS No. 143 applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and/or the normal operation of along-lived asset, except for certain obligations of lessees.   SFAS No. 143 is effective for us on January1, 2003.  We expect that SFAS No. 143will not have a material effect on our financial position or results ofoperations.

*** ***

***SFAS No. 144 – Accounting for the Impairment or Disposal ofLong-Lived Assets***. In August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  SFAS No. 144 addresses financial accountingand reporting for the impairment or disposal of long-lived assets and supersedesSFAS No. 121, *Accounting for theImpairment of Long-Lived Assets and for**Long-Lived Assets to Be*

 

25

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*Disposed Of*, andthe accounting and reporting provisions of APB Opinion No. 30, *Reporting the Results of Operations-Reporting the Effectsof Disposal of a Segment of a Business, and Extraordinary, Unusual and InfrequentlyOccurring Events and Transactions,*for the disposal of a segment ofa business (as previously defined in that Opinion).  SFAS No. 144 also amends ARB No. 51, *Consolidated Financial Statements*, to eliminate theexception to consolidation for a subsidiary for which control is likely to betemporary.  SFAS No. 144 was effectivefor us on January 1, 2002 and did not have a material effect on our financialposition or results of operations.

** **

**SFAS No. 145 - *Rescission of FASB statements NO. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections.***  In April 2002, the FASB issued SFAS No. 145,*Rescission of FASB Statements No. 4, 44, and64, Amendment of FASB Statement No. 13, and Technical Corrections.*SFAS No. 145 was adopted by us on July 1, 2002. The adoption of the technicalcorrections contained in SFAS No. 145 did not have an impact on our financialposition or results of operations.

 

***SFAS No. 146 –Accounting for Costs Associated with Exit or Disposal Activities****.* In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.SFAS No. 146 addresses financial accounting and reporting for costs associatedwith exit or disposal activities and nullifies Emerging Issues Task Force(EITF) Issue No. 94-3, *Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including**Certain Costs Incurredin a Restructuring).* SFAS No. 146 requires that a liability for acost associated with an exit or disposal activity be recognized when theliability is incurred. Under EITF 94-3, a liability for an exit cost was recognizedat the date of an entity’s commitment to an exit plan. SFAS No. 146 will beeffective for exit or disposal activities that are initiated by us afterDecember 31, 2002.  The adoption SFASNo. 146 is not expected to have a material effect on our financial position orresults of operations.

 

***FASB Interpretation No. 45 – Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.***  InNovember 2002, the FASB issued FASB Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others* (FIN 45).  FIN 45 clarifies the requirements for a guarantor’saccounting for and disclosure of certain issued and outstandingguarantees.  The initial recognition andinitial measurement provisions of FIN 45 are applicable to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The adoption of FIN 45 did not have amaterial impact on the Company’s consolidated balance sheet or results of operations.

 

***SFAS******No. 148 – Accounting for Stock-Based Compensation –Transition and Disclosure-an Amendment of FASB Statement No. 123***.  In December 2002, the FASB issued SFAS No.148, *Accounting for Stock-Based Compensation-Transition andDisclosure – an amendment of FASB Statement No. 123.* SFAS No. 148,which amends SFAS No. 123, *Accounting for Stock-BasedCompensation*, provides alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employee compensation.In addition, SFAS No. 148 amends the disclosure requirement of SFAS No. 123 torequire more prominent and more frequent disclosures in financial statements ofthe effects of stock-based compensation. The transition guidance and annualdisclosure provisions of SFAS 148 are effective for fiscal years ending afterDecember 15, 2002. The interim disclosure provisions are effective forfinancial reports containing condensed financial statements for interim periodsbeginning after December 15, 2002. The adoption of SFAS 148 did not have amaterial impact on the Company’s consolidated balance sheet or results ofoperations.  Management has adopted thedisclosure provisions of this standard as of December 31, 2002.

 

**RiskFactors**

 

*CautionaryNote Regarding Forward-Looking Statements*

 

26

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*ThisReport on Form 10-K contains forward-looking statements that have been madepursuant to the provisions of the Private Securities Litigation Reform Act of1995.  These forward-looking statementsare not historical facts, but rather are based on our current expectations,estimates and projections about the semiconductor capital equipment industry,and our beliefs and assumptions.   Weintend words such as “anticipates,” “expects,” “intends,” “plans,” “believes,”“seeks,” “estimates” and similar expressions to identify forward-lookingstatements.  These statements are notguarantees of future performance and are subject to certain risks, uncertaintiesand other factors, some of which are beyond our control and are difficult topredict.  These factors could causeactual results to differ materially from those expressed or forecasted in theforward-looking statements.  These risksand uncertainties are described in  thefollowing risk factors and elsewhere in the this Report on Form 10-K. Wecaution you not to place undue reliance on these forward-looking statements,which reflect our management’s view only as of the date of this Report on Form10-K.  We are not obligated to updatethese statements or publicly release the result of any revisions to them toreflect events or circumstances after the date of this Report on Form 10-K orto reflect the occurrence of unanticipated events.*

 

**Our ability to continue as a “goingconcern” is uncertain.**

 

Our consolidated financial statement have beenprepared on the assumption that we will continue as a going concern, which contemplatesthe realization of assets and liquidation of liabilities in the normal courseof business.  The independent auditor’sreport included herein contains an explanatory paragraph that raises substantialdoubt about our ability to continue as a going concern.

 

As of December 31, 2002, we had cash and cashequivalents totaling $1.6 million and have used a substantial portion of thecash balances during the first quarter of 2003.  On March 7, 2003, and on March 26, 2003,  we completed a private equity financing witha group of accredited investors for net proceeds of approximately $1.2 millionthrough the issuance of additional shares of our common stock.

 

We expect losses and negative cash flows to continueat least through the first half of 2003, which will require us to obtain additionalcapital or pursue other strategic alternatives.  It is uncertain whether we will be able to obtain a sufficientamount of additional capital, if needed, on acceptable terms, or at all.  Further, if future financing requirements aresatisfied through the issuance of equity or debt instruments, shareholders mayexperience additional dilution in terms of their percentage of ownership of oursecurities.  In the event that the weare unable to obtain additional capital, our operations will be materiallynegatively impacted and we will be required to take actions that will harm ourbusiness, including potentially ceasing certain or all of our operations.

 

**Thesuccess of our new products depends upon customer acceptance of both the testingof semiconductor devices in strip form and the automation of the back-end ofthe semiconductor manufacturing process.**

 

Several of our new products, including our Tapestrystrip handler and other Smart Solutions products, are used to test and processsemiconductor devices in strip form. Assembly of semiconductor devices in strip form is the standard industrypractice.  However, we cannot assure youthat testing of semiconductor devices in strip form will become widely acceptedby the industry.  Until recently, mostsemiconductor manufacturers believed it was necessary to test semiconductorsafter they were cut from the strips because they believed the act of cuttingthe strips containing the semiconductor devices, referred to as singulation,could result in damage or contamination to the semiconductor devices and, as aconsequence, make the prior test results unreliable.

 

We introduced our Tapestry handling system in February1999.  In May 2000, we introduced otherSmart Solutions products, which provide additional process capability forhandling and testing semiconductor devices in strip form.  Our new products are attractive to customersonly if the customers can see the value of automating the test and assemblyportions of their semiconductor manufacturing operations.  Although semiconductor manufacturers haveautomated the wafer fabrication portion of their operation, or the front-end ofthe semiconductor manufacturing process, very few semiconductor manufacturershave invested a significant amount of capital to automate the test and assemblyportions of their operations.  We areintroducing new products for technologies, which may not be accepted on awide-scale basis by the industry.  Ifeither the testing of

 

27

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semiconductor devices in strip form or wide-scale automation of theback-end is not accepted by the industry, our net sales likely will suffer.

 

**Downturnsin semiconductor industry business cycles could have a negative impact on ouroperating results.**

 

Our business dependsheavily upon capital expenditures by semiconductor manufacturers.  The semiconductor industry is highlycyclical, with periods of capacity shortage and periods of excesscapacity.  In periods of excesscapacity, the industry sharply cuts purchases of capital equipment, such as ourproducts.  Thus, a semiconductorindustry downturn or slowdown substantially reduces our revenues and operatingresults and could hurt our financial condition.  In the fourth quarter of 2000, the semiconductor capitalequipment industry went into a severe downturn.  This downturn has intensified and continued throughout 2002,which has adversely impacted our revenues, operating results and financialposition over the last two years.  It isnot certain when this downturn will end and it could continue well into 2003and possibly into subsequent years.

 

**We haveoffered automation solutions and, unless we effectively market our company as aprovider of automation solutions, our expected financial results will suffer.**

 

We offer equipment automation solutions and softwaredevelopment services.  These solutionsand services require different marketing techniques and involve a moreextensive decision-making process by customers than for our traditional handlerproducts.  We need to successfullymarket our automation products using different sales methods than we havepreviously used.

 

We acquired an automation software business in June1999 and introduced our first suite of products to provide an automation solutionfor the testing portion of semiconductor manufacturing in May 2000.  The sales from these operations make up lessthan 5% and 6% of net sales for the years ended December 31, 2002 and 2001,respectively.  Our future success isdependent upon being able to successfully market our automation products.  If we are not successful in effectivelymarketing ourselves as an equipment automation solutions provider to thesemiconductor industry, our results of operations and financial condition willsuffer.

 

**We investheavily in research and development efforts and our financial results dependupon the success of these efforts.**

 

We have spent, and expect to continue to spend, asignificant amount of time and resources developing new products and refiningexisting products and systems.  In lightof the long product development cycles inherent in our industry, theseexpenditures will be made well in advance of the prospect of deriving revenuefrom the sale of new systems.

 

Our ability to introduce and market new productssuccessfully is subject to a wide variety of challenges during this developmentcycle, such as design defects or changing market requirements that could delayintroduction of these systems.  Inaddition, since our customers are not obligated by long-term contracts topurchase our products, our anticipated product orders may not materialize, ororders that do materialize may be canceled. As a result, if we do not achieve market acceptance of new products, wemay not be able to realize sufficient sales needed to recoup our research anddevelopment expenditures.

 

**Ouroperating results often have large changes from period to period, which mayresult in a decrease in our stock price.**

 

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

 

28

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•the cyclical nature of the semiconductor industry; 

•delays in, or cancellation of, significant system purchases by customers; 

•delays in the development, introduction and production of our products; 

•changes in the mix of our products and their gross margins; 

•new product introductions by competitors and competitive pricing pressures; 

•the time required for us to adjust our operating expenses to respond to changesin sales and market conditions;

•the timing of any future acquisitions and their effect on our financialresults;

•component shortages resulting in manufacturing delays; and 

•pressure by customers to reduce prices, shorten delivery times and extendpayment terms.

 

We cannot predict the impact of these and otherfactors on our sales or operating results in any future period.  Results of operations in any period,therefore, should not be considered indicative of the results to be expectedfor any future period.  Because of thisdifficulty in predicting future performance, our operating results may fallbelow expectations of security analysts or investors in some future periods.  Our failure to meet these expectations wouldlikely adversely affect the market price of our common stock.

 

**Ourstock price is volatile and it may drop unexpectedly.**

 

Stock prices of companies in the semiconductorequipment industry, including ours, can swing dramatically with littlerelationship to operating performance. Factors, which could cause our stock price to change, include:

 

•  changes in the market’s view of thesemiconductor industry in general;

•  changes in our quarterly operating results forthe reasons set out in the previous risk factors for other reasons;

•  changes in our reported financial resultsbased on accounting pronouncements;

•  changes in research analysts’ expectations forus or our industry or failure to meet research analysts’ estimates; • changes in the general economicconditions or developments in the semiconductor industry which affect investorsconfidence;

•  announcements by us or our competitors oftechnological innovations or new or enhanced products and;

•  the potential impact on the liquidity of oursecurities due to the de-listing action from the Nasdaq SmallCap Market.

 

Additional factors, which may impact our results,include:

 

• We dependupon a few customers for the majority of our revenues and a reduction in theirorders could adversely affect us.

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

• The loss ofany of our key personnel could harm our business.

•Our markets are very competitive and demand for our products may decrease ifadditional competitors enter our markets.

• Ourdependence upon international sales involves significant risk.

• The possibleadverse impact of economic or political changes in the market we serve.

• Ourinability to obtain financing to fund continuing operations.

 

Fluctuations or decreasesin the trading price of our common stock may adversely affect the ability totrade our shares.  In addition, thesefluctuations could adversely affect our ability to raise capital through futureequity financing.

 

29

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**ITEM8.  Consolidated Financial Statementsand Supplementary Data**

 

See ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-K forthe year ended December 31, 2002.  Thefinancial information by quarter is included in Item 7 of this Annual Report onForm 10-K.

 

**ITEM9.  Changes in and Disagreements withAccountants on Accounting  and FinancialDisclosure**

 

This item is notapplicable.

 

**PARTIII**

 

**ITEM10.  Directors and Executive Officers ofthe Registrant**

 

The information requiredby this item concerning directors and executive officers is incorporated by referencefrom the Proxy Statement to be filed no later than 120 days following ourDecember 31, 2002 year end.

 

**ITEM11.  Executive Compensation**

 

The informationrequired under this item is hereby incorporated by reference from the ProxyStatement.

 

**ITEM 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

 

The information requiredunder this item is hereby incorporated by reference from the Proxy Statement.

 

**ITEM13.  Certain Relationships and RelatedTransactions**

 

The information requiredunder this item is hereby incorporated by reference from the Proxy Statement.

** **

**ITEM14.  Controls and Procedures**

 

(a)          Evaluation of disclosurecontrols and procedures.

 

Under the supervision andwith the participation of our management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures (as defined inRule 13a-14(c) under the Exchange Act) as of a date (the “EvaluationDate”) within 90 days prior to the filing date of this report.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of theEvaluation Date, our disclosure controls and procedures are effective in timelyalerting them to the material information relating to us (or our consolidatedsubsidiaries) required to be included in our periodic SEC filings.

 

(b)         Changes in internalcontrols.

 

There were no significantchanges made in our internal controls or, to our knowledge, in other factorsthat could significantly affect these controls, subsequent to the date of theirevaluation.

 

30

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**ITEM15. ****Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 
| **(a)1.  Consolidated Financial Statements**                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Index to  Consolidated Financial Statements                                                                                                                 |
| Independent Auditors’  Report                                                                                                                          |
| Consolidated Balance  Sheets as of December 31, 2002, and December 31, 2001                                                                                 |
| Consolidated  Statements of Operations for the Years Ended December 31, 2002, December 31,  2001, and December 31, 2000                                     |
| Consolidated  Statements of Changes in Stockholders’ (Deficit) Equity for the Years Ended  December 31, 2002, December 31, 2001, and December 31, 2000 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002, December 31,  2001, and December 31, 2000                                     |
| Notes to  Consolidated Financial Statements                                                                                                                 |

 

**(a)3.Exhibits**
|   |   |                                                                                                                 |
|--------|--------|----------------------------------------------------------------------------------------------------------------------|
| 3A.    |   | Bylaws of MCT. (7)                                                                                                   |
| 3B.    |   | Articles of Incorporation of MCT. (7)                                                                                |
| 3C.    |   | Articles of Amendment dated March 14, 2002 (11).                                                                     |
| 4.     |   | Specimen Certificate of Common stock. (1)                                                                            |
| 10A.   |   | Form of Non-Competition Agreement between MCT and  certain senior executive officers. (1)                            |
| 10B.   |   | Stock Purchase Agreement and Commission Agreement  between MCT and Cardine & Levy, dated September 25, 1995. (3) |
| 10C.   |   | Employment Agreement with Roger E. Gower dated March  28, 1995. (2)                                                  |
| 10D.   |   | Employment Agreement with Dennis L. Nelson dated May  30, 1996. (5)                                                  |
| 10E    |   | Offer Letter to Thomas P. Maun dated July 15, 2002.  (filed herewith)                                                |
| 10F.   |   | Stock Option Plan for Outside Directors as amended  through April 10, 2001. (10)                                     |
| 10G.   |   | Incentive Stock Option Plan as amended through April  10, 2001. (10)                                                 |
| 10H.   |   | Former Aseco Corp. 1986 Incentive Stock Option Plan.  (9)                                                            |
| 10I.   |   | Former Aseco Corp. 1993 Omnibus Stock Plan. (9)                                                                      |
| 10J.   |   | Former Aseco Corp. 1993 Non-Employee Director Stock  Option Plan. (9)                                                |
| 10K.   |   | Lease for MCT’s corporate headquarters dated October  16, 1996. (6)                                             |
| 10L.   |   | Lease for space in Marlborough, Massachusetts dated  April 13, 1993. (8)                                             |
| 10M.   |   | Employee Stock Purchase Plan. (4)                                                                                    |
| 10U.   |   | Warrant Purchase Agreement dated July 11, 1992. (1)                                                                  |
| 10V.   |   | Second Common Stock Warrant Purchase Agreement dated  August 10, 1993. (1)                                           |
| 10W.   |   | Form of 10% Senior Subordinated Convertible Note.  (11)                                                              |
| 21.    |   | Revised Listing of Subsidiaries of Micro Component  Technology, Inc. (11)                                            |
| 23.    |   | Consent of Deloitte & Touche LLP. (filed  herewith)                                                              |
| 99.1   |   | Certification of Chief Executive Officer (filed  herewith)                                                           |
| 99.2   |   | Certification of Chief Financial Officer (filed  herewith)                                                           |

 

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(1)                                Incorporatedby reference to the exhibits to the registration statement on Form S-1 filed byMCT on August 24, 1993, as amended, SEC File Number 33-67846.

(2)                                Incorporatedby reference to the report on Form 10-Q filed by MCT for the quarter endedMarch 25, 1995, SEC File No. 0-22384.

(3)                                Incorporatedby reference to the report on Form 10-Q filed by MCT for the quarter ended September30, 1995, SEC File No. 0-22384.

 

31

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(4)                                Incorporatedby reference to the exhibits to the Post-Effective Amendment to RegistrationStatement on Form S-8 filed by MCT on July 15, 1996, as amended, SEC File No.33-85766.

(5)                                Incorporatedby reference to the exhibits to the report on Form 10-K filed by MCT for thefiscal year ended June 29, 1996, SEC File No. 0-22384.

(6)                                  Incorporatedby reference to the report on Form 10-Q filed by MCT for the quarter endedSeptember 28, 1996, SEC File No. 0-22384.

(7)                                  Incorporatedby reference to the exhibits to the Post-Effective Amendment No. 1 to theRegistration Statement on Form S-1 filed by MCT on November 18, 1996, SEC FileNo. 33-98940.

(8)                                Incorporatedby reference to the Registration Statement on Form S-1, as amended, filed byAseco Corporation on January 29, 1993, SEC File No. 33-57644.

(9)                                Incorporatedby reference to the exhibits to the Registration Statement on Form S-8 filed byMCT on January 31, 2000, SEC File No. 333-95765.

(10)                            Incorporatedby reference to the definitive proxy materials for the 2001 Annual StockholdersMeeting, filed April 30, 2001.

(11)                            Incorporatedby reference to the report on Form 10-K filed by MCT for the period endedDecember 31, 2001, SEC File No. 0-22384.

 

**(b)           Reports on Form 8-K**

 

There was no Form8-K filed during the quarter ended December 31, 2002.

 

32

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**MICRO COMPONENT TECHNOLOGY, INC.**

 

**Index to Consolidated FinancialStatements**

 

 
| Index to  Consolidated Financial Statements                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------|
| Independent Auditors’  Report                                                                                                                |
| Consolidated Balance  Sheets as of December 31, 2002, and December 31, 2001                                                                       |
| Consolidated  Statements of Operations for the Years Ended December 31, 2002, December 31,  2001, and December 31, 2000                           |
| Consolidated  Statements of Stockholders’ (Deficit) Equity for the Years Ended December 31,  2002, December 31, 2001, and December  31, 2000 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002, December 31,  2001, and December 31, 2000                           |
| Notes to  Consolidated Financial Statements                                                                                                       |

 

 

F-1

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Stockholders and Board of Directors of

Micro Component Technology, Inc.

 

We have audited the accompanying consolidatedbalance sheets of Micro Component Technology, Inc. and subsidiaries (theCompany) as of December 31, 2002 and 2001 and the related consolidated statementsof operations, stockholders’ (deficit) equity and cash flows for the yearsended December 31, 2002, 2001, and 2000. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material aspects, the financial position ofthe Company at December 31, 2002, and 2001, and the results of itsoperations and its cash flows for the years ended December 31, 2002, 2001,and 2000, in conformity with accounting principles generally accepted in theUnited States of America.

 

The accompanying financial statements havebeen prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements,the Company’s recurring losses from operations and stockholders’ deficit raisessubstantial doubt about its ability to continue as a going concern.  Management’s plans concerning these mattersare also described in Note. 1.  Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

 
| /s/ Deloitte & Touche LLP  |   |
|--------------------------------|--------|
|                           |
|                           |
| Minneapolis, Minnesota         |
| February 17, 2003              |
| (March 26, 2003 as to Note 12) |

 

F-2

----

 

**MICRO COMPONENT TECHNOLOGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

(in thousands, exceptshare and per share amounts)

 
|                                                                                                |   | **December  31,  2002** |   | **December  31,  2001** |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
| **Assets**                                                                                          |   |                    |   |                    |   |
| Current assets:                                                                                     |   |                    |   |                    |   |
| Cash and cash  equivalents                                                                          |   | $                       | 1,560  |                    | $      | 11,086 |   |
| Accounts receivable,  less allowance for doubtful accounts of $319 and $425, respectively           |   | 786                     |   | 3,136                   |   |
| Inventories                                                                                         |   | 3,850                   |   | 5,084                   |   |
| Other                                                                                               |   | 212                     |   | 254                     |   |
| Total current  assets                                                                               |   | 6,408                   |   | 19,560                  |   |
|                                                                                                |   |                    |   |                    |   |
| Property, plant  and equipment, net                                                                 |   | 605                     |   | 878                     |   |
| Debt issuance costs,  net                                                                           |   | 665                     |   | 832                     |   |
| Other assets                                                                                        |   | 75                      |   | 71                      |   |
|                                                                                                |   |                    |   |                    |   |
| Total assets                                                                                        |   | $                       | 7,753  |                    | $      | 21,341 |   |
|                                                                                                |   |                    |   |                    |   |
| **Liabilities  and Stockholders’ (Deficit) Equity**                                            |   |                    |   |                    |   |
| Current  liabilities:                                                                               |   |                    |   |                    |   |
| Current portion  of long-term debt                                                                  |   | $                       | 29     |                    | $      | 42 |   |
| Current portion  of accrued restructuring costs                                                     |   | 194                     |   | 678                     |   |
| Accounts payable                                                                                    |   | 1,010                   |   | 1,536                   |   |
| Accrued  compensation                                                                               |   | 419                     |   | 661                     |   |
| Accrued interest                                                                                    |   | 500                     |   | 19                      |   |
| Accrued warranty                                                                                    |   | 200                     |   | 400                     |   |
| Customer  prepayments and unearned service revenue                                                  |   | 300                     |   | 688                     |   |
| Deferred revenue  in excess of costs incurred                                                       |   | 48                      |   | 1,133                   |   |
| Other accrued  liabilities                                                                          |   | 847                     |   | 1,496                   |   |
| Total current  liabilities                                                                          |   | 3,547                   |   | 6,653                   |   |
|                                                                                                |   |                    |   |                    |   |
| Long-term debt                                                                                      |   | —                  |   | 33                      |   |
| Long-term  portion of accrued restructuring costs                                                   |   | —                  |   | 278                     |   |
| 10% senior  subordinated convertible debt                                                           |   | 10,000                  |   | 10,000                  |   |
|                                                                                                |   |                    |   |                    |   |
| Commitments and  contingencies (Note 8)                                                             |   |                    |   |                    |   |
|                                                                                                |   |                    |   |                    |   |
| Stockholders’  (deficit) equity:                                                               |   |                    |   |                    |   |
| Preferred stock,  $.01 par value, 1,000,000 authorized, none issued and outstanding                 |   |                    |   |                    |   |
| Common stock,  $.01 par value, 40,000,000 authorized 14,152,520 and 14,074,365 issued, respectively |   | 142                     |   | 141                     |   |
| Additional  paid-in capital                                                                         |   | 88,302                  |   | 88,144                  |   |
| Cumulative other  comprehensive loss                                                                |   | (69                     | )      | (69                     | )      |
| Accumulated  deficit                                                                                |   | (94,169                 | )      | (83,839                 | )      |
| Total  stockholders’ (deficit) equity                                                          |   | (5,794                  | )      | 4,377                   |   |
|                                                                                                |   |                    |   |                    |   |
| Total  liabilities and stockholders’ (deficit) equity                                          |   | $                       | 7,753  |                    | $      | 21,341 |   |
|                                                                                                |   |                    |   |                    |   |
| See Notes to  Consolidated Financial Statements.                                                    |   |

 

 

F-3

----

 

 

**MICRO COMPONENT TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(in thousands,except per share data)

 
|                                                               |   | **Years  Ended**        |    |
|--------------------------------------------------------------------|--------|-------------------------|---------|
|                                                               |   | **December  31,  2002** |    | **December  31,  2001** |   | **December  31,  2000** |   |
| Net sales                                                          |   | $                       | 12,211  |   | $ | 25,406 |   | $ | 49,902 |   |
| Cost of sales:                                                     |   |                    |    |   |   |   |   |
| Product                                                            |   | 7,604                   |    | 15,832 |   | 26,905 |   |
| Inventory  revaluation                                             |   | 913                     |    | 8,092 |   | 3,979 |   |
| Total cost of  sales                                               |   | 8,517                   |    | 23,924 |   | 30,884 |   |
| Gross profit                                                       |   | 3,694                   |    | 1,482 |   | 19,018 |   |
|                                                               |   |                    |    |   |   |   |   |
| Operating  expenses:                                               |   |                    |    |   |   |   |   |
| Selling,  general, and administrative                              |   | 8,556                   |    | 10,864 |   | 16,177 |   |
| Research and  development                                          |   | 4,214                   |    | 7,859 |   | 9,271 |   |
| Amortization of  intangible assets                                 |   | —                  |    | 2,632 |   | 4,308 |   |
| Write-down of  impaired intangible assets                          |   | —                  |    | 9,298 |   | 3,405 |   |
| Restructuring  charge                                              |   | 207                     |    | 2,444 |   | — |   |
| Total operating  expenses                                          |   | 12,977                  |    | 33,097 |   | 33,161 |   |
|                                                               |   |                    |    |   |   |   |   |
| Loss from  operations                                              |   | (9,283                  | )       | (31,615 | ) | (14,143 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Other income  (expense):                                           |   |                    |    |   |   |   |   |
| Interest income                                                    |   | 102                     |    | 227 |   | 356 |   |
| Interest expense                                                   |   | (1,175                  | )       | (26 | ) | (330 | ) |
| Other expense                                                      |   | 26                      |    | (5 | ) | (72 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Loss before  income taxes                                          |   | (10,330                 | )       | (31,419 | ) | (14,189 | ) |
| Income tax  provision                                              |   | —                  |    | — |   | — |   |
|                                                               |   |                    |    |   |   |   |   |
| Loss before  cumulative effect of change in accounting principle   |   | (10,330                 | )       | (31,419 | ) | (14,189 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Cumulative  effect of change in accounting principle               |   | —                  |    | — |   | (1,264 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Net loss                                                           |   | $                       | (10,330 | ) | $ | (31,419 | ) | $ | (15,453 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Net loss per  share before cumulative adjustment:                  |   |                    |    |   |   |   |   |
| Basic and  diluted                                                 |   | $                       | (0.73   | ) | $ | (2.24 | ) | $ | (1.23 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Cumulative  adjustment                                             |   | $                       | —  |   | $ | — |   | $ | (0.11 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Net loss per  share:                                               |   |                    |    |   |   |   |   |
| Basic and  diluted                                                 |   | $                       | (0.73   | ) | $ | (2.24 | ) | $ | (1.34 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Weighted average  common and common equivalent shares outstanding: |   |                    |    |   |   |   |   |
| Basic                                                              |   | 14,125                  |    | 14,027 |   | 11,531 |   |
| Diluted                                                            |   | 14,125                  |    | 14,027 |   | 11,531 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

F-4

----

 

**MICRO COMPONENT TECHNOLOGY, INC.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY**

(in thousands,except share data)

 
|                                                |   | **Common  Stock** |   | **Comprehensive  Loss**          |   | **Accumulated  Deficit** |   | **Cumulative  Other  Comprehensive  Loss** |    |
|-----------------------------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|--------|--------------------------------------------|---------|
| **Shares**                                          |   | **Par  Value**    |   | **Additional  Paid-in  Capital** |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |   |   |   |   |
| Balance at  December 31, 1999                       |   | 7,540,647         |   | $                                | 75     |                     | $      | 44,217                                     |    |   |   | $ | (36,967 | ) | $ | (69 | ) |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |
| Net loss                                            |   |              |   |                             |   |                     |   | $                                          | (15,453 | ) | (15,453 | ) |   |   |
| Shares issued on  exercise of options, net          |   | 494,514           |   | 5                                |   | 814                      |   |                                       |    |   |   |   |   |
| Shares issued  for acquisition                      |   | 2,578,366         |   | 26                               |   | 23,174                   |   |                                       |    |   |   |   |   |
| Proceeds from  issuance of stock, net               |   | 3,290,000         |   | 33                               |   | 19,615                   |   |                                       |    |   |   |   |   |
| Shares issued through  employee stock purchase plan |   | 46,447            |   | —                           |   | 122                      |   |                                       |    |   |   |   |   |
| Comprehensive  loss                                 |   |              |   |                             |   |                     |   | $                                          | (15,453 | ) |   |   |   |   |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |
| Balance at  December 31, 2000                       |   | 13,949,974        |   | $                                | 139    |                     | $      | 87,942                                     |    |   |   | $ | (52,420 | ) | $ | (69 | ) |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |
| Net loss                                            |   |              |   |                             |   |                     |   | $                                          | (31,419 | ) | (31,419 | ) |   |   |
| Shares issued on  exercise of options, net          |   | 87,510            |   | 1                                |   | 96                       |   |                                       |    |   |   |   |   |
| Shares issued  through employee stock purchase plan |   | 36,881            |   | 1                                |   | 106                      |   |                                       |    |   |   |   |   |
| Comprehensive  loss                                 |   |              |   |                             |   |                     |   | $                                          | (31,419 | ) |   |   |   |   |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |
| Balance at  December 31, 2001                       |   | 14,074,365        |   | $                                | 141    |                     | $      | 88,144                                     |    |   |   | $ | (83,839 | ) | $ | (69 | ) |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |
| Net loss                                            |   |              |   |                             |   |                     |   | $                                          | (10,330 | ) | (10,330 | ) |   |   |
| Shares issued on  exercise of options, net          |   | 49,176            |   | 1                                |   | 81                       |   |                                       |    |   |   |   |   |
| Shares issued  through employee stock purchase plan |   | 28,979            |   | —                           |   | 77                       |   |                                       |    |   |   |   |   |
| Comprehensive  loss                                 |   |              |   |                             |   |                     |   | $                                          | (10,330 | ) |   |   |   |   |
|                                                |   |              |   |                             |   |                     |   |                                       |    |   |   |   |   |
| Balance at  December 31, 2002                       |   | 14,152,520        |   | $                                | 142    |                     | $      | 88,302                                     |    |   |   | $ | (94,169 | ) | $ | (69 | ) |

 

See Notes toConsolidated Financial Statements.

 

F-5

----

 

**MICRO COMPONENT TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
|                                                                                        |   | **Years  Ended**        |    |
|---------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                        |   | **December  31,  2002** |    | **December  31,  2001** |   | **December  31,  2000** |   |
| Cash flows from  operating activities:                                                      |   |                    |    |   |   |   |   |
| Net loss                                                                                    |   | $                       | (10,330 | ) | $ | (31,419 | ) | $ | (15,453 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                |   |                    |    |   |   |   |   |
| Depreciation                                                                                |   | 403                     |    | 734 |   | 883 |   |
| Amortization                                                                                |   | 167                     |    | 2,632 |   | 4,308 |   |
| Write-down of  impaired intangible assets                                                   |   | —                  |    | 9,298 |   | 3,405 |   |
| Inventory  revaluation                                                                      |   | 913                     |    | 8,092 |   | 3,979 |   |
| Other, net                                                                                  |   | —                  |    | (41 | ) | (19 | ) |
| Loss on disposal  on property                                                               |   | 17                      |    | — |   | — |   |
| Changes in  operating assets and liabilities:                                               |   |                    |    |   |   |   |   |
| Accounts  receivable                                                                        |   | 2,350                   |    | 8,769 |   | (3,495 | ) |
| Inventories                                                                                 |   | 321                     |    | 242 |   | (7,843 | ) |
| Other assets                                                                                |   | 39                      |    | 116 |   | 365 |   |
| Accounts payable                                                                            |   | (526                    | )       | (5,420 | ) | 2,747 |   |
| Accrued  restructuring costs                                                                |   | (762                    | )       | 996 |   | — |   |
| Other accrued  liabilities                                                                  |   | (2,084                  | )       | (4,010 | ) | 4,322 |   |
| Net cash used in  operating activities                                                      |   | (9,492                  | )       | (10,011 | ) | (6,801 | ) |
|                                                                                        |   |                    |    |   |   |   |   |
| Cash flows from  investing activities:                                                      |   |                    |    |   |   |   |   |
| Additions to  property, plant and equipment                                                 |   | (184                    | )       | (325 | ) | (466 | ) |
| Proceeds from  disposition of property                                                      |   | 37                      |    | — |   | — |   |
| Payment for  acquisition, net of cash acquired                                              |   | —                  |    | — |   | (473 | ) |
| Net cash used in  investing activities                                                      |   | (147                    | )       | (325 | ) | (939 | ) |
|                                                                                        |   |                    |    |   |   |   |   |
| Cash flows from  financing activities:                                                      |   |                    |    |   |   |   |   |
| Increase in  long-term debt                                                                 |   | —                  |    | 41 |   | — |   |
| Payments on  long-term debt                                                                 |   | (46                     | )       | (34 | ) | (53 | ) |
| Proceeds from  issuance of senior subordinated convertible debt, net of debt issuance costs |   | —                  |    | 9,164 |   | — |   |
| Reduction in  working line of credit                                                        |   | —                  |    | — |   | (1,794 | ) |
| Proceeds from  issuance of stock                                                            |   | 159                     |    | 204 |   | 20,589 |   |
| Net cash  provided by financing activities                                                  |   | 113                     |    | 9,375 |   | 18,742 |   |
|                                                                                        |   |                    |    |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                       |   | (9,526                  | )       | (961 | ) | 11,002 |   |
|                                                                                        |   |                    |    |   |   |   |   |
| Cash and cash  equivalents at beginning of period                                           |   | 11,086                  |    | 12,047 |   | 1,045 |   |
|                                                                                        |   |                    |    |   |   |   |   |
| Cash and cash  equivalents at end of period                                                 |   | $                       | 1,560   |   | $ | 11,086 |   | $ | 12,047 |   |
|                                                                                        |   |                    |    |   |   |   |   |
| Supplemental  disclosure:                                                                   |   |                    |    |   |   |   |   |
| Non-cash  investing and financing activities:                                               |   |                    |    |   |   |   |   |
| Equipment  acquired by capital lease                                                        |   | $                       | —  |   | $ | 41 |   | $ | 14 |   |
| Stock issued for  the acquisition of Aseco Corporation                                      |   | —                  |    | — |   | 22,500 |   |
| Cash paid for  interest                                                                     |   | $                       | 527     |   | $ | 210 |   | $ | 354 |   |

 

See Notes toConsolidated Financial Statements.

 

F-6

----

 

**MICRO COMPONENT TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES**

 

*Business*

 

We design, manufacture,market and service automated test handling equipment for the semiconductorindustry.  Our handlers are designed tohandle most semiconductor or integrated circuit device packages currently inproduction.  We operate in one businesssegment in three geographic locations.

 

A network of offices andrepresentatives supports our customers across North America, Europe andAsia.  Our company was formed in 1972and is headquartered in St. Paul, Minnesota.

 

*Basisof Presentation*

 

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

 

Our consolidated financial statements have beenprepared on the assumption that we will continue as a going concern, which contemplatesthe realization of assets and liquidation of liabilities in the normal courseof business. The independent auditor’s report included herein contains an explanatoryparagraph that raises substantial doubt about our ability to continue as agoing concern.   The financialstatements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the outcome of thisuncertainty.

 

As of December 31, 2002,we had cash and cash equivalents of $1.6 million, working capital of $2.9 million,assets totaling $7.8 million, liabilities totaling $13.5 million and incurredlosses from continuing operations of $10.3 million for the year thenended.  We expect to continue to expendcash and incur operating losses at these net sales levels at least though thefirst half of 2003 and our ability to generate cash and operating income isdependent on the realization of our restructuring efforts, the successfultransfer of our core manufacturing to Penang, Malaysia and our responsivenessto further negative impacts due to the downturn in the semiconductor capitalequipment market.  We are pursing thesub-letting of our St. Paul, Minnesota operations and will be exiting leases inseveral other of our facilities pursuant to those lease terms to further lowerour operating costs.

 

As discussed in Note 12,in March 2003, we completed a private equity placement of our common stock,which resulted in net proceeds to us of $1.2 million.  We estimate that we will need to raise additional capital throughdebt or equity offerings, selling assets or accelerating available cash throughthe factoring of our receivables. We are actively pursing these activities;however, there is no assurance that additional financing will be available onterms and conditions acceptable or favorable to us, if at all.  If we are unsuccessful in obtaining sufficientfinancing, our operations will be materially negatively impacted and we will berequired to take actions that will harm our business, including potentiallyceasing certain or all of our operations.

 

*Useof Estimates*

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires that we make estimates andassumptions that affect amounts reported therein.  Due to the inherent uncertainty involved in making estimates,actual results reported in future periods might differ from those estimates.

 

 

F-7

----

 

*RevenueRecognition*

 

Effective January 1, 2000, we changed our method ofrevenue recognition for certain semiconductor equipment sales to comply withSEC Staff Accounting Bulletin No. 101 (SAB 101) – *Revenue Recognition in**FinancialStatements* (see Note 2).  SAB101 sets forth guidelines on the timing of revenue recognition based uponfactors such as passage of title, installation, payment and customeracceptance.

 

Under our old policy (prior to SAB 101), we recognizedrevenue for product sales upon shipment, as our terms were free on board (FOB)shipping point, if all conditions precedent to the sale had been met or wereassured of being met.  If we had rightsof return within a contract due to significant technological issues (primarilyon new first build products placed for the first time at a customer), we wouldnot recognize revenue until technological feasability had been proven andaccepted and, therefore the return provision had lapsed. Revenues related tospare parts were recognized upon shipment. Service revenue was deferred andamortized to earnings on a straight-line basis over the life of the servicecontract.

 

Under SAB 101, our revenuepolicy was changed. Revenue is recognized upon shipment, as our terms are FOBshipping point, for established products that have previously satisfiedexisting customer performance specifications and that provide for full paymenttied to shipment.  Revenue for productsthat have not previously satisfied customer performance specifications or fromsales where all or a portion of customer payment is based upon acceptance areonly recognized upon customer acceptance. The related inventory costs are offset against the deferred revenue andreported as “deferred revenue in excess of costs incurred” in the consolidatedbalance sheet.  Product warranty andinstallation costs are accrued in the period sales are recognized.  Installation services are considered to beperfunctory as defined under SAB 101 and average less than 5% of the contractprice.  Revenue related to spare partsis recognized upon shipment.  Revenue relatedto maintenance and service contracts are deferred and amortized to earnings ona straight-line basis over the life of the service contract.  Custom integration software revenue isrecognized on a project basis with milestone acceptance provisions.

 

*Researchand Development Expenses*

 

Research and developmentexpenses for new product development are charged to expense as incurred.

 

*Cashand Cash Equivalents*

 

We consider all highlyliquid investments purchased with original maturities of 90 days or less to becash equivalents.

 

*Inventories*

 

Inventories are stated atthe lower of cost or market.  Cost isdetermined by the first-in, first-out (“FIFO”) method.  Provision to reduce inventories to the lowerof cost or market is made based on a review of excess and obsolete inventories,estimates of future sales, examination of historical consumption rates and therelated value of component parts.

 

*Property,Plant and Equipment*

 

Property, plant andequipment are stated at cost. Depreciation is provided by the straight-line method over theestimated useful lives of the assets for financial reporting and acceleratedmethods for tax purposes.  Estimatedlives used in computing book depreciation are as follows:

 
| Leasehold  improvements  |   | 3 to 10 years |   |
|--------------------------|--------|---------------|--------|
| Machinery and  equipment |   | 2 to 7        |   |
| Furniture and  fixtures  |   | 3 to 5        |   |

 

F-8

----

 

*Impairmentof Long-Lived Assets*

 

We periodically evaluate the carrying value oflong-lived assets for potential impairment. We consider projected future operating results, cash flows, trends, andother circumstances in making such estimates and evaluations.  When the carrying value of any long-livedasset exceeds its projected undiscounted cash flows, an impairment isrecognized to reduce the carrying value to its fair market value.

 

*ProductWarranty*

 

Estimated costs of warranty obligations to customersare charged to expense and a related accrual is established at the time theproduct is sold.

 

F-9

----

 

*IncomeTaxes*

 

We account for incometaxes in accordance with the provisions of Statement of Financial AccountingStandards (SFAS) No. 109*, Accounting for Income Taxes*.  Deferred income taxes are recorded based ondifferences in the bases of assets and liabilities between the financialstatements and the tax returns as well as from loss carryforwards.  The valuation allowance for deferred incometax benefits is determined by us based upon the expectation of whether thebenefits are more likely than not to be realized.

 

*Stock-BasedCompensation*

 

We account for stock-basedtransactions under SFAS No. 123*, Accounting for Stock-Based Compensation*.  As permitted by SFAS No. 123, we haveelected to continue following the guidance of APB Opinion No. 25 (asinterpreted by FIN 44) for measurement and recognition of stock-based transactionswith employees and non-employee directors. Because stock options have been granted at exercise prices at leastequal to the fair market value of the stock at the grant date, no compensationcost has been recognized for stock options issued to employees and non-employeedirectors under the stock option plans. Stock-based transactions with non-employees are accounted for in accordancewith SFAS No. 123 and related interpretations.

 

*ForeignCurrency Translation*

 

Assetsand liabilities of the foreign subsidiary are translated to U.S. dollars atyear-end rates, and the statements of operations are translated at averageexchange rates during the year. Translation adjustments arising from the translation of the foreignaffiliates’ net assets into U.S. dollars were recorded in cumulative other comprehensiveincome until 1999.  During 1999, theforeign subsidiary’s functional currency changed to the U.S. dollar dueprincipally to a significant shift in the amount of activity denominated inU.S. dollars versus the local currency. All translation adjustments are now recorded in the consolidatedstatements of operations.

 

*Reclassifications*

 

Certainreclassifications have been made to prior years’ consolidated financialstatements in order to conform to the 2002 presentation. Such reclassificationshad no effect on total shareholders’ (deficit) equity, net loss, or loss pershare as previously reported.

 

*New Accounting Standards*

 

*SFAS No. 143 – Accounting for Asset Retirement Obligations***.**  In June 2001, the FASB issued SFAS No. 143, *Accounting for Asset Retirement Obligations*.  SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees.  SFAS No. 143 is effective for us on January 1, 2003.  We expect that SFAS No. 143 will not have a material effect on our financial position or results of operations.

 

*SFAS  No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets*.  In August 2001, the FASB issued SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*.  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, *Accounting for the Impairment of Long-Lived Assets and for**Long-Lived Assets to Be Disposed Of*, and the accounting and reporting provisions of APB Opinion No. 30, *Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently*

 

F-10

----

 

*Occurring Events and Transactions,*for the disposal of a segment of a business (as previously defined in that Opinion)*.*  SFAS No. 144 also amends ARB No. 51, *Consolidated Financial Statements*, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary.  SFAS No. 144 was effective for us on January 1, 2002 and did not have a material effect on our financial position or results of operations.

 

*SFAS No. 145 - Rescission of FASBstatements NO. 4, 44, and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.)*  InApril 2002, the FASB issued SFAS No. 145, *Rescissionof FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections.* SFAS No. 145 was adopted by us on July 1,2002. The adoption of the technical corrections contained in SFAS No. 145 didnot have an impact on our financial position or results of operations.

 

*SFAS No. 146 – Accounting for CostsAssociated with Exit or Disposal Activities.*  In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*. SFAS No. 146 addresses financial accounting andreporting for costs associated with exit or disposal activities and nullifiesEmerging Issues Task Force (EITF) Issue No. 94-3, *Liability Recognition for Certain Employee Termination Benefits andOther Costs to Exit an Activity (Including**Certain Costs Incurred in a Restructuring).*SFAS No. 146 requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred. Under EITF94-3, a liability for an exit cost was recognized at the date of an entity’scommitment to an exit plan. SFAS No. 146 will be effective for exit or disposalactivities that are initiated by us after December 31, 2002. The adoption SFASNo. 146 is not expected to have a material effect on our financial position orresults of operations.

 

*FASB Interpretation No. 45 – Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.*  InNovember 2002, the FASB issued FASB Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others* (FIN 45).  FIN 45 clarifies the requirements for aguarantor’s accounting for and disclosure of certain issued and outstandingguarantees.  The initial recognition andinitial measurement provisions of FIN 45 are applicable to guarantees issued ormodified after December 31, 2002.  Thedisclosure requirements of FIN 45 are effective for financial statements ofinterim or annual periods ending after December 15, 2002.  The adoption of FIN 45 did not have a materialimpact on the Company’s consolidated balance sheet or results of operations.

 

*SFAS No. 148 – Accounting forStock-Based Compensation – Transition and Disclosures – an amendment to FASBNo. 123*.  In December 2002, the FASB issued SFAS No.148, *Accounting for Stock-Based Compensation-Transition andDisclosure-an amendment to FASB No. 123.* SFAS No. 148, which amends SFAS No. 123, *Accountingfor Stock-Based Compensation*, provides alternative methods of transition for avoluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS No. 148 amends the disclosurerequirement of SFAS No. 123 to require more prominent and more frequentdisclosures in financial statements of the effects of stock-based compensation.The transition guidance and annual disclosure provisions of SFAS No. 148 areeffective for fiscal years ending after December 15, 2002. The interimdisclosure provisions are effective for financial reports containing condensedfinancial statements for interim periods beginning after December 15, 2002. Theadoption of SFAS No. 148 did not have a material impact on the Company’sconsolidated balance sheet or results of operations. Management has adopted thedisclosure provisions of this standard as of December 31, 2002.

 

 

**NOTE2  – CUMULATIVE EFFECT OF CHANGE INACCOUNTING PRINCIPLE**

 

In December 1999, the Securities and ExchangeCommission staff issued SAB 101, which, among other things, establishes theSEC’s staff’s interpretation that if uncertainty exists about customeracceptance of a

 

F-11

----

 

product, revenue should not be recognized until acceptance occurs.  In SAB 101, the SEC staff stated thatcustomer acceptance provisions may be included in a contract to enforce acustomer’s right to (1) test the delivered product, (2) require the seller toperform additional services subsequent to delivery of an initial product orperformance of an initial service, such as a seller is required to install oractivate delivered equipment, or (3) identify other work necessary to be donebefore accepting the product.  The SECpresumes that such contractual customer acceptance provisions are substantive,bargained-for terms of an arrangement. Accordingly, when such contractual customer acceptance provisions exist,the SEC generally believes that the seller should not recognize revenue untilcustomer acceptance occurs or the acceptance provisions lapse.

 

In the fourth quarter of 2000, we changed our methodof recognizing revenue to comply with SAB 101. As a result of this change, we reported a change in accounting principlein accordance with APB Opinion No. 20 (APB 20),*Accounting Changes*, by acumulative effect adjustment.  Becausewe are a calendar year entity who adopted SAB 101 in the fourth quarter of theyear ended December 31, 2000, no cumulative effect of the change was includedin net income of the fourth quarter. Instead, APB 20 requires that the change be made as of the beginning ofthe year (January 1, 2000) and that financial information for pre-changeinterim periods, in this case the first three quarters of 2000, be restated byapplying SAB 101 to those periods.  Forthe year ended December 31, 2000, we recognized $3.3 million of revenue, whichwas included in our cumulative effect adjustment pursuant to the adoption ofSAB 101.  This represented 100% of therevenue contained in the cumulative effect adjustment.

 

**NOTE 3 - LOSS PER SHARE**

 

Loss per share is computed in accordance with SFAS No.128, *EarningsPer Share*.  Basic loss pershare is computed using the weighted average number of common sharesoutstanding during each period.  Dilutedearnings per share include the dilutive effect of common shares potentiallyissuable upon the exercise of stock options, warrants outstanding and theconversion of convertible debt.  The followingtable reconciles the denominators used in computing basic and diluted loss pershare for the periods reported (in thousands):

 
|                                           |   | **Years Ended**           |   |
|------------------------------------------------|--------|---------------------------|--------|
|                                           |   | **December 31,  2002(1)** |   | **December 31,  2001(1)** |   | **December 31,  2000(1)** |   |
|                                           |   |                      |   |   |   |   |   |
| Weighted  average common shares outstanding    |   | 14,125                    |   | 14,027 |   | 11,531 |   |
| Effect  of dilutive stock options and warrants |   | —                    |   | — |   | — |   |
| Effect  of convertible debt                    |   | —                    |   | — |   | — |   |
|                                           |   | 14,125                    |   | 14,027 |   | 11,531 |   |

 

----

(1)          We reported a loss for the period.  No adjustment was made for the effect ofstock options, warrants or convertible debt as the effect wasanti-dilutive.  Stock options andwarrants outstanding totaled 2,688,751 shares at December 31, 2002, 2,349,915shares at December 31, 2001 and 2,157,598 shares at December 31, 2000.

 

**NOTE 4 - RESTRUCTURING CHARGES**

 

**2002 Restructuring Charges**

 

In 2002, in response to the continued and prolongeddownturn in the semiconductor capital equipment industry, we took the followingactions:

 

Duringthe first quarter, we reduced our workforce across all functional areas byapproximately 25% at the time, resulting in a restructuring charge of$323,000.  This charge reflectedseverance and other benefits costs associated with this reduction.  This workforce reduction affected anadditional 44 employees, principally in the areas of manufacturing, sales andmarketing and engineering.

 

F-12

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During the second quarter, we further reduced our workforceby 7% at the time, resulting in a restructuring charge of $199,000.  This charge reflected severance and otherbenefit costs associated with the reduction, which affected 9 employees acrossall functional areas.  We also completeda lease settlement agreement related to our Marlborough, Massachusetts’facility.  This agreement required us topay $450,000 or approximately 35% of the outstanding lease obligation, whichwas to run through April 2003.  As ofDecember 31, 2002, the full amount of this settlement has been paid. Thesettlement of this lease resulted in a $674,000 benefit.

 

Duringthe third quarter, as a result of the on going transfer of our coremanufacturing operations to our Penang, Malaysia facility, we incurred arestructuring charge of $345,000, representing severance and other benefitcosts associated with further reductions to our workforce.  This reduction was implemented in the thirdand fourth quarters of 2002 and affected a total of 38 employees or 30% of ourworkforce at the time, across all functional areas.

 

Duringthe fourth quarter, we further reduced our workforce, resulting in a restructuringcharge of $14,000.  This chargereflected severance and other benefit costs associated with the reduction,which affected 9 employees or 8% of our workforce at the time, principally inthe area of sales and marketing.

 

**2001 Restructuring Charges**

 

In 2001, in response to the continued and prolongeddownturn in the semiconductor capital equipment industry, we took the followingactions:

 

Duringthe first quarter, we announced plans to consolidate the manufacturing andoperation functions performed in our Marlborough, Massachusetts facility to ourSt. Paul, Minnesota facility, resulting in reductions in staffing levels, aswell as other reduction initiatives which resulted in a restructuring charge inthe first quarter of 2001.  This planwas later adjusted to transfer the manufacturing functions to our Penang,Malaysia facility.

 

The restructuring charges resulting from theconsolidation of operations and cost reduction measures initiated in the firstquarter of 2001 totaled approximately $2.3 million.  This charge principally represented employee separation costs andcosts related to idle facilities over the remaining lease term, which ran throughApril 2003.  This restructuring affectedapproximately 25% of our workforce at the time and comprised a total of 73employees principally in the areas of manufacturing and administration.  Idle facility costs included in the chargerepresented a percentage of the remaining rent payments, utilities andinsurance costs ($1.28 million) and the impairment of certain leaseholdimprovements ($0.04 million).

 

Duringthe third quarter, we reduced our workforce across all functional areas byapproximately 17% at the time, resulting in a restructuring charge of$113,000.  This charge reflectedseverance and other benefit costs associated with this reduction. Thisworkforce reduction affected an additional 31 employees, principally in theareas of manufacturing and engineering. All of these costs were incurred and paid during the quarter ended September29, 2001.

 

Thefollowing table summarizes these charges related to workforce and manufacturingcost reductions (in thousands):

 

F-13

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|                                                                 |   | **Employee  Separation  Costs** |   | **Idle Facility  Costs** |   | **Total** |   |
|----------------------------------------------------------------------|--------|---------------------------------|--------|--------------------------|--------|-----------|--------|
|                                                                 |   |                            |   |                     |   |      |   |
| Accrued  restructuring costs at December 31, 2001                    |   | $                               | 66     |                     | $      | 890       |   | $ | 956 |   |
|                                                                 |   |                            |   |                     |   |      |   |
| Restructuring  charge for the quarter ended March 30, 2002           |   | 323                             |   | —                   |   | 323       |   |
|                                                                 |   |                            |   |                     |   |      |   |
| Utilization for  the quarter ended March 30, 2002                    |   | (272                            | )      | (167                     | )      | (439      | )      |
|                                                                 |   |                            |   |                     |   |      |   |
| Restructuring  charge (recovery) for the quarter ended June 29, 2002 |   | 199                             |   | (674                     | )      | (475      | )      |
|                                                                 |   |                            |   |                     |   |      |   |
| Utilization for  the quarter ended June 29, 2002                     |   | (126                            | )      | (49                      | )      | (175      | )      |
|                                                                 |   |                            |   |                     |   |      |   |
| Restructuring  charge for the quarter ended September 28, 2002       |   | 345                             |   | —                   |   | 345       |   |
|                                                                 |   |                            |   |                     |   |      |   |
| Utilization for  the quarter ended September 28, 2002                |   | (119                            | )      | —                   |   | (119      | )      |
|                                                                 |   |                            |   |                     |   |      |   |
| Restructuring  charge for the quarter ended December 31, 2002        |   | 14                              |   | —                   |   | 14        |   |
|                                                                 |   |                            |   |                     |   |      |   |
| Utilization for  the quarter ended December 31, 2002                 |   | (236                            | )      | —                   |   | (236      | )      |
|                                                                 |   |                            |   |                     |   |      |   |
| Accrued  restructuring costs at December 31, 2002                    |   | $                               | 194    |                     | $      | —    |   | $ | 194 |   |

 

**NOTE5 – BALANCE SHEET INFORMATION**

 

The allowance fordoubtful accounts receivable was as follows (in thousands):

 
|               |   | **December 31,  2002** |   | **December 31,  2001** |   |
|--------------------|--------|------------------------|--------|------------------------|--------|
|               |   |                   |   |                   |   |
| Beginning  balance |   | $                      | 425    |                   | $      | 200 |   |
| Provisions         |   | —                 |   | 225                    |   |
| Write  offs        |   | (106                   | )      | —                 |   |
| Ending  balance    |   | $                      | 319    |                   | $      | 425 |   |

 

Provisionsare charged to selling, general and administrative expense.

 

Major components ofinventories were as follows (in thousands):

 
|            |   | **December 31,  2002** |   | **December 31,  2001** |   |
|-----------------|--------|------------------------|--------|------------------------|--------|
|            |   |                   |   |                   |   |
| Raw  materials  |   | $                      | 2,541  |                   | $      | 3,602 |   |
| Work-in-process |   | 778                    |   | 825                    |   |
| Finished  goods |   | 531                    |   | 657                    |   |
|            |   | $                      | 3,850  |                   | $      | 5,084 |   |

 

F-14

----

 

In accordance with generally accepted accountingprinciples, we value our inventories at the lower of cost or market.  In the fourth quarter of 2002, we recorded acharge of $913,000 for excess inventory related to our older singulatedtechnologies resulting from the continued downturn in the semiconductor capitalequipment market.  This charge isincluded in costs of sales in the fourth quarter of 2002 and the year endedDecember 31, 2002.  In the third quarterof 2001, we recorded a charge of $8.1 million for excess and obsoleteinventory.  Approximately $1.9 millionof this charge represented discontinued products and approximately $0.6 millionrepresented obsolete components resulting from a shift in product focus.  The remaining charge of approximately $5.6million related to excess inventory, principally in our older singulatedproducts, due to the protracted downturn in the semiconductor capital equipmentindustry and our change in product strategy. In the fourth quarter of 2000, werecorded a charge of $4.0 million for excess inventory due to the initialdownturn in the market.  These provisionsfor excess inventory resulted from the significant decrease in forecasteddemand and consumption rates associated with the market downturn and werecalculated in accordance with our policy, which considers, among other factors,technological obsolescence, historical consumptions and expected demandlevels.  These amounts are included incost of sales for the third quarter of 2001 and the year ended December 31,2001, and the fourth quarter of 2000 and the year ended December 31, 2000.  All inventory that has been designatedobsolete is physically disposed of.

 

Property, plant andequipment were as follows (in thousands):

 
|                           |   | **December 31,  2002** |   | **December 31,  2001** |   |
|--------------------------------|--------|------------------------|--------|------------------------|--------|
|                           |   |                   |   |                   |   |
| Leasehold  improvements        |   | $                      | 473    |                   | $      | 553 |   |
| Machinery  and equipment       |   | 3,293                  |   | 3,076                  |   |
| Furniture  and fixtures        |   | 600                    |   | 2,210                  |   |
|                           |   | 4,366                  |   | 5,839                  |   |
| Less  accumulated depreciation |   | (3,761                 | )      | (4,961                 | )      |
|                           |   | $                      | 605    |                   | $      | 878 |   |

 

Forthe year ended December 31, 2002,  wewrote off approximatly $1.7 million in fully depreciated assets that are nolonger utilized in the business.

 

F-15

----

 

Intangibleassets and goodwill were as follows: (in thousands):

 
|                           |   | **December  31,  2002 (2)** |   | **December  31,  2001(2)** |   | **Estimated  Useful Life** |   |
|--------------------------------|--------|-----------------------------|--------|----------------------------|--------|----------------------------|--------|
|                           |   |                        |   |                       |   |                       |   |
| Intellectual  property         |   | $                           | 42     |                       | $      | 42                         |   | 24 months |   |
| Customer lists                 |   | 333                         |   | 333                        |   | 60 months                  |   |
| Established work  force        |   | 1,019                       |   | 1,019                      |   | 24 months                  |   |
| Developed  products (1)        |   | 1,125                       |   | 1,125                      |   | 36 months                  |   |
| Core products  (1)             |   | 1,667                       |   | 1,667                      |   | 60 months                  |   |
| Goodwill                       |   | 2,760                       |   | 2,760                      |   | 60 months                  |   |
|                           |   | 6,946                       |   | 6,946                      |   |                       |   |
| Less accumulated  amortization |   | (6,946                      | )      | (6,946                     | )      |                       |   |
|                           |   | $                           | — |                       | $      | —                     |   |   |   |

 

----

(1)          Originalassignment of values was based on the specific products assigned to eachproduct group and discounting the forecasted net future cash flows of thoseproducts.

 

(2)  Due to the deep and protracted downturn inthe semiconductor capital equipment industry, in 2001we shifted productstrategy and focused our resources on profit contribution in high growthmarkets.  These high contributionmarkets directly relate to the company’s new strip testing technology and suiteof automated equipment solutions.  Wewill continue to market and manufacture certain of our older singulatedproducts; however, the financial contribution of these products will continueto represent a lower percentage of our overall results.  In accordance with generally accepted accountingprinciples, we evaluate our carrying values of long-lived assets (purchasedintangibles) and goodwill based on the analysis by which the carrying valuesexceed the present value of the estimated future cash flows for purchased intangibleassets and goodwill.  Therefore, as aresult of the significant industry downturn, which began in the fourth quarterof 2000 and continued through 2001, we reduced the carrying value of thepurchased intangible assets and goodwill as follows:

 
|                       |   | **For the years  ended**  |   |
|----------------------------|--------|---------------------------|--------|
|                       |   | **December 31,  2001(b)** |   | **December 31,  2000 (b)** |   |
|                       |   |                      |   |   |   |
| Intellectual  property     |   | $                         | — |   | $ | — |   |
| Customer  list             |   | 667                       |   | — |   |
| Established  workforce (a) |   | 148                       |   | 300 |   |
| Developed  products        |   | 695                       |   | 600 |   |
| Core  products             |   | 3,333                     |   | — |   |
| Goodwill                   |   | 4,440                     |   | 2,505 |   |
| Other                      |   | 15                        |   | — |   |
| Total  impairment charge   |   | $                         | 9,298  |   | $ | 3,405 |   |

 

----

(a)          Thereduction of the carrying values for the established workforce of $0.1 millionand $0.3 million affected a total of 6 and 11 individuals, respectively,principally in the areas of manufacturing and engineering.

 

(b)         Theseimpairments fully relate to the January 30, 2000 Aseco Corporation acquisitionand reduced the carrying value of purchased intangible assets and goodwill tozero, as of December 31, 2001.

 

 

Weprovide a standard thirteen month warranty program for our equipment products.We record provisions for warranty claims for these products based uponhistorical claim performance.  Thefollowing table provides the expense recorded and charges against our reservesfor the year ended December 31, 2002.

 

F-16

----

 
| Accrued warranty  balance at December 31, 2001 |   | $      |  400 |   |
|------------------------------------------------|--------|--------|-----------|--------|
|                                           |   |   |      |
| Provision                                      |   | 30     |      |
|                                           |   |   |      |
| Warranty claims                                |   | (231   | )         |
|                                           |   |   |      |
| Accrued warranty  balance at December 31, 2002 |   | $      |  200 |   |

 

#### **NOTE 6 -LONG-TERM DEBT**

 

Long-termdebt and financing obligations were as follows (in thousands):

 
|                                       |   | **December 31,  2002** |   | **December 31,  2001** |   |
|--------------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                       |   |                   |   |                   |   |
| Equipment and software  lease agreements   |   | $                      | 29     |                   | $      | 75 |   |
| Less current  obligations                  |   | (29                    | )      | (42                    | )      |
| Total long-term debt                       |   | $                      | — |                   | $      | 33 |   |
|                                       |   |                   |   |                   |   |
| 10% senior  subordinated convertible notes |   | $                      | 10,000 |                   | $      | 10,000 |   |

 

In December 2001, weissued $10.0 million of 10% Senior Subordinated Convertible Notes due in 2006to a group of accredited investors. These Notes are convertible into our common stock at a conversion priceequal to $2.60 per share.  The Notes areredeemable by us at any time after January 3, 2004 as long as the market priceof our common stock equals or exceeds $3.90 per share.  Proceeds from the Notes, net of debtissuance costs, totaled $9.2 million. Holders of the Notes have standard registration rights if they convertthe Notes to common stock.  The NotePurchase Agreement between us and the holders of the Notes contains certainaffirmative and negative covenants. Among other things, these covenants prohibit us from paying dividends toour shareholders or incurring more than $5.0 million of indebtedness that issenior to, or ranks the same as the Notes. The covenants also require us to comply with applicable laws and regulations,maintain a market for our common stock, and provide the Note holders withcopies of our SEC reports and certain other information. There are no financialcovenants related to these Notes.

 

We have manufacturing,phone and software equipment lease agreements utilized in several of our facilities.  Capitalized lease amounts included inproperty, plant and equipment at December 31, 2002 and 2001 were $123,000 and$137,000, respectively, with accumulated depreciation of $70,000 and $49,000for the same periods, respectively.

 

Payments due underdebt obligations at December 31, 2002 are as follows: 2003 - $29,000; 2004- $0; 2005 - $0; 2006 - $10.0 million and thereafter $0**.**

 

**NOTE 7 -INCOME TAXES**

 

TheCompany incurred losses for the years ended December 31, 2002, 2001, and 2000,respectively, and recorded no provision for income taxes.

 

Thereconciliation of income tax computed at the U.S. federal statutory rate toincome tax expense recorded in the consolidated financial statements was asfollows:

 

F-17

----

 
|                                |   | **Years Ended December 31,** |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                |   |                         |   |   |   |   |   |
| Tax (benefit) at  statutory rate    |   | (35.0                        | )%     | (35.0 | )% | (35.0 | )% |
| Effect of  graduated tax rates      |   | 1.0                          |   | 1.0 |   | 1.0 |   |
| State taxes                         |   | —                       |   | — |   | — |   |
| Nondeductible  item – goodwill |   | —                       |   | 13.0 |   | 17.0 |   |
| Adjustment for  valuation allowance |   | 34.0                         |   | 21.0 |   | 17.0 |   |
|                                |   | 0.0                          | %      | 0.0 | % | 0.0 | % |

 

As of December 31, 2002,we had federal net operating loss (NOL) carryforwards totaling approximately$87.9 million and tax credit carryforwards of approximately $121,000 which canbe used to reduce future taxable income. Such tax loss and tax credit carryforwards begin to expire in 2004.  Changes in the ownership of the Company haveplaced limitations on the annual usage of these NOLs.  Future changes in ownership may place additional limitations onthese losses.

 

Wehave recorded a total valuation allowance on deferred tax assets due touncertainity of their ultimate realization as follows:

 
|                             |   | **December 31,  2002** |   | **December 31,  2001** |   |
|----------------------------------|--------|------------------------|--------|------------------------|--------|
|                             |   |                   |   |                   |   |
| Net operating loss  carryfowards |   | $                      | 32,339 |                   | $      | 26,841 |   |
| Inventories                      |   | 3,790                  |   | 6,187                  |   |
| Accrued expenses                 |   | 282                    |   | 1,041                  |   |
| Deferred profit                  |   | 20                     |   | 901                    |   |
| Other                            |   | 568                    |   | 703                    |   |
| Valuation allowance              |   | (36,999                | )      | (35,673                | )      |
|                             |   | $                      | — |                   | $      | — |   |

 

**NOTE 8 – COMMITMENTSAND CONTINGENCIES**

 

Welease certain facilities and equipment under various operating leases.  Effective April 1997, we entered into anoperating lease agreement and relocated our headquarters to a new facility inSt. Paul, Minnesota, coinciding with the expiration of the operating lease atour previous headquarters facility. Under the terms of the new agreement, which extends through April 2007,we are responsible for base rent and all operating expenses associated with theportion of the facility that we occupy.  The agreement provides us with a one-time option to cancel thelease after seven years, at which time we would only be responsible for certainunamortized build-out costs incurred by the landlord.  In May 2000, we notified ourlandlord of our intent to exercise our one-time option to lease the remainingadditional 11,000 square feet within the same building, beginning twelve totwenty-four months later, at a date to be mutually determined.

 

Total rent expensecharged to operations, primarily for facilities and equipment, was $864,000,$826,000 and $1,376,000 for the years ended December 31, 2002, 2001 and 2000,respectively.

 

Thefuture minimum rental payments at December 31, 2002, due under noncancelableoperating leases, are as follows: 2003 - $742,000; 2004 - $665,000; 2005 -$519,000; 2006 - $468,000; 2007 - $463,000; thereafter -$154,000.

 

F-18

----

 

Wehave an employment agreement with our Chief Executive Officer that may beterminated upon 60 days written notice by either party.  If we terminate the agreement, we shallcontinue to pay his salary in effect at date of termination for 12 monthsthereafter.  We also have an agreement withone other officer that provides for severance pay and other remuneration if hisemployment is terminated without cause or if he should resign following achange of control.  We also have anagreement with another executive officer that provides for severance pay andother remuneration if his employment is terminated or duties significantlydiminished as a result of a change of control.

 

**NOTE 9 –STOCK OPTION AND BONUS PLANS AND WARRANTS TO PURCHASE COMMON STOCK**

 

In May 1995 andAugust 1995, our Board of Directors amended the April 1993 Incentive StockOption Plan, (the Plan) for key employees and reserved an additional 500,000shares and 250,000 shares, respectively, for a total of 1,250,000 shares ofcommon stock for issuance under the Plan at fair market value at the date ofgrant.  In September 1999, our Board ofDirectors reserved an additional 1,050,000 shares for a total of 2,300,000shares of common stock for issuance under the Plan at fair market at the dateof grant.  In April 2001, our Board of Directorsreserved an additional 300,000 shares for a total of 2,600,000 shares of commonstock for issuance under the Plan at fair market at the date of grant.  The shareholders have approved all of theseamendments.  The options expire five toten years from the date of grant and generally vest over a two-year orfour-year period.  If an individualceases employment, he/she has one month to exercise vested options grantedprior to June 8, 1994 or 90 days for vested options granted on or after June 8,1994.  Options granted in excess of the$100,000 annual IRS limitations become non-qualified.

 

In fiscal 1996, our Boardof Directors and our shareholders approved the Stock Option Plan for outsidedirectors and reserved 300,000 shares of common stock for issuance under thePlan.  In April 2001, our Board of Directorsreserved an additional 150,000 shares for a total of 450,000 shares of commonstock for issuance under the Plan, which was approved by our shareholders.  Each person who becomes an outside directorwill automatically be granted an option to purchase 10,000 shares.  In addition, each outside director will alsoautomatically be granted an option to purchase 10,000 shares immediately uponeach reelection as a director, or on the anniversary of the prior year’s grantin any year in which there is no meeting of the stockholders at which directorsare elected.  The period within which anoption must be exercised will be the earlier of (1) ten years from the date ofthe grant, or (2) the date which is one year after the director ceases to be adirector for any reason, provided that if a director voluntarily declines tostand for re-election after the age of 60, he shall not be required to exercisehis options within one year after he ceases to be a director and shall continueto vest in his options after he ceases to be a director.  The exercise price for each option will bethe fair market value of the stock on the date of grant, and each option willgenerally vest over a two-year period at 50 percent per year.

 

On January 31, 2000, weconverted 594,744 Aseco options into our option plan pursuant to the mergeragreement (see Note 11).

 

Wehave also reserved a total of 3,846,153 shares of common stock for issuanceupon conversion of the Notes described in Note 6.

 

We have also reserved150,000 shares of common stock for the grant of non-qualified stock options foroutside directors, consultants, advisors and employees.

 

F-19

----

 

Shares subject to optionsunder these were as follows:

 
| **Options**                       |   | **Shares** |   | **Exercise  Price Range** |   | **Weighted  Average  Exercise  Price Per  Share** |   |
|-----------------------------------|--------|------------|--------|---------------------------|--------|---------------------------------------------------|--------|
|                              |   |       |   |                      |   |                                              |   |
| Outstanding  at December 31, 1999 |   | 1,452,009  |   | $1.00  to $7.50           |   | $                                                 | 2.30   |   |
|                              |   |       |   |                      |   |                                              |   |
| Granted                           |   | 694,500    |   | $6.06  to $11.25          |   | $                                                 | 7.14   |   |
| Aseco converted  options          |   | 594,774    |   | $1.18 to $8.00            |   | $                                                 | 1.54   |   |
| Exercised                         |   | (494,514   | )      | $1.12  to $8.00           |   | $                                                 | 1.66   |   |
| Expired                           |   | (89,171    | )      | $1.18  to $9.00           |   | $                                                 | 5.29   |   |
|                              |   |       |   |                      |   |                                              |   |
| Outstanding  at December 31, 2000 |   | 2,157,598  |   | $1.00  to $11.25          |   | $                                                 | 3.66   |   |
|                              |   |       |   |                      |   |                                              |   |
| Granted                           |   | 432,500    |   | $2.55  to $3.38           |   | $                                                 | 2.93   |   |
| Exercised                         |   | (87,510    | )      | $1.00  to $1.94           |   | $                                                 | 1.20   |   |
| Expired                           |   | (152,673   | )      | $1.13  to $11.25          |   | $                                                 | 6.04   |   |
|                              |   |       |   |                      |   |                                              |   |
| Outstanding  at December 31, 2001 |   | 2,349,915  |   | $1.00  to $11.25          |   | $                                                 | 3.44   |   |
|                              |   |       |   |                      |   |                                              |   |
| Granted                           |   | 633,109    |   | $0.69  to $3.55           |   | $                                                 | 2.07   |   |
| Exercised                         |   | (49,176    | )      | $1.00  to $2.62           |   | $                                                 | 1.66   |   |
| Expired                           |   | (245,097   | )      | $1.94  to $11.25          |   | $                                                 | 4.98   |   |
|                              |   |       |   |                      |   |                                              |   |
| Outstanding  at December 31, 2002 |   | 2,688,751  |   | $0.69  to $11.25          |   | $                                                 | 3.01   |   |
|                              |   |       |   |                      |   |                                              |   |
| Exercisable  at December 31, 2002 |   | 1,648,376  |   | $1.00  to $11.25          |   | $                                                 | 2.96   |   |

 

Options outstanding atDecember 31, 2002 had exercise prices ranging from $0.69 to $11.25 per share assummarized in the following table:

 
| **Range of  Exercise  Prices** |   | **Number  Outstanding  at Dec. 31,  2002** |   | **Weighted  Average  Remaining  Life** |   | **Weighted  Average  Exercise  Price Per Share** |   | **Number  Exercisable  at Dec. 31,  2002** |      |
|--------------------------------|--------|--------------------------------------------|--------|----------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------|-----------|
|                           |   |                                       |   |                                   |   |                                             |   |                                       |      |
| $0.69 to $1.56                 |   | 721,892                                    |   | 4.0  years                             |   | $                                                | 1.09   |                                       | 506,892   |   |
| $1.84 to $2.95                 |   | 934,359                                    |   | 6.0  years                             |   | $                                                | 2.29   |                                       | 571,234   |   |
| $3.19 to $4.30                 |   | 541,750                                    |   | 7.5  years                             |   | $                                                | 3.50   |                                       | 275,500   |   |
| $5.44 to $7.75                 |   | 460,750                                    |   | 8.0  years                             |   | $                                                | 6.51   |                                       | 274,750   |   |
| $9.25 to $11.25                |   | 30,000                                     |   | 8.0  years                             |   | $                                                | 9.92   |                                       | 20,000    |   |
| $0.69 to $11.25                |   | 2,688,751                                  |   | 6.0  years                             |   | $                                                | 3.01   |                                       | 1,648,376 |   |

 

 

AtDecember 31, 2002 and 2001, 220,516 shares and 621,250 shares, respectively,were available for future grants under the terms of these plans.

 

F-20

----

 

In February 1996, theBoard of Directors adopted the Employee Stock Purchase Plan and reserved300,000 shares of common stock for issuance under the Plan.  Eligible employees can elect under the Planto contribute between two percent and ten percent of their base pay each planyear (June 1 - May 31) to purchase shares of common stock at a price per shareequal to 85 percent of market value on the first day of the plan year or thelast day of the plan year, whichever is lower. Employee contributions are deducted from their regular salary orwages.  The maximum number of sharesthat can be purchased by an employee in any plan year is 1,000 shares.  For the year ended December 31, 2002, 28,551shares were issued under the plan at prices ranging from $2.59 to $2.68 at aweighted average price of $2.68.  Forthe year ended December 31, 2001, 36,881 shares were issued under the plan atprices ranging from $2.50 to $2.91, at a weighted average price of $2.89.  During the year ended December 31, 2000,46,447 shares were issued under the plan at prices ranging from $1.90 to $4.83,at a weighted average price of $2.63. Approximately 130,900 shares remain reserved for future issuances.

 

Aspermitted by SFAS No. 148 and SFAS No. 123, we have elected to continuefollowing the guidance of APB Opinion No. 25 for measurement and recognition ofstock-based transactions with employees. Because stock options have been granted at exercise prices at least equalto the fair market value of the stock at the grant date, no compensation costhas been recognized for stock options issued to employees under the stockoption plans.  If compensation cost forour stock option and employee stock purchase plans had been determined based onthe fair value at the grant dates, consistent with the method provided in SFASNo. 148 and SFAS No. 123, our net loss and net loss per share would have beenas follows:

 
|                                |   | **Years  Ended**  |    |
|-------------------------------------|--------|-------------------|---------|
|                                |   | **Dec. 31  2002** |    | **Dec 31  2001** |   | **Dec. 31  2000** |   |
| Net  loss, in thousands:            |   |              |    |   |   |   |   |
| As  reported                        |   | $                 | (10,330 | ) | $ | (31,419 | ) | $ | (15,453 | ) |
| Fair  value compensation expense    |   | (1,147            | )       | (1,240 | ) | (1,287 | ) |
| Pro  forma                          |   | $                 | (11,477 | ) | $ | (32,659 | ) | $ | (16,740 | ) |
|                                |   |              |    |   |   |   |   |
| Net  loss per share – basic:   |   |              |    |   |   |   |   |
| As  reported                        |   | $                 | (0.73   | ) | $ | (2.24 | ) | $ | (1.34 | ) |
| Fair  value compensation expense    |   | (0.08             | )       | (0.09 | ) | (0.11 | ) |
| Pro  forma                          |   | $                 | (0.81   | ) | $ | (2.33 | ) | $ | (1.45 | ) |
|                                |   |              |    |   |   |   |   |
| Net  loss per share – diluted: |   |              |    |   |   |   |   |
| As  reported                        |   | $                 | (0.73   | ) | $ | (2.24 | ) | $ | (1.34 | ) |
| Fair  value compensation expense    |   | (0.08             | )       | (0.09 | ) | (0.11 | ) |
| Pro  forma                          |   | $                 | (0.81   | ) | $ | (2.33 | ) | $ | (1.45 | ) |

 

Thefair value of options granted under the stock option and employee stockpurchase plans for the years ended December 31, 2002, 2001, and 2000 wasestimated on the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions and results:

 
|                                     |   | **Years Ended**    |   |
|------------------------------------------|--------|--------------------|--------|
|                                     |   | **Dec. 31,  2002** |   | **Dec. 31,  2001** |   | **Dec. 31,  2000** |   |
|                                     |   |               |   |   |   |   |   |
| Dividend  yield                          |   | 0.00               | %      | 0.00 | % | 0.00 | % |
| Expected  volatility                     |   | 88.17              | %      | 102.51 | % | 107.02 | % |
| Risk-free  interest rate                 |   | 3.87               | %      | 4.62 | % | 6.31 | % |
| Expected  life of options                |   | 3.5  years         |   | 3.5  years |   | 3.5  years |   |
| Fair  value per share of options granted |   | $                  | 1.28   |   | $ | 1.94 |   | $ | 5.98 |   |
|                                          |        |                    |        |  |  |  |  |  |  |  |

 

F-21

----

 

**NOTE 10 –SEGMENT, GEOGRAPHIC, CUSTOMER INFORMATION AND CONCENTRATION OF CREDIT RISK**

 

Weoperate in one industry segment supplying automated equipment test handlers tothe semiconductor industry.  Net salesto customers located in the three geographic regions in which we operate aresummarized as follows (in thousands):

 
|          |   | **Years Ended**    |   |
|---------------|--------|--------------------|--------|
|          |   | **Dec. 31,  2002** |   | **Dec. 31,  2001** |   | **Dec. 31,  2000** |   |
|          |   |               |   |   |   |   |   |
| United States |   | $                  | 3,538  |   | $ | 11,628 |   | $ | 22,123 |   |
| Asia          |   | 7,527              |   | 12,080 |   | 26,382 |   |
| Europe        |   | 1,146              |   | 1,698 |   | 1,397 |   |
|          |   | $                  | 12,211 |   | $ | 25,406 |   | $ | 49,902 |   |

 

 

We do not hold a material amount of long-lived assetsoutside of the United States.

 

Duringthe year ended December 31, 2002, our top ten customers accounted forapproximately 77% of net sales with three customers accounting for approximately40% of net sales and one customer accounting for approximately 16% of net salesand another customer accounted for approximately 15% of our net sales.  During the year ended December 31, 2001,three customers accounted for approximately 41% of net sales.  During the year ended December 31, 2000, onecustomer accounted for approximately 14% of net sales.

 

##### **NOTE 11 –ACQUISITION**

 

On January 31, 2000, wecompleted the acquisition of Aseco Corporation, a Massachusetts-based manufacturerof singulated handling equipment for the back-end of the semiconductormanufacturing process.  The acquisitionwas structured as a stock-for-stock purchase and Aseco is now a wholly ownedsubsidiary of MCT.  The purchase pricetotaled $24.0 million, consisting of 2.6 million shares of our****commonstock valued at $22.5 million issued to former Aseco shareholders and $1.5million of acquisition-related costs.

 

Theacquisition was accounted for using the purchase method of accounting.  The results of operations of Aseco are includedin our consolidated financial statements beginning January 31, 2000.  The purchase price was allocated based onthe estimated fair values of net assets acquired at the date of acquisition.  The excess of purchase price over net assetsacquired, amounting to $9.7 million, was allocated to goodwill, and was beingamortized using a straight-line method over the estimated useful life of fiveyears.  Other intangible assets,including established workforce, customer list, and core and developed technology,totaling $9.9 million, were being amortized using the straight-line method overthe estimated useful lives of two to five years.

 

As a result of theindustry downturn in the fourth quarter of 2000, we reduced the carrying valuesof goodwill by $2.5 million and purchased intangible assets by $0.9 million,due to impairment of these assets in the fourth quarter of 2000.  In the third quarter of 2001, due to thecontinuing industry downturn and a shift in product strategy from singulatedproducts to strip testing, we reduced the remaining carrying values of goodwilland purchased intangible assets by $4.4 million and $4.9 million,respectively.  This impairment chargereduced all amounts of goodwill and purchased intangible assets associated withthe Aseco acquisition to zero as of December 31, 2001.

 

F-22

----

 

**NOTE12 – SUBSEQUENT EVENT**

 

On March 7, 2003, andMarch 26, 2003, pursuant to a private equity placement with a group ofaccredited investors, we issued 3,166,869 shares of common stock, whichresulted in net proceeds to us of approximately $1.2 million.  Stock issuance costs associated with thisoffering totaled approximately $145,000. As part of this offering, we also issued warrants to purchase a total of253,350 shares of common stock that have a term of five years with an exerciseprice of $0.43 per share.

 

 

F-23

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned; thereuntoduly authorized, in the City of St. Paul, State of Minnesota, on March 27,2003.

 
|   |   | MICRO COMPONENT  TECHNOLOGY, INC.    |
|--------|--------|--------------------------------------|
|   |   |                                 |   |
|   |   | By:                                  | /s/ Roger E. Gower |
|   |   | Roger E. Gower                       |   |
|   |   | President, Chief  Executive Officer, |   |
|   |   | Chairman of the Board  and Director  |   |
|        |        |                                      |  |  |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities indicated on March 27, 2003.

 
| **Signature**           |                 | **Capacity**                             |
|-------------------------|----------------------|------------------------------------------|
|                    |                 |
| /s/Roger E. Gower       |                 | President, Chief Executive Officer,      |
|                    | Roger E. Gower       | Chairman of the Board and Director       |
|                    |                 |
| /s/Thomas P. Maun       |                 | Vice President of Finance/               |
|                    | Thomas P. Maun       | Administration, Chief Financial Officer, |
|                    | Treasurer            |
|                    |                 |
| /s/Donald J. Kramer     |                 | Director                                 |
|                    | Donald J. Kramer     |                                     |
|                    |                 |
| /s/David M. Sugishita   |                 | Director                                 |
|                    | David M. Sugishita   |                                     |
|                    |                 |
| /s/Donald R. VanLuvanee |                 | Director                                 |
|                    | Donald R. VanLuvanee |                                     |
|                    |                 |
| /s/Patrick Verderico    |                 | Director                                 |
|                    | Patrick Verderico    |                                     |
|                    |                 |
| /s/Dr. Sheldon Buckler  |                 | Director                                 |
|                    | Dr. Sheldon Buckler  |                                     |
|                         |                      |                                          |  |  |

 

F-24

----

 

## ***CERTIFICATION***

## *** ***

## ***I,Roger E. Gower, certify that:***

 

1.             Ihave reviewed this annual report on Form 10-K of Micro Component Technology,Inc.:

 

2.                                    Based on myknowledge, this annual report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made,

 

3.                                       Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)          evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the “EvaluationDate”); and

 

c)              presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significant deficienciesin the design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

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

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
|   | Dated:  March ** **27, 2003 | By: | /s/ Roger E. Gower |   |
|--------|---------------------------------------|-----|--------------------|--------|
|   | Roger E. Gower                        |
|   | President and Chief Executive Officer |

 

F-25

----

 

**CERTIFICATION**

## ***I,Thomas P. Maun, certify that:***

 

1.                                       I have reviewedthis annual report on Form 10-K of Micro Component Technology, Inc.:

 

2.                                    Based on myknowledge, this annual report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made,

 

3                                          Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                                    Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

b)             designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)          evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the “EvaluationDate”); and

 

d)             presented in this annualreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

b)             all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

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

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated:  March 27**,**  2003 | By:                      | /s/ Thomas P. Maun |   |
|----------------------------------|--------------------------|--------------------|--------|
|                             | Thomas P Maun            |
|                             | Chief Financial Officer  |
|                             | Chief Accounting Officer |

 

F-26

----

 

**ExhibitIndex**

 
| 10E    |   | Offer Letter to Thomas P. Maun dated July 15, 2002.  (filed herewith) |
|--------|--------|-----------------------------------------------------------------------|
|   |   |                                                                  |
| 23     |   | Consent of Deloitte & Touche LLP. (filed  herewith)               |
|   |   |                                                                  |
| 99.1   |   | Certification of Chief Executive Officer. (filed  herewith)           |
|   |   |                                                                  |
| 99.2   |   | Certification of Chief Financial Officer. (filed  herewith)           |

 

F-27

----