**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**x        ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the year ended December 31,2007**

 

**OR**

 

**o        TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number 0-22384**

 

**MICRO COMPONENT TECHNOLOGY, INC.**

(Exact name of registrantas specified in its charter)

 
| **Minnesota**                    |   | **41-0985960**      |
|----------------------------------|--------|---------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer    |
| incorporation or  organization)  |   | Identification No.) |

 
| **2340  West County Road C, St. Paul, 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, $0.01 PAR VALUE** |   |
|                                                                             | (Title of Class) |   |

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes o  No x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.   Yes o  No x

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.   Yes x  No o

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes  o  No  x

 

The aggregate market value of the common stock held bynon-affiliates of the Registrant as of June 29, 2007 (the business day ofthe Registrant’s most recently completed second fiscal quarter), was $10.3 millionbased upon the closing price of $0.28 on that date for the shares.

 

Number of sharesoutstanding of the Registrant’s Common stock, as of****March 28, 2008,****is37,876,889.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

Portions of theRegistrant’s Definitive Proxy Statement for the annual meeting of stockholders(the “Proxy Statement”) to be filed within 120 days after the Registrant’sfiscal year ended December 31, 2007, are incorporated by reference into Part III.

 

 

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**MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

 

**TABLE OFCONTENTS**

 
| **PART I**                                |   |                                                                                                              |   |   |
|------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                           |   |                                                                                                              |   |   |
| ITEM 1.                                        |   | Business                                                                                                          |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM  1A.                                      |   | Risk  Factors                                                                                                     |   |   |
|                                           |   |                                                                                                              |   |   |
| 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, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM 6.                                        |   | Selected Consolidated Financial Data                                                                              |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM 7.                                        |   | Management’s Discussion and Analysis of Financial Condition  and Results of Operations                       |   |   |
|                                           |   |                                                                                                              |   |   |
| 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                             |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM 9A.                                       |   | Controls and Procedures                                                                                           |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM  9B.                                      |   | Other  Information                                                                                                |   |   |
|                                           |   |                                                                                                              |   |   |
| **PART III**                              |   |                                                                                                              |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM 10.                                       |   | Directors, Executive Officers, and Corporate  Governance                                                          |   |   |
|                                           |   |                                                                                                              |   |   |
| 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 and  Director Independence                                         |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM 14.                                       |   | Principal Accountant Fees and Services                                                                            |   |   |
|                                           |   |                                                                                                              |   |   |
| ITEM 15.                                       |   | Exhibits and Financial Statement Schedules                                                                        |   |   |
|                                           |   |                                                                                                              |   |   |
| **Index to Consolidated Financial Statements** |   |                                                                                                              |
|                                           |   |                                                                                                              |
| Signatures and  Certifications                 |   |                                                                                                              |

 

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**PART I**

 

This Report on Form 10-K contains forward-lookingstatements that have been made pursuant to the provisions of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements are not historical facts, but ratherare based on our current expectations, estimates and projections about thesemiconductor capital equipment industry, and our beliefs and assumptions.   We intend words such as “anticipates,” “expects,”“intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions toidentify forward-looking statements. These statements are not guarantees of future performance and aresubject to certain risks, uncertainties and other factors, some of which arebeyond our control and are difficult to predict.  These factors could cause actual results todiffer materially from those expressed or forecasted in the forward-lookingstatements.  These risks anduncertainties are described in Item 1A and elsewhere in this report on Form 10-K.  We caution you not to place undue reliance onthese forward-looking statements, which reflect our management’s view only asof the date of this Report on Form 10-K. We are not obligated to update these statements or publicly release theresult of any revisions to them to reflect events or circumstances after thedate of this Report on Form 10-K or to reflect the occurrence ofunanticipated events.

 

**ITEM 1. 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 Component Technology, Inc.and its consolidated subsidiaries. MCT was incorporated in Minnesota on June 20,1972, was reorganized as a Delaware corporation on June 28, 1983 andreorganized as a Minnesota corporation on November 6, 1996.  MCT has three wholly owned active operatingsubsidiaries, Micro Component Technology Asia Pte. Ltd., (“MCT Asia”), MCT Asia(Penang) Sdn. Bhd., (“Penang”), and MCT Philippines, Inc. (“Philippines”).  Our principal executive offices are locatedat 2340 West County Road C, St. Paul, Minnesota 55113 and our telephone numberat 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***, ***MCT7632***, ***S-170***and ***S-130***. All other trademarks ortrade names referred to in this Form 10-K are the property of theirrespective owners.

 

**Introduction**

 

We are a leading supplier of integrated automation solutionsfor the global semiconductor test and assembly industry.  We offer complete and comprehensive equipmentautomation solutions for the test, laser mark and mark inspect processes forthe back-end of the semiconductor manufacturing process that significantlyimprove our customers’ productivity, yield and throughput.  Our solutions include our series ofintegrated Smart Solutions, automated test handlers, factory automationsoftware and equipment integration services. Our customers include many leading semiconductor companies such as MicrochipTechnologies, Analog Devices, NXP (formerly Phillips Semiconductor), CypressSemiconductor and ST Microelectronics and many of the leading back-end contracttest and assembly companies including Amkor and UTAC.  We believe we have one of the world’s largestinstalled bases of handlers used to test semiconductor devices.

 

Semiconductor devices are becoming more complex and arecharacterized by shrinking semiconductor device sizes, miniaturized packaging,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) WLCSP (wafer level chip scale packaging)and miniaturized packaging.

 

Beginning in 1999, webroadened our strategy from that of a test handler manufacturer to also becomea provider of comprehensive equipment automation solutions for the back-end ofthe semiconductor manufacturing process. Consistent with this new strategy, we completed two acquisitions.  Our acquisition of Infinity Systems in June 1999,a company involved in the development of factory automation software, wasintegral to the development of our integrated equipment Smart Solutions productsuite.  In January 2000, wecompleted our acquisition of Aseco Corp, which provided us with increasedmachine vision and robotics engineering technology critical to the handling ofstrips and wafers.

 

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**Background**

 

On December 24,2001, we issued $10.0 million of 10% Senior Subordinated Convertible Notesoriginally due in 2006 to a group of accredited investors.  These Notes are convertible into MCT commonstock. The conversion price was initially $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 stockequals or exceeds 150% of the conversion price. Proceeds of the Notes, net of debt issuance costs, totaled $9.2 million.

 

On March 7, 2003 andMarch 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 $1.1 million.  Stock issuance costs associated with thisoffering totaled approximately $241,000. 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.

 

OnJune 30, 2003, we completed the restructuring of $9.29 million, or 92.9%,of our 10% Senior Subordinated Convertible Notes, wherein the participatingnoteholders agreed to accept stock in lieu of cash for the next foursemi-annual interest payment dates beginning June 30, 2003 through December 31,2004, and we agreed to reduce the conversion price to $1.00 per share.  On February 25, 2005, we completed asecond amendment to the agreement with the holders of our 10% SeniorSubordinated Convertible Notes, wherein holders of 80% of the remaining Notes,representing $2.9 million, agreed to continue to accept stock in payment ofinterest for the remaining four interest payments through December 24,2006.  The conversion price was thenreduced to $0.85 per share.

 

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

 

On January 28, 2005, wecompleted an amendment to the financing agreement with Laurus to defer paymentson the long-term convertible note.  As part of this amendment, theconversion prices for both notes were reduced. We also issued Laurus at that time a seven-year warrant to purchase 150,000shares of common stock at $.67 per share.

 

OnApril 29, 2005, we completed another financing transaction with Laurus inwhich we borrowed an additional $2.5 million, and which was convertible intoshares of common stock.  We also issued Laurus at that time an option topurchase 2,556,651 shares of common stock at an exercise price of $.01 pershare.  We received net proceeds of approximately $2.4 million at theclosing.  As a result of the newfinancing with Laurus, the conversion price for all of the Noteholders whoaccepted the prior restructuring agreements was at that time reduced to $0.61per share.

 

On February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million.  The Company also issued Laurus a 10-year option topurchase 2,500,000 shares at an exercise price of $.01 per share.  As aresult of the new financing with Laurus, the conversion price for all of theNoteholders who accepted the prior restructuring agreements was reduced to$0.56 per share.

 

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 millionin principal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006,an additional $65,000 in principal amount of the Notes was satisfied by cashpayments by the Company at a discount.  There is currently $1.2 million inprincipal amount of the Notes outstanding, represented by one Note now held byLaurus.  The Note has a conversion price of $.50 per share, and is due andpayable in full on September 30, 2009.

 

On March 29, 2007, we restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible and payable in full on September 30,2009.  In addition to the $5.25 millionnote, there is a $4.0 million working capital line of credit, which is payablein full on September 30, 2009.  Interest is payable monthly on theline at the prime rate plus 2.5%.  As of March 28, 2008, there was an$800,000 over-advance in excess of the borrowing base on the working capitalline of credit.  Principal on theover-advance is repayable in $100,000 monthly payments beginning on May 1,2008.  At December 31, 2007, theamount of the over-advance was $111,000.

 

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The restructured financing includes an additional $1.0 millionterm note.  The proceeds from the $1million term note, net of fees and expenses from the 2007 refinancing, arerequired to be held in a restricted account at a bank, and will only bereleased by the bank to the Company, upon approval of Laurus in its discretion,for the manufacture of demo equipment. As of December 31, 2007 the outstanding balance on this note was$657,000.  Interest is payable monthly atthe prime rate plus 2.0% and the principal is payable in full on September 30,2009.  As part of the 2007 restructuring,the Company also issued Laurus a 10-year option to purchase 5,000,000 shares atan exercise price of $0.01 per share.

 

In 2007 Laurus required that the Company grant Roger Gower,the Company’s CEO, an option for 1,000,000 shares, as incentive for him toremain with the Company.  On March 20,2007, the Compensation Committee of the Company approved the grant to Mr. Gowerof a non-qualified stock option to purchase 1,000,000 shares of common stock ata price of $0.26 per share, the closing sale price on the day of grant.  The option becomes fully vested on March 20,2008 and has a term of 10 years.

 

On December 6, 2007,the Company entered into an agreement with Laurus to extend the maturity datesfor all of the notes issued by the Company to Laurus from dates starting in February 2008to September 30, 2009.  These notes had an aggregate principal amountof $11,124,000 as of  December 31,2007.  The agreement also extends to January 1,2009, the commencement date for principal payments under the $5,250,000term-note, and reduces the monthly principal payments prior to the maturitydate from $87,500 per month to $44,000 per month.  In consideration forthe extension by Laurus of the note maturity dates, the Company granted Laurusa ten-year warrant to purchase 3,500,000 shares of common stock with anexercise price of $.01 per share.  Laurus has agreed in the transactiondocuments that it will not sell any shares acquired by it under the 3,500,000share warrant, or under the 5,000,000 share warrant granted to it as part ofthe March 2007 refinancing, prior to January 1, 2009.  Laurushas also agreed that sales by it of Company common stock underlying the 2007warrants on any trading day after January 1, 2009 will not exceed 20% ofthe aggregate number of shares of Company common stock sold on that day.

 

**Industry Overview**

 

The semiconductor device industry had grown tremendously overthe ten-year period ending in the year 2000. This growth had been driven bytraditional semiconductor markets like personal computers and data processing,and more recently by the proliferation of semiconductor devices intelecommunications, wireless communications, and consumer electronics, as wellas Internet infrastructure equipment. However, the semiconductor capital equipment market, in which wecompete, has historically been subject to cyclical periods of high growth andcontraction.  In the fourth quarter of2000, the semiconductor industry went into a sharp downturn, which intensifiedand continued through the majority of 2003, resulting in a significant adverseimpact on our business.  In late 2003,worldwide semiconductor bookings began showing signs of stabilization anddemand for our products increased during this period and continued through thefirst half of 2004.  However, in thethird quarter of 2004 the markets again retracted, impacting our financialresults through the end of 2004 and continuing through 2007. At this juncture,the return to sustained market growth cannot be predicted in the short term.

 

The process ofsemiconductor manufacturing is one of the most complicated and logisticallychallenging manufacturing processes in the world.  An advanced semiconductor device can travelthousands of miles and undergo as many as 500 production steps beforecompletion.  The semiconductor devicemanufacturing process is traditionally divided into two parts: the front-end,which includes wafer fabrication from raw materials to a finished wafer; andthe back-end, which includes semiconductor device assembly, test, andpackaging.  Front-end and back-endmanufacturing facilities are expected to run 24 hours a day, 7 days a week, toprovide the productivity needed to meet the requirements of the market.

 

Initially, semiconductormanufacturers concentrated their efforts on improving the more expensivefront-end wafer fabrication process. They improved the front-end by first automating the individualproduction tools and more recently by integrating the various production toolsthrough factory automation software. Tool automation was significant because it replaced most human handlingof the wafers with robotics, resulting in dramatically increased yields.  Factory automation software is significantlyimproving productivity, yield and throughput in the front-end by utilizingpowerful production scheduling, materials handling and process tool control software.

 

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Automation and processimprovement of back-end tools and facilities has severely lagged thefront-end.  Over the last several years,manufacturers began to seek automation and process 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 semiconductordevice.  We believe that as manufacturersseek to raise the standards of yield, productivity, throughput and costreduction in the back-end, the growth rate of the newly developing back-end automationmarket could increase rapidly.

 

**Traditional SemiconductorManufacturing Process**

 

Semiconductor devicesarrive for test in strip or wafer format, with each strip or wafer containingmultiple individual devices.  Untilrecently, most semiconductor manufacturers believed it was necessary to testindividual semiconductor devices after they were singulated, or cut from thestrip or wafer.  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 nowacknowledge that post-test singulation can be done, in certain package formats,without damage to the device.  Thisunderstanding permits manufacturers to process, handle, and test multipledevices while still in strip or wafer format. Strip handling increases process flexibility by permitting the handlingand testing of a variety of packages, substrates and semiconductor devicesizes. In addition, strip handling significantly increases throughput byreducing the number of process steps and by allowing the tester to easily testmultiple semiconductor devices in parallel. We believe that as manufacturers seek to increase productivity, yieldand throughput, they will increasingly adopt strip test processing.  Consequently, we believe strip testprocessing technology will be critical to any back-end automation strategy andwill facilitate re-tooling of many back end processes.

 

In implementing broaderautomation strategies in the back-end, manufacturers face other significant challengesbesides the development of strip processing tools.  For example, production tools in the back-endhistorically have not communicated well with one another, if at all, and thetransitions between production steps have not been integrated.  This lack of communication and integrationhas prevented back-end manufacturers from realizing many of the benefits offactory automation and has prevented the collection of critical process data.

 

**Our Solution**

 

We seek to provide ourcustomers comprehensive equipment automation solutions for their test and assemblyprocesses.  By deploying our products andservices, our customers are able to improve their production yields, factorythroughput, tool productivity and utilization while reducing product cost.  The key components of our solution are:

 

· Tapestry series automated strip handler,

· Smart Solutions integrated equipmentproduct series, and

· Factory automation software andequipment integration services.

 

Our solution provides thefollowing benefits to our customers:

 

***Flexibilityto address new form factors, including wafers and strips.*** We believe that our Tapestry series of handlers are among the firsthandlers capable of processing semiconductor devices in strip or waferformats.  Tapestry provides increasedflexibility, permitting the handling and testing of a variety of packages,substrates and semiconductor device types. Depending on the application, we believe that our Tapestry handler’sthroughput capability is three to ten times greater than existing singulatedhandling options available today.

 

***Abilityto collect critical process data. ***Our Smart Solutions equipment productsutilize our factory automation software to provide both the hardware andsoftware necessary to accurately track important yield events in the test andassembly portion of the back-end process. We use state-of-the-art technology including machine vision toaccurately track all semiconductor devices as they travel through the test andassembly processes.  This machine visiontechnology 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.

 

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***Deploymentof integrated, comprehensive solutions.***  Our suite ofequipment automation tools, software products and services addresses the variedautomation needs of individual back-end manufacturing facilities.  Our factory automation software has theability to integrate production tools from various manufacturers into one totalsolution.  This allows our customers tofulfill a significant portion of their test and assembly automation needsthrough a single supplier, thereby simplifying training, maintenance, capacityexpansion and supplier accountability.

 

***Worldwideservice and support engineering.***  We provideworldwide service and support engineering to our customers as part of thepurchase of all of our products, which includes comprehensive installationsupport. As our products have expanded to offer greater functionality, we haveprovided application engineering support so that our customers can take advantageof these advances to 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:

 

***Providingcomprehensive automated solutions.***  Today, weprovide equipment automation solutions for the test and assembly portion of thesemiconductor manufacturing process, including test, laser mark, mark inspect,and other processes.  In addition, we areexpanding our automation solutions to include equipment integration solutionscompatible with products from a greater number of other equipment manufacturerssuch as trim, form and singulation system providers.  We have enhanced the software component ofour automation solutions by adding data analysis and report generatingcapabilities to increase our customer’s ability to improve their manufacturingprocess.  In the future we plan to expandthe Smart Solution suite of products to handle other processes within thesemiconductor test and assembly area.

 

***Capitalizingon 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 on semiconductortest and assembly processes, including the ability to perform multi-passtesting and stacked die testing.  As aleader in providing equipment automation solutions that address chip scalepackaging technologies, we are continuing development of next-generationhandling and equipment automation solutions for advanced semiconductor devicepackaging.

 

***Strengtheningkey customer relationships.***  Our customersinclude many of the world’s leading providers of semiconductor devices as wellas major third-party test and assembly companies.  We expect that our customers will look to usto help resolve their process as well as automation problems throughout theback-end.   As we solve our customers’diverse needs, we will deepen our present customer relationships and also buildour knowledge base so that we can develop similar relationships with others inthe semiconductor manufacturing industry.

 

***Leveragingour strong sales and service capability.***  Wepredominantly sell our products through our direct sales force and haveestablished sales and service offices in the world’s major centers ofsemiconductor manufacturing including Penang, Malaysia, Singapore and in thePhilippines.  In addition to our salesand service engineers, we have several applications engineers in key customersupport locations.  We have placedsoftware engineers in several Asian locations to directly support our pursuitof factory automation software sales.

 

***Continuingto develop and support existing singulated test handling solutions andproducts.***  We believe that we have one of the largestinstalled bases of traditional test handlers in the world.

 

**Products**

 

***Automation Products***

 

***Smart Solutions****.*  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 and inspection.  Our Smart Solutions product family offerssemiconductor manufacturers greater flexibility, yield and throughput.  These products are designed to meet theback-end semiconductor manufacturer’s demand for greater production efficiency,lower cost of test and manufacturing flexibility.  The following table sets forth our keyautomation product offerings by category, date introduced and application.

 

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| **Automation Product Category** | ** ** | **Product Name**           | ** ** | **Introduced**             | ** ** | **Applications**                                                                                                                                                                           |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Smart Solutions                 |       | Filmframe                  |       | July 2007             |       | A next generation handling system for semiconductor  devices that can be tested singulated on a film frame.                                                                                |
|                            |       | Tapestry SC Tri-Temp       |       | May 2006              |       | A next generation handling system for semiconductor  devices that are in strip or wafer package formats capable of thermally  conditioning devices (-55 to +160C) under test.              |
|                            |       | Tapestry SC                |       | July 2003             |       | A next generation handling system for semiconductor  devices that are in strip or wafer package formats.                                                                                   |
|                            |       | Tapestry PH1               |       | February 1999         |       | A next generation handling system for semiconductor  devices that are in strip or wafer package formats.                                                                                   |
|                            |       | SmartMark SC               |       | September 2004        |       | A next generation high-speed laser marker for integration  with strip handling or for marking strips with 2D codes.                                                                        |
|                            |       | SmartTrak                  |       | May 2000              |       | Software management system providing a map with information  about each semiconductor device in the strip.                                                                                 |
| Automation Software             |       | 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. |

 

Our Smart Solutionsequipment product family was introduced to meet the anticipated evolution ofback-end manufacturing from singulated handling to strip processing through thefinal stages of assembly and electrical test. Additionally, our Smart Solutions products are designed with electronicstrip 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 selling pricefor Smart Solutions products vary from $300,000 for a single module and can approachapproximately $1.0 million for a fully configured system that includes all ofthe components.

 

Tapestry SC, introducedin July 2003, is our next generation system for semiconductor devices thatare in strip format.  The system istargeted to meet the growing need for lower cost of ownership, greaterflexibility, easier use, increased process control, faster set-up andchangeover times.  The Tapestry SC hasseveral optional features and can be targeted at several different applicationswith the potential to add additional options and / or capability at a latertime.  The Tapestry SC is compatible andcomplementary to the Tapestry PH-1.

 

Tapestry, our striphandling system introduced in February 1999, is the flagship of the SmartSolution product family.  Tapestry is aversatile, high volume, parallel test handling and thermal conditioning systemfor semiconductor devices that are in strip format.  Thermal conditioning is required to ensurethat a semiconductor device can operate normally in a wide range oftemperatures.  Tapestry can conditiondevices at temperatures ranging from -55 degrees centigrade to +160 degreescentigrade.  The system is capable ofhandling fine pitch chip scale packages as well as traditional leadedsemiconductor devices in strip format. Using standard industry interfaces, the system is designed to functionas a stand-alone system, or can be integrated into an in-line process with ourother Smart Solution products or equipment of other manufacturers.  In July 2007, we introduced a nextgeneration handling system for semiconductor devices that can be testedsingulated on a film frame.

 

SmartMark SC, introducedin September 2004, is our next generation high-speed laser marker forintegration with strip handling or for marking strips with 2D codes.  This system takes advantage of the same basesystem that is used with our Tapestry SC, allowing for lower costs ofproduction and a common platform of spare parts for our customers, thuslowering overall customer costs.

 

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 theinput/output devices for both slotted and stacked magazines used with strips.

 

***AutomationSoftware. ***Systems Software Solutions provide highlysophisticated systems integration services to the semiconductor test andassembly industry.  Systems SoftwareSolutions assist customers in creating either new manufacturing environments orimplementing new methods and control systems in existing ones.  These installations allow previously isolatedstand-alone equipment to exchange information with other equipment and providefor remote monitoring and control of these systems.  Our engineering experience, efficient softwaredevelopment process, strong project management and our understanding ofsemiconductor handling systems allow us to assist customers in specifyingequipment behavior and software interfaces as a proactive component of thedesign and procurement process.

 

8

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***Singulated Handling Products***

 

We also provide moretraditional singulated handling products utilizing gravity-feedtechnology.  As a result of our shift inproduct strategy to strip-based solutions, we will build our singulatedproducts only when a sales order exists and if technology permits.  We continue to support these products for ourinstalled base of systems for consumable and spare parts.

 

***OtherProducts and Services***

 

We provide service and spare parts for all of our current andmany of our discontinued products. We have also done business in supportservices for a semiconductor device tester that is still widely used but thatwas last manufactured by us in 1993.

 

**Research and Development**

 

As an importantelement of our business strategy, we work closely with our customers to developnew products and enhancements of existing products to meet the evolving needsof the 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 Tapestry family of products including the PH1,Tri-Temp, SC (ambient and elevated temperature versions) strip testing andassociated handling modules, and our SmartMark and SmartMark SC products.

 

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 resources.  In addition, we work closely with several manufacturersof products that are incorporated into our products or are complementary to ourproducts when we believe a higher quality, lower cost product would result.

 

An ongoing goal of ourresearch and development activities is to reduce the time required to developnew products and bring them to market. As the back-end process becomes increasingly automated and complex, thedevelopment of improved software for our products becomes increasinglyimportant.

 

Our research and development expenses were $1.9 million, $2.0 million,and $2.0 million in the years ended December 31, 2007, 2006 and 2005,respectively.  Our combined resources totaled 16employees and contractors in research and development, or approximately 24% ofour entire workforce, at December 31, 2007. We expect research and developmentexpenses to remain fairly flat in 2008 relative to 2007 levels, subject to mandatedincreases due to customer requirements for system related products.

 

**Customers**

 

Our customers include many of the leading manufacturers ofsemiconductor devices, as well as test and assembly companies, in the UnitedStates, Europe and Asia.  In recentyears, our significant customers have shifted from the major semiconductormanufacturers to test and assembly companies, corresponding to the increasedutilization of test and assembly companies by the major semiconductormanufacturers.  Analog Devices, MicrochipTechnologies and ST Microelectronics accounted for 39%, 20% and 9% of our netsales, respectively, in the year ended December 31, 2007.  Analog Devices, Carsem Semi, and MicrochipTechnologies accounted for 48%, 10% and 9% of our net sales, respectively, inthe year ended December 31, 2006. Microchip Technologies, Maxim Integrated Products and Kestronicsaccounted for 33%, 11% and 10% of our net sales, respectively, in the yearended December 31, 2005.

 

Our customers tend tolimit the number of qualified equipment vendors they purchase from in order togain the efficiencies of standardization across their production process.  We therefore expend substantial efforts tomaintain our relationships with our existing major customers to increase thelikelihood that they will continue to select our products for their future generationsof semiconductor devices.

 

**Marketing, Sales and WorldwideSupport**

 

We market our productsprimarily to semiconductor manufacturers and third party test and assemblycompanies through our own sales force and in selected markets throughindependent sales representatives and distributors.  Our automation solutions, however, aremarketed directly by our employees to the key personnel at customers andpotential customers who are in charge of capital equipment for the entireback-end.  These sales frequently involvemajor decisions by the customer as to the configuration and operation of itsentire back-end operation.  Consequently,the sales cycle for Smart Solutions products may be longer than for ourtraditional handler products as the average order amount is generally larger.

 

9

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We augment our salesefforts with direct customer support/service engineers and applicationengineers based in the field.  Theseengineers are specialists in our product portfolio and partner with ourcustomers to help determine product requirements.  Our service engineers install our equipmentand train the customers’ operators and maintenance technicians on the properuse and care of our equipment.  Ourapplication engineers help identify emerging markets for new products.

 

We established a presencein Asia more than 20 years ago, where we operate through our subsidiaries withoffices in Singapore and Penang, Malaysia. To supplement the region’s sales and service coverage, we use salesrepresentative companies and distributors in Korea, Taiwan and China.  We also established an office in thePhilippines to provide better sales and service support and the establishmentof a software development group.  We havestationed service engineers in Singapore, Malaysia, Thailand and the Philippinesfor rapid response to customer needs in Asia.

 

**Manufacturing and Suppliers**

 

In 2002, we began thetransition of our manufacturing operations from our St. Paul, Minnesotafacility to Penang, Malaysia.  This wascompleted in early 2003.  It is ourbelief that our Malaysian operations will provide cost savings as well as anincreased presence in our prime sales geographical area.  We combine proprietary software andcomponents developed in our facilities with components and subassembliesobtained from outside suppliers.  We haveestablished relationships with suppliers in Malaysia which allow us toout-source manufacturing of our components to a number of different suppliers.We do not maintain any long-term supply agreements with any of our key suppliers.

 

In June 2007, werelocated our Penang, Malaysia manufacturing operation to another locationclose to our former Malaysia facility. This relocation has enabled us to reduce our leased space in Malaysiafrom 54,000 to 10,000 square feet.  Aspart of the restructuring of our Malaysian manufacturing operations, we enteredinto Contract Manufacturing Agreements with several organizations.  Underthe agreements, the Contract Manufacturers will order raw materials,manufacture and assemble products, and perform certain basic testing servicesfor our products.

 

**Competition**

 

The semiconductor devicetesting and assembly equipment industry is highly competitive, and the marketfor our automation products and services is expected to become morecompetitive.  We face substantial competitionthroughout the world primarily from manufacturers in Asia, the United States,Europe and Japan.  The companies that weare aware of that currently offer a production grade strip handling solutioncomparable to our Tapestry products are ASM International, Tesec, Rasco, Multitestand Cohu, Inc., whose products were introduced between 1995 and 2006.

 

The principal elements ofcompetition in our markets include throughput capability, quality, reliability,price, product performance, customer service and support, financial strength,versatility and the ability to deliver on schedule.  Although we believe that we compete favorablywith respect to each of these factors, new product introductions by ourcompetitors could cause a decline in sales or loss of market acceptance of our existingproducts.  If competitors introduce moretechnologically advanced products, the demand for our similar products wouldlikely be reduced.

 

**Intellectual Property Rights**

 

Weattempt to protect the proprietary aspects of our products with patents, trademarksand copyrights, as well as contractual and other trade secret protectionstrategies.

 

Wefrequently review our inventions and discoveries to attempt to determine whichinventions will provide substantial differentiation between our products andthose of our competitors.  We currently have four U.S. patents issued andactive.  In certain cases, we may also choose to keep an invention orprocess confidential as trade secrets, in lieu of making public disclosurethrough the patenting process.  Key employees are required to enter intonondisclosure and invention assignment agreements, and customers, vendors andother third parties also must agree to nondisclosure restrictions prior todisclosure of our trade secrets or other confidential or proprietaryinformation.

 

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Wehave developed and are using trademarks, slogans and other commercial symbolsto advertise and sell our products, a number of which have been registered withthe U.S. Patent and Trademark Office.  Our proprietary computer programsare protected under federal copyright law as unpublished original works. We also maintain the secrecy of our software source codes through licensing andother restrictions.

 

Theintellectual property position of any manufacturer, including us, is subject touncertainties and may involve complex legal 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 adequate protection.  Additionally, it may be possible for competitorsor customers to copy aspects of our products or to obtain information that wemay regard as a trade secret.  Litigation may be necessary in the futureto enforce our patents and other intellectual property rights or to defend usagainst claims of infringement.

 

**Backlog**

 

At December 31, 2007, our backlog of unfilled orders forwhich a purchase order number has been assigned by the customer and for which adelivery schedule has been specified was $1.8 million.  At December 31, 2006, our backlog was$2.8 million.  A significant portion ofthe backlog at December 31, 2007, is expected to be shipped in the firstquarter of 2008.  Since a large majorityof the shipments made in a given quarter are usually made during the latterpart of the quarter, and since a significant portion of shipments in a givenquarter are booked during that same quarter, backlog as of a date in the middleof the quarter will typically be greater than backlog at quarter end.  All orders are subject to cancellation by thecustomer with limited charges.  Ourbacklog at a particular date is not necessarily indicative of actual sales forthat or any succeeding period and does not reflect the effects of the SEC’sStaff Accounting Bulletin No. 101, amended by Staff Accounting Bulletin104 (SAB 104) discussed in our revenue recognition policy in Note 1 of Notes toConsolidated Financial Statements included elsewhere herein.

 

**Employees**

 

At December 31,2007, we had a total of 67 employees in the following areas: 19 in manufacturing,15 in engineering and research and development, 18 in sales, marketing, applicationengineering and service, and 15 in administration.  At the end of 2006, there were 91employees.  Our workforce was reduced in June 2007due to the outsourcing of a portion of our manufacturing activities.  Many of our employees are highly skilled, andwe believe our future success will depend in large part on our ability toattract and retain similar employees. None of our employees are covered by a collective bargaining agreement,and we have experienced no work stoppages. We consider our relationship with our employees 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 impact onresults of operations for that particular quarter.  Moreover, production difficulties could delayshipments.  Accordingly, our operatingresults may vary significantly from quarter to quarter and could be adverselyaffected for a particular quarter if shipments and customer acceptances for thatquarter were lower than anticipated.  Ourquarterly operating results may also be affected by, among other factors, thetiming of new product introductions, fluctuations in the semiconductor marketand the actions of competitors.

 

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

 

We operate in threegeographic areas.  Summarized data forour operations are included in Note 9 of Notes to Consolidated FinancialStatements, included elsewhere herein.

 

**ITEM 1A.Risk Factors**

 

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

 

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

 

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Our consolidated financial statements have been prepared onthe assumption that we will continue as a going concern, which contemplates therealization of assets and liquidation of liabilities in the normal course ofbusiness.  The Company has suffered recurringlosses from operations and has a stockholders’ deficit.  These factors raise substantial doubt aboutthe Company’s ability to continue as a going concern

 

As of December 31, 2007, we had cash and cash equivalentsof $373,000, assets totaling $5.5 million, liabilities totaling $11.1 million,and incurred losses from continuing operations of $1.6 million for the yearthen ended.  We expect to continue toexpend cash and incur operating losses at the current net sales levels, but toa lesser extent than the twelve months ended December 31, 2007 as certainoperating expenses are expected to decline from 2007 levels. Our ability togenerate cash and operating income is dependent on increasing our customer baseto expand the penetration of our product technology and the realization of ourlower operating expense targets.

 

Beginning May 1, 2008, principal on the $800,000over-advance in excess of the borrowing base on the working capital line ofcredit is repayable in $100,000 monthly payments.  Also, starting in January 2009, monthlyprincipal payments of $44,000 become due and payable to Laurus.  On September 30, 2009 all remainingprincipal and interest due from the Company to Laurus on the existing financingagreements becomes due and payable.  Inthe event that we are unable to repay, extend or refinance our debt payments in2008 and 2009, Laurus could potentially take a number of actions as securedcreditor which would have a material negative impact on the Company and itsshareholders, including foreclosure, a forced sale of all or part of theCompany, and/or liquidation. 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.

 

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

 

Several of our new products,including our Tapestry strip handler and other Smart Solutions products, areused to test and process semiconductor devices in strip form.  Assembly of semiconductor devices in stripform is the standard industry practice. However, we cannot assure you that testing of semiconductor devices instrip form will become widely accepted by the industry.  Until recently, most semiconductormanufacturers believed it was necessary to test semiconductors after they werecut from the strips because they believed the act of cutting the stripscontaining the semiconductor devices, referred to as singulation, could resultin damage or contamination to the semiconductor devices and, as a consequence,make the prior test results unreliable.

 

We introduced our Tapestryhandling system in February 1999. In May 2000, we introduced other Smart Solutions products, whichprovide additional process capability for handling and testing semiconductordevices in strip form.  In July of2003, we introduced our Tapestry SC, a second-generation system.  In September of 2004 we introduced ourTapestry SC SmartMark, a second-generation system, while in May 2006 weintroduced Tapestry SC Tri-Temp and in July 2007 we introduced theFilmframe. Our new products are attractive to customers only if the customerscan see the value of automating the test and assembly portions of theirsemiconductor manufacturing operations. Although semiconductor manufacturers have automated the waferfabrication portion of their operation, or the front-end of the semiconductormanufacturing process, very few semiconductor manufacturers have invested asignificant amount of capital to automate the test and assembly portions oftheir operations.  We are introducing newproducts for technologies, which may not be accepted on a wide-scale basis bythe industry.  If either the testing ofsemiconductor devices in strip form or wide-scale automation of the back-end isnot accepted by the industry, our net sales likely will suffer.

 

**Downturns in semiconductor industrybusiness cycles could have a negative impact on our operating results.**

 

Our businessdepends heavily upon capital expenditures by semiconductor manufacturers.  The semiconductor industry is highlycyclical, with periods of capacity shortage and periods of excesscapacity.  In periods of excess capacity,the industry sharply cuts purchases of capital equipment, such as ourproducts.  Thus, a semiconductor industrydownturn or slowdown substantially reduces our revenues and operating resultsand could hurt our financial condition. In the fourth quarter of 2000, the semiconductor capital equipmentindustry went into a severe downturn and continued through 2005.  In 2006 and 2007, there was a slight upturnin the market, but the depressed market over the prior six years has negativelyaffected our operations and financial condition.

 

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

 

We offer 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 successfully marketour automation products using different sales methods than we have previouslyused.

 

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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 areexposed to the risks of operating a global business.**

 

We are a globalcorporation with offices and subsidiaries in certain foreign locations tosupport our sales and services to the global semiconductor industry and, assuch, we face risks in doing business abroad that we do not face domestically.  Certain aspects inherent in transactingbusiness internationally could negatively impact our operating results,including:

 

·                  costs and difficulties in staffing andmanaging international operations;

 

·                  unexpected changes in regulatoryrequirements;

 

·                  difficulties in enforcing contractuaraland intellectual property rights;

 

·                  longer payment cycles;

 

·                  local political and economic conditions;

 

·                  potentially adverse tax consequences,including resteictions on repatriating earnings and the threat if “doubletaxation”; and

 

·                  flucations in currency exchange rates,which can effect demand and increase costs.

 

Additionally, managinggeographically dispersed operations presents difficult challenges associatedwith organizational alignment and infrastructure, communications andinformation technology, inventory control, customer relationship management,terrorist threats and related security matters and cultural diversities.  If we are unsuccessful in managing suchoperations effectively, our business and results of operations will beadversely affected.

 

**Failure of criticalsuppliers to deliver sufficient quantities of parts in a timely andcost-effective manner could adversely impact our operations.**

** **

We use numerous vendors to supply parts, componentsand subassemblies for the manufacture of our products.  It is not always possible to maintainmultiple qualified suppliers for all of our parts, components andsubassemblies. As a result, certain key parts may be available only from a singlesupplier or a limited number of suppliers. In addition, suppliers may cease manufacturing certain components thatare difficult to replace without significant reengineering of ourproducts.  On occasion, we haveexperienced problems in obtaining adequate and reliable quantities of variousparts and components from certain key suppliers.  Our results of operations may be materiallyand adversely impacted if we do not receive sufficient parts to meet ourrequirements in a timely and cost effective manner.

 

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

 

We have spent, and expectto continue to spend, a significant amount of time and resources developing newproducts and refining existing products and systems.  In light of the long product developmentcycles inherent in our industry, these expenditures will be made well inadvance of the prospect of deriving revenue from the sale of new systems.

 

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

 

**The lossof key personnel could adversely impact our business.**

 

Certain key personnel arecritical to our business.  Our futureoperating results depend substantially upon the continued service of our keypersonnel, many of whom are not bound by employment or non-competitionagreements. Our future operating results also depend in significant part uponour ability to attract and retain qualified management, manufacturing,technical, engineering, marketing, sales and support personnel.  Competition for qualified personnel,particularly those with technical skills, is intense, and we cannot ensuresuccess in attracting or retaining qualified personnel. Our business, financialcondition and results of operations could be materially adversely affected bythe loss of any of our key employees, by the failure of any key employee toperform in his or her current position, or by our inability to attract andretain skilled employees.

 

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**Recentlyenacted and future changes in securities laws and regulations have increasedour costs.**

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations,are creating challenges for publicly-held companies. We are committed tomaintaining high standards of corporate governance and public disclosure. As aresult, our efforts to comply with evolving laws, regulations and standardshave resulted in, and are likely to continue to result in, increased generaland administrative expenses and a diversion of management time and attentionfrom revenue-generating activities to compliance activities. In particular, ourefforts to maintain compliance with Section 404 of the Sarbanes-Oxley Actof 2002 and the related regulations regarding our required assessment of ourinternal controls over financial reporting and our external auditors’ audit ofthat assessment has required the commitment of significant financial and managerialresources. We expect these efforts to require the continued commitment ofsignificant resources. Further, our board members, chief executive officer andchief financial officer could face an increased risk of personal liability inconnection with the performance of their duties. As a result, we may havedifficulty attracting and retaining qualified board members and executiveofficers, which could harm our business.

 

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

 

Our quarterly and annual operating results are affected by awide variety of factors that could adversely affect sales or operating resultsor lead to significant variability in our operating results.  A variety of factors could cause thisvariability, including the following:

 

·  the cyclical nature of the semiconductorindustry;

 

·  delays in, or cancellation of, significantsystem purchases by customers;

 

·  delays in the development, introduction andproduction of our products;

 

·  changes in the mix of our products and theirgross margins;

 

·  new product introductions by competitors andcompetitive pricing pressures;

 

·  the time required for us to adjust ouroperating expenses to respond to changes in sales and market conditions;

 

·  the timing of any future acquisitions andtheir effect on our financial results;

 

·  component shortages resulting in manufacturingdelays; and

 

·  pressure by customers to reduce prices,shorten delivery times and extend payment terms.

 

We cannot predict theimpact of these and other factors on our sales or operating results in anyfuture period.  Results of operations inany period, therefore, should not be considered indicative of the results to beexpected for any future period.  Because ofthis difficulty in predicting future performance, our operating results mayfall below expectations of security analysts or investors in some futureperiods.  Our failure to meet theseexpectations would likely adversely affect the market price of our commonstock.

 

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

 

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

 

·  changesin the market’s view of the semiconductor industry in general;

 

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

 

·  changesin our reported financial results based on accounting pronouncements;

 

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

 

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Additionalfactors, which may impact our results, include:

 

·      we depend upon a few customers for themajority of our revenues and a reduction in their orders could adversely affectus;

 

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

 

·  theloss of any of our key personnel could harm our business;

 

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

 

·  ourdependence upon international sales involves significant risk;

 

·  thepossible adverse impact of economic or political changes in the market weserve;

 

·  ourinability to obtain financing to fund continuing or expanding operations;

 

Fluctuations ordecreases in the trading price of our common stock may adversely affect theability to trade our shares.  Inaddition, these fluctuations could adversely affect our ability to raisecapital through future equity financing.

 

# **ITEM 2.  Properties**

#  

We occupy approximately 24,029 square feet of leased space inSt. Paul, Minnesota, for our principal executive and administrative offices,research and product development and equipment distribution activities.  This lease expires on April 30, 2012with a one-time option to terminate the lease on April 30, 2010 with atermination fee of two months gross rent. We occupy approximately 10,000 square feet of leased space in Penang,Malaysia, which is utilized as a manufacturing and assembly center. This leaseexpires in June 15, 2009.  We occupyapproximately 1,300 square feet of leased space in the Philippines in supportof our applications engineering and software development activities.  This lease expires August 14, 2008.  We believe that our current and committedfacilities are adequate to support our activities for at least the next twelvemonths.

 

**ITEM 3. Legal Proceedings**

 

This item is not applicable.

 

**ITEM 4. Submission of Matters to a Vote of Security Holders**

 

There were no matters submitted to a vote of the securityholders during the quarter ended December 31, 2007.

 

**PART II**

 

**ITEM5.  Market for Registrant’s Common Stock,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

Our common stock istraded 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 share prices represent prices established between broker-dealers andtherefore do not reflect prices of actual transactions.

 
| ** **                         | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|
| Year ended December 31, 2007: |       |     |       |    |       |
| First Quarter                      |       | $        | 0.28       |    | $          | 0.16 |   |
| Second Quarter                     |       | 0.34     |       | 0.21    |       |
| Third Quarter                      |       | 0.30     |       | 0.17    |       |
| Fourth Quarter                     |       | 0.25     |       | 0.13    |       |
|                               |       |     |       |    |       |
| Year ended December 31, 2006: |       |     |       |    |       |
| First Quarter                      |       | $        | 0.51       |    | $          | 0.14 |   |
| Second Quarter                     |       | 0.55     |       | 0.35    |       |
| Third Quarter                      |       | 0.55     |       | 0.21    |       |
| Fourth Quarter                     |       | 0.26     |       | 0.13    |       |

 

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Theapproximate number of holders of record of our common stock as of December 31,2007 was 293.

 

We havenever declared or paid any cash dividends on our common stock and do notanticipate paying any cash dividends in the foreseeable future.  We currently intend to retain future earningsto fund the development and growth of our business.

 

Underthe Note Purchase Agreement  associatedwith the issuance of the 10% Senior Subordinated Convertible Notes and theSecurity Agreement associated with our Revolving Line of Credit and Term Note(each discussed in Note 5 in Notes to Consolidated Financial Statementscontained elsewhere herein) we are prohibited from paying dividends.

 

**STOCKPERFORMANCE GRAPH**

 

The following graph compares the cumulative totalstockholder return on the Company’s Common Stock for the five fiscal yearsbeginning December 31, 2002 and ending December 31, 2007, with thecumulative total return on the NASDAQ Stock Market-U.S. Index and thePhiladelphia Exchange Semiconductor Sector Index (“SOXX”) over the same period(assuming the investment of $100 in the Company’s Stock, the NASDAQ StockMarket-U.S. Index and the SOXX Index on December 31, 2002 and thereinvestment of all dividends).

 
| **Period Ended**                 | ** ** | **Dec 31,  2002** | ** ** | **Dec 31,  2003** | ** ** | **Dec. 31,  2004** | ** ** | **Dec. 31,  2005** | ** ** | **Dec. 31,  2006** | ** ** | **Dec. 31,  2007** | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Micro Component Technology, Inc. |       | 100                    |       | 205.71                 |       | 80.00                   |       | 24.29                   |       | 28.57                   |       | 22.86                   |       |
| NASDAQ Stock Market — U.S. Index |       | 100                    |       | 150.01                 |       | 162.89                  |       | 165.13                  |       | 180.85                  |       | 198.60                  |       |
| PHLX Semiconductor Sector Index       |       | 100                    |       | 175.67                 |       | 149.81                  |       | 165.78                  |       | 161.47                  |       | 141.07                  |       |

 

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**ITEM 6.  Selected Consolidated Financial Data**

 
| ** **                                     | ** ** | **SELECTED CONSOLIDATED FINANCIAL DATA**            | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Years Ended**                                               | ** ** |
| ** **                                     | ** ** | **Dec. 31,**                                                  | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                     | ** ** | **2007**                                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated Statement of Operations Data:** | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                                                                  | 14,614     |   | $ | 12,214 |   | $ | 7,069 |   | $ | 14,602 |   | $ | 11,123 |   |
| Cost of sales:                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product                                        |       | 7,461                                                              |       | 6,162 |   | 4,012 |   | 7,286 |   | 6,295 |   |
| Inventory  revaluation                         |       | 285                                                                |       | 171 |   | 525 |   | — |   | — |   |
| Total cost of  sales                           |       | 7,746                                                              |       | 6,333 |   | 4,537 |   | 7,286 |   | 6,295 |   |
| Gross Profit                                   |       | 6,868                                                              |       | 5,881 |   | 2,532 |   | 7,316 |   | 4,828 |   |
| Operating  expenses:                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general  and administrative           |       | 4,311                                                              |       | 4,095 |   | 4,213 |   | 5,596 |   | 4,872 |   |
| Research and  development                      |       | 1,884                                                              |       | 2,041 |   | 1,980 |   | 2,841 |   | 2,351 |   |
| Restructuring  charges                         |       | 137                                                                |       | — |   | 107 |   | 35 |   | 266 |   |
| Income (loss)  from operations                 |       | 536                                                                |       | (255 | ) | (3,768 | ) | (1,156 | ) | (2,661 | ) |
| Interest, net                                  |       | (2,186                                                             | )          | (3,356 | ) | (1,234 | ) | (862 | ) | (1,189 | ) |
| Other income and  (expense)                    |       | 56                                                                 |       | (42 | ) | (101 | ) | (30 | ) | 182 |   |
| Loss before  income taxes                      |       | (1,594                                                             | )          | (3,653 | ) | (5,103 | ) | (2,048 | ) | (3,668 | ) |
| Income tax  provision                          |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Net income  (loss)                             |       | $                                                                  | (1,594     | ) | $ | (3,653 | ) | $ | (5,103 | ) | $ | (2,048 | ) | $ | (3,668 | ) |
|                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share                |       | $                                                                  | (0.04      | ) | $ | (0.12 | ) | $ | (0.20 | ) | $ | (0.08 | ) | $ | (0.21 | ) |
| Diluted earnings (loss) per share              |       | $                                                                  | (0.04      | ) | $ | (0.12 | ) | $ | (0.20 | ) | $ | (0.08 | ) | $ | (0.21 | ) |
|                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding:           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                          |       | 37,130                                                             |       | 30,642 |   | 25,894 |   | 25,013 |   | 17,606 |   |
| Diluted                                        |       | 37,130                                                             |       | 30,642 |   | 25,894 |   | 25,013 |   | 17,606 |   |
|                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Selected Balance Sheet Data:**               | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash  equivalents                     |       | $                                                                  | 373        |   | $ | 200 |   | $ | 77 |   | $ | 166 |   | $ | 1,078 |   |
| Working capital                                |       | 3,358                                                              |       | (664 | ) | (188 | ) | 1,737 |   | 1,618 |   |
| Total assets                                   |       | 5,509                                                              |       | 5,556 |   | 4,546 |   | 6,122 |   | 7,194 |   |
| Long-term debt                                 |       | 9,320                                                              |       | 5,506 |   | 3,683 |   | 1,458 |   | 195 |   |
| Convertible  notes                             |       | —                                                             |       | — |   | 3,630 |   | 3.630 |   | 7,340 |   |
| Total  stockholders’ equity (deficit)     |       | $                                                                  | (5,649     | ) | $ | (5,815 | ) | $ | (7,056 | ) | $ | (2,676 | ) | $ | (5,026 | ) |

 

**ITEM 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

We supply equipment automation solutions for the globalsemiconductor 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.

 

Beginningin 1999 and continuing into 2000, we broadened our strategy from that of a testhandler manufacturer to becoming a provider of comprehensive equipmentautomation solutions for the back-end of the semiconductor manufacturingprocess.  First, we developed andintroduced in February 1999 our Tapestry strip handler.  Tapestry combines strip handling capabilitywith robotics, machine vision technology and critical software, enabling thetesting and tracking of semiconductor devices in strip form and the generationof critical process data throughout the test process.  Second, in June 1999 we acquired theInfinity 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. Together with a third party tester, our Smart Solutions equipment products including our Tapestry handler enable complete automation of the test,laser mark, mark inspect and other processes of the back end.

 

17

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The demand for our products and services is dependent upongrowth in the semiconductor industry and the increasing automation needs ofsemiconductor manufacturers and independent test and assembly facilities.  In the fourth quarter of 2000, thesemiconductor industry went into a sharp downturn, which continued through 2005but with a slight upturn in 2006 and 2007. At this juncture, the return to sustained market growth cannot bepredicted in the short term.  As we havedisclosed in our Form 10-K for the year ended December 31, 2006 and2005 and each of our Forms 10-Q for the first three quarters of 2007 and 2006,a continued or renewed market downturn might result in significant losses,charges for inventory revaluation, or asset impairment or restructuringcharges.  In response to these negativemarket conditions a number of restructuring steps were taken in 2003, 2004, and2005 as described below.  Norestructuring actions were taken in 2006. In 2007, in an attempt to increase our manufacturing flexibility and toreduce operational costs, we took a number of restructuring steps describedbelow.

 

***Workforce and Facility Cost Reductions***

* *

During the second quarter of 2007, werelocated our Penang, Malaysia manufacturing operation to another locationclose to our former Malaysia facility. As part of the restructuring of our Malaysian manufacturing operations,we entered into Contract Manufacturing Agreements with severalorganizations.  Under these agreements, the Contract Manufacturers willorder raw materials, manufacture and assemble products, and perform certainbasic testing services for our products. The remainder of the equipment integration, configuration and softwareinstallation will continue to be completed by our production organization.  Approximately 28 manufacturing positions wereeliminated resulting in a restructuring charge of $137,000.  This charge reflected termination benefits and related costsassociated with this reduction.

 

During the second quarter of 2005, in response to thecontinuing downturn in the semiconductor capital equipment market, we reducedour workforce across all functional areas by approximately 7% resulting in arestructuring charge of $67,000.  Thischarge reflected severance and other benefit costs associated with thisreduction.  This workforce reductionaffected a total of seven employees across all functional areas.

 

During the third quarter of 2005, in connection with ourrestructuring activities, we reduced our workforce within manufacturing andsales by approximately 2% resulting in a restructuring charge of $40,000.  This charge reflected severance and other benefitcosts associated with this reduction. This workforce reduction affected a total of two employees.

 

During the fourth quarter of 2004, we reduced ourmanufacturing workforce by 11% at the time, resulting in a restructuring chargeof $35,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total of12 employees all within the manufacturing area.

 

During the first quarterof 2003, in response to the continued and prolonged downturn in the semiconductorcapital equipment industry, we reduced our workforce across all functionalareas by approximately 24% at the time, resulting in a restructuring charge of$19,000.  This charge reflected severanceand other benefit costs associated with this reduction.  This workforce reduction affected a total of26 employees across all functional areas.

 

During the second quarter of 2003, we completed therestructuring of our master lease for our St. Paul, MN facility, resulting in arestructuring charge of $227,000, which included write-offs of $41,000 relatedto leasehold improvements in the vacated space which provided no futureeconomic benefit to us.  Additionally, wefurther reduced our workforce across all functional areas by approximately 4%at the time, resulting in a restructuring charge of $20,000.  This charge reflected severance and otherbenefit costs associated with this reduction. This workforce reduction affected a total of four employees across allfunctional areas.

 

***Financing transactions***

*** ***

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

 

18

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OnJanuary 28, 2005, we completed an amendment to the financing agreementwith Laurus to defer payments on the long-term convertible note.  As partof this amendment, the conversion prices on both notes were reduced.  Wealso issued Laurus at that time a seven-year warrant to purchase 150,000 sharesof common stock at $.67 per share.

 

OnApril 29, 2005, we completed another financing transaction with Laurus inwhich we borrowed an additional $2.5 million, and which was convertible intoshares of common stock.  We also issued Laurus at that time an option topurchase 2,556,651 shares of common stock at an exercise price of $.01 pershare.  We received net proceeds of approximately $2.4 million at theclosing.

 

On February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million.  The Company also issued Laurus a 10-year option topurchase 2,500,000 shares at an exercise price of $.01 per share.  As aresult of the new financing with Laurus, the conversion price for all of theNoteholders who accepted the prior restructuring agreements was reduced to $0.56per share.

 

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 millionin principal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006,an additional $65,000 in principal amount of the Notes was satisfied by cashpayments by the Company at a discount.  There is currently $1.2 million inprincipal amount of the Notes outstanding, represented by one Note now held byLaurus.  The Note has a conversion price of $.50 per share, and is due andpayable in full on September 30, 2009.

 

On March 29, 2007, we restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible and payable in full on September 30,2009.  In addition to the $5.25 millionnote, there is a $4.0 million working capital line of credit, which is payablein full on September 30, 2009.  Interest is payable monthly on theline at the prime rate plus 2.5%.  As of March 28, 2008, there was an$800,000 over-advance in excess of the borrowing base on the working capitalline of credit.  Principal on theover-advance is repayable in $100,000 monthly payments beginning on May 1,2008.  The restructured financing also includes an additional $1.0 millionterm note.  The proceeds from the $1million term note, net of fees and expenses from the 2007 refinancing, arerequired to be held in a restricted account at a bank, and will only bereleased by the bank to the Company, upon approval of Laurus in its discretion,for the manufacture of demo equipment. As of December 31, 2007, the the outstanding balance on this notewas $657,000.  Interest is payablemonthly at the prime rate plus 2.0% and the principal is payable in full on September 30,2009.  As part of the 2007 restructuring,the Company issued Laurus a 10-year option to purchase 5,000,000 shares at anexercise price of $0.01 per share.

 

In 2007 Laurus required that the Company grant Roger Gower,the Company’s CEO, an option for 1,000,000 shares, as incentive for him toremain with the Company.  On March 20,2007, the Compensation Committee of the Company approved the grant to Mr. Gowerof a non-qualified stock option to purchase 1,000,000 shares of common stock ata price of $0.26 per share, the closing sale price on the day of grant.  The option becomes fully vested on March 20,2008 and has a term of 10 years.

 

On December 6, 2007,the Company entered into an agreement with Laurus to extend the maturity datesfor all of the notes issued by the Company to Laurus from dates starting in February 2008to September 30, 2009.  These noteshad an aggregate principal amount of $11,124,000 as of  December 31, 2007.  The December 6, 2007 agreement reducesand extends the monthly principal payments prior to the maturity date of the $5.25 million term notefrom $87,500 per month to $44,000 per month starting January 2009 insteadof March 2008.  In consideration for the extension by Laurus of thenote maturity dates, the Company granted Laurus a ten-year warrant to purchase3,500,000 shares of common stock with an exercise price of $.01 per share.

 

Laurushas agreed in the transaction documents that it will not sell any sharesacquired by it under the 3,500,000 share warrant, or under the 5,000,000 sharewarrant granted to it as part of the March 2007 refinancing, prior to January 1,2009.  Laurus has also agreed that sales by it of Company common stockunderlying the 2007 warrants on any trading day after January 1, 2009 willnot exceed 20% of the aggregate number of shares of Company common stock soldon that day.

 

19

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Industry forecasts for purchases of capital equipment in 2008are varied and the ability for the market to sustain an improvement continuesto be uncertain.  Therefore, we willcontinue to monitor the market and if required, examine opportunities tofurther reduce our costs through further consolidation of operations, limitingcapital expenditures, monitoring inventory purchases and additional strategicrestructuring initiatives.  Certain ofthese types of actions have the potential for further charges in futureperiods.  The impact of a continuingcontraction of the semiconductor capital equipment market has the potential tohave a material adverse effect on our financial condition, results ofoperations, and cash flows.

 

**Critical Accounting Policies**

 

***Revenue Recognition***

*** ***

Under SAB 104, we recognize revenueupon shipment, as our terms are FOB shipping point, for established equipmentproducts that have previously satisfied existing customer performancespecifications and that provide for full payment tied to shipment.  Revenue for products that have not previouslysatisfied customer performance specifications or from sales where all or aportion of customer payment is based upon acceptance are only recognized uponcustomer acceptance.  As such, in periodsof increasing shipments, revenues will be deferred if the shipments are for newcustomers, new products or the payment terms are tied to acceptancecriteria.  Consequently, if these conditionsexist, we may report revenue levels that are not reflective of actual shipmentgrowth rates.  Conversely, in periods ofdecreasing shipments, we potentially could recognize revenues related toshipments made in prior periods.  Consequently,if these conditions exist, we may report revenue levels that are greater thanactual shipments.  During the year ended December 31,2007, revenue recorded approximated shipments.

 

***Allowance for Doubtful Accounts***

*** ***

We record a provision for doubtful accounts based on specificidentification of our accounts receivable. This involves a degree of judgmentbased on discussion with our internal sales and marketing groups, our customerbase and the examination of the financial stability of our customers.  There can be no assurance that our estimateswill match actual amounts ultimately written off.  During periods of downturn in the market forsemiconductor capital equipment or economic recession, a greater degree of riskexists concerning the ultimate collectibility of our accounts receivable due tothe impact that these conditions might have on our customer base.  For the year ended December 31, 2007, noprovisions were recorded and we charged approximately $5,000 against theallowance for accounts receivable that we deemed to be uncollectible.

 

***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 costing system for ourinventories.  Assumptions with respect todirect labor utilization, standard direct and indirect cost rates, vendorpricing and utilization of factory capacities are formulated in the developmentof our standard costing system.  Suddenor continuing changes in the semiconductor capital equipment market affectingour shipments can result in significant production variances from our standardrates. These variances directly impact our gross profit performance and maycause variability in gross profits results from reporting period-to-reportingperiod.  Our labor and overhead rates areset for production rates that match typical market conditions.  Production variances are charged to cost ofsales each quarter as incurred. Material standards are based upon normal purchasevolumes.  Purchase price variances arecharged to costs of sales each quarter as incurred.

 

Provisions to reduce inventories to the lower of cost ormarket are made based on a review of excess and obsolete inventories through anexamination of historical component consumption, current market demands andshifting product technology.  Significantassumptions with respect to market trends and customer product acceptance areutilized to formulate our provision methods. Sudden or continuing downward changes in the semiconductor capital equipmentmarket may cause us to record additional inventory revaluation charges infuture periods.  For the years ended December 31,2007, 2006 and 2005, we recorded additional inventory reserves of $285,000,$171,000 and $525,000.

 

***AccruedWarranty***

*** ***

We provide a standardthirteen month warranty program for our equipment products. We record provisionsfor warranty claims for these products based upon historical claim performance.  This approach has been applied since theinception of the warranty program and involves a degree of subjectivity in thathistorical performance is used to estimate future warranty claims. There can beno assurance that our estimates will match the actual amount of future warrantyclaims.

 

20

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**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, certain items in ourstatements of operations as a percentage of net sales:

 

| ** **                          | ** ** | **Years Ended** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **Dec. 31,**    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                          | ** ** | **2007**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                           |       | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 53.0                 |       | 51.9 |   | 64.2 |   |
| Gross profit                        |       | 47.0                 |       | 48.1 |   | 35.8 |   |
| Operating expenses:                 |       |                 |       |   |   |   |   |
| Selling, general  and adminstrative |       | 29.5                 |       | 33.5 |   | 59.6 |   |
| Research and  development           |       | 12.9                 |       | 16.7 |   | 28.0 |   |
| Restructuring  charge               |       | 0.9                  |       | — |   | 1.5 |   |
| Total operating  expenses           |       | 43.3                 |       | 50.2 |   | 89.1 |   |
| Income (loss)  from operations      |       | 3.7                  |       | (2.1 | ) | (53.3 | ) |
| Interest, net                       |       | (15.0                | )          | (27.5 | ) | (17.5 | ) |
| Other income and (expense)          |       | 0.4                  |       | (0.3 | ) | (1.4 | ) |
| Net loss                            |       | (10.9                | )%         | (29.9 | )% | (72.2 | )% |

 

***Year Ended December 31,2007 versus Year Ended December 31, 2006***

 

***Net Sales****.*  Net sales forthe year ended December 31, 2007 increased $2.4 million or 19.6% to $14.6million, compared to net sales of $12.2 million for the prior year.  This increase is a result ofa slight upturn in the capital equipment market.  Sales of our Tapestry and Smart Solutions strip-basedproducts increased $2.6 million or 31% over the prior year period.  Sales of our Tapestry and Smart Solutionsstrip-based product made up 76.0% of our net sales for the year ended December 31,2007 compared to 70.0% in the prior year period.

 

Net sales to Asia comprised approximately 92.5% of our netsales for the year ended December 31, 2007.  Net sales to customers in the United Statesrepresented approximately 7.2% and net sales to customers in Europe representedapproximately 0.3% for year ended December 31, 2007.  Comparatively, net sales to customers in Asiacomprised approximately 84.1% of our net sales for the year ended December 31,2006, while net sales to customers in the United States representedapproximately 13.0% and net sales to customers in Europe represented approximately2.9%.

 

***Gross Profit****.*  Gross profit increased $1.0 million to $6.9million or 47.0% of net sales in 2007 from $5.9 million or 48.1% of net sales,in the prior year.  The increase in grossmargin is directly related to the increase in sales volume resulting in fixedcosts being spread over higher sales volumes, partially offset by recording of$285,000 of additional inventory reserve and $268,000 related to scrapinventory costs.  For the year ended December 31,2006, we recorded an additional inventory reserve of $171,000 and $250,000related to scrap inventory costs.

 

***Selling, General and Administrative Expense****.*  Selling,general and administrative expense in 2007 was $4.3 million, or 29.5% of netsales compared to $4.1 million, or 33.5% of net sales in the prior year.  The percentage to net sales is lower than theprior year due to expenses being spread over higher net sales.  Selling, general and administrative expenseis expected to remain fairly flat in 2008.

 

***Research and Development Expense***.  Research anddevelopment expense was $1.9 million in 2007 and $2.0 milion in 2006.  As a percentage of sales, research anddevelopment expense in 2007 was 12.9% of net sales compared to 16.7% of netsales in 2006.  The decrease in percentof sales over the prior year is directly related to the spread of expenses overa higher net sales amount.  We expectresearch and development expenses to remain fairly flat in 2008.

 

***Restructuring Charge****. *In 2007 werestructured our Penang, Malaysia manufacturing operation. The restructuringplan included the reduction of our lease facility from 54,000 square feet to10,000 square feet, a workforce reduction of approximately 28 positions in ourMalaysian manufacturing operation, and outsourcing manufacturing of certainfabricated parts.  We recorded arestructuring charge in the second quarter of 2007 of $137,000 or 0.9% of netsales primarily for cash expenditures for termination benefits and relatedcosts. There were norestructuring charges in 2006.

 

21

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***Other Income (Expense).***  Interestincome for the year ended December 31, 2007 was $10,000 compared to$11,000 in the prior year.  This decreaseresulted from lower balances in investment in interest-bearing cash and cashequivalents.  Interest expense in 2007was $1.1 million or 7.8% of net sales, compared to $1.2 million or 9.8% of netsales in 2006.

 

Interest expense —amortization of warrant discounts and debt issue costs for 2007 was $1.1million compared to $808,000 in 2006. Included in 2007 is $920,000 of non-cash expenses related to theamortization of warrant discounts and $135,000 for the amortization of debtissue costs.  Included in 2006 is$435,000 of non-cash expenses related to the amortization of warrant discounts,$373,000 for the amortization of debt issue costs.  Interest expense — debt conversion expense in2006 was $1.4 million related to conversion from debt to equity of $2.1 millionin subordinated notes payable.  Otherincome and (expense) was $56,000 in 2007, compared to ($42,000) in 2006.

 

* **Income TaxProvision**.*  During 2007 and 2006, weincurred minimal tax liabilities.  Wehave recorded valuation allowances against all benefits associated with netoperating loss carry forwards due to uncertainty regarding their ultimateutilization.

 

***Net Loss****.*  Net loss for the year ended December 31,2007 was $1.6 million, or $0.04 per basic and diluted share, as compared to netloss of $3.7 million, or $ 0.12 per basic and diluted share for the prior year.

 

***Year Ended December 31,2006 versus Year Ended December 31, 2005***

 

***Net Sales****.*  Net sales forthe year ended December 31, 2006 increased $5.1 million or 72.8% to $12.2million, compared to net sales of $7.1 million for 2005.  This increase is a result ofan upturn in the capital equipment market. Sales increases were experienced across all of our product lines.  Sales of our Tapestry and Smart Solutions strip-basedproducts increased $5.2 million or 161% over 2005, while sales of singulateddevice handler products also increased $0.1 million or 6% from 2005.  Sales of our Tapestry and Smart Solutionsstrip-based product made up 70.0% of our net sales for the year ended December 31,2006 compared to 46.0% in 2005.

 

Net sales to Asia comprised approximately 84.1% of our netsales for the year ended December 31, 2006.  Net sales to customers in the United Statesrepresented approximately 13.0% and net sales to customers in Europerepresented approximately 2.9% for year ended December 31, 2006.  Comparatively, net sales to customers in Asiacomprised approximately 78.5% of our net sales for the year ended December 31,2005.  Net sales to customers in theUnited States represented approximately 17.1% and net sales to customers inEurope represented approximately 4.4% for year ended December 31, 2005.

 

***Gross Profit****.*  Gross profit increased $3.3 million to $5.9million or 48.1% of net sales in 2006 from $2.5 million or 35.8% of net sales,for 2005.  The increase in gross marginis directly related to the increase in sales volume resulting in fixed costsbeing spread over higher sales volumes, partially offset by recording of$171,000 of additional inventory reserve and $250,000 of scrap inventorycosts.  For the year ended December 31,2005, we recorded an additional inventory reserve of $525,000.

 

***Selling, General and Administrative Expense****.*  Selling,general and administrative expense in 2006 was $4.1 million, or 33.5% of netsales compared to $4.2 million, or 59.6% of net sales in the prior year.  The expenses for 2006 remained flat comparedto the prior year due to the results of restructuring efforts that have been completedduring 2003, 2004, and 2005.  Althoughthe expenses remain the same, the percentage to net sales is lower in 2005 dueto expenses being spread over higher net sales.

 

***Research and Development Expense***.  Research anddevelopment expense was $2.0 million in 2006 and 2005.  As a percentage of sales, research and developmentexpense in 2006 was 16.7% of net sales compared to 28.0% of net sales in2005.  The decrease in percent of salesover 2005 is directly related to the spread of expenses over a higher net salesamount.

 

***Restructuring Charge****. *There were no restructuring charges in2006.  However, in 2005, due to the continuingretraction of the semiconductor capital equipment market, we reduced ourworkforce across all functional areas by approximately 7% in the second quarterand 2% in the third quarter.  The restructuringcharge totaled $107,000 or 1.5% of net sales in 2005.  This charge reflected severance and otherbenefit costs associated with the reduction. This workforce reduction affected a total of 9 employees.

 

22

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***Other Income (Expense).***  Interestincome for the year ended December 31, 2006 was $11,000 compared to$13,000 for 2005.  This decrease resultedfrom lower balances in investment in interest-bearing cash and cashequivalents.  Interest expense was $1.2million or 9.8% of net sales in 2006, compared to $827,000 or 11.7% of netsales in 2005.

 

Interest expense —amortization of warrant discounts and debt issue costs for 2006 was $808,000compared to $420,000 in 2005.  Includedin 2006 is $435,000 of non-cash expenses related to the amortization of warrantdiscounts, $373,000 for the amortization of debt issue costs.  Included in 2005 is $222,000 of non-cashexpenses related to the amortization of warrant discounts, $198,000 for theamortization of debt issue costs.  Interest expense — debt conversion expense in 2006 was $1.4 millionrelated to conversion from debt to equity of $2.1 million in subordinated notespayable.  Other income and (expense) was($42,000) in 2006, compared to ($101,000) in 2005.

 

***Income Tax Provision****.*  During both2006 and 2005, we incurred minimal tax liabilities.  We have recorded valuation allowances againstall benefits associated with net operating loss carry forwards due to uncertaintyregarding their ultimate utilization.

 

***Net Loss****.*  Net loss for the year ended December 31,2006 was $3.7 million, or $0.12 per basic and diluted share, as compared to netloss of $5.1 million, or $ 0.20 per basic and diluted share for 2005.

 

***Liquidity and Capital Resources***

 

The net loss and increases in accounts receivable anddecreases in other accrued liabilities were the primary uses of cash in 2007,offset by increases in accounts payable with slight decreases in inventory andother assets.  The net loss and increasesin accounts receivable, partially offset by other accrued liabilities, were theprimary uses of cash in 2006.  The netloss and decreases in accounts payable were the primary uses of cash in2005.  Cash used in operations was$175,000, $3.2 million and $3.2 million in 2007, 2006 and 2005, respectively.

 

We record provisions fordoubtful accounts based on specific identification of our accountsreceivable.  As a result of thisexamination, no provisions were recorded for the year ended December 31,2007; however, we wrote off approximately $5,000 for the year ended December 31,2007 and $22,000 for the year ended December 31, 2006, which we deemeduncollectible.  We recorded no provisionsfor doubtful accounts for the years ended December 31, 2006 and December 31,2005, respectively.

 

Capital expenditurestotaled $105,000, $36,000 and $35,000 for the years ended December 31,2007, 2006 and 2005, respectively. Capital purchases for all periods have been primarily for production andcomputer equipment and for leasehold improvements.   As of December 31, 2007, we hadapproximately $275,000 in committed purchase orders outstanding with ourvendors and budgeted capital expenditures for 2008 is approximately $50,000.

 

On March 9, 2004, wecompleted a $5.0 million secured financing transaction with an institutionallender, Laurus Master Fund Ltd.  Underthe terms of the three-year agreement, we put in place a $3.0 million securedworking capital line of credit and a $2.0 long-term convertible note.  In connection with the execution of thiscredit facility, we issued to the lender a seven-year warrant to purchase400,000 shares of our common stock at exercise prices ranging from $2.30 to$2.88.  Our existing secured lendingrelationship was terminated as a result of this transaction.  This credit facility is secured by all theassets of the Company.

 

OnJanuary 28, 2005, we completed an amendment to the financing agreementwith Laurus to defer payments on the long-term convertible note.  As partof this amendment, the conversion prices on both notes were reduced.  Wealso issued Laurus at that time a seven-year warrant to purchase 150,000 sharesof common stock at $.67 per share.

 

 On April 29, 2005, we completed anotherfinancing transaction with Laurus in which we borrowed an additional $2.5million, and which was convertible into shares of common stock.  We alsoissued Laurus at that time an option to purchase 2,556,651 shares of commonstock at an exercise price of $.01 per share.  We received net proceeds ofapproximately $2.4 million at the closing.

 

On February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million.  The Company also issued Laurus a 10-year option topurchase 2,500,000 shares at an exercise price of $.01 per share.  As aresult of the new financing with Laurus, the conversion price for all of theNoteholders who accepted the prior restructuring agreements was reduced to$0.56 per share.

 

23

----

 

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 millionin principal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006,an additional $65,000 in principal amount of the Notes was satisfied by cashpayments by the Company at a discount.  There is currently $1.2 million inprincipal amount of the Notes outstanding, represented by one Note now held byLaurus.  The Note has a conversion price of $.50 per share, and is due andpayable in full on September 30, 2009.

 

On March 29, 2007, we restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible and payable in full on September 30,2009.  In addition to the $5.25 millionnote, there is a $4.0 million working capital line of credit, which is payablein full on September 30, 2009.  Interest is payable monthly on theline at the prime rate plus 2.5%.  As of March 28, 2008, there was an $800,000 over-advance in excess of theborrowing base on the working capital line of credit.  Principal on the over-advance is repayable in$100,000 monthly payments beginning on May 1, 2008.  The restructuredfinancing also includes an additional $1.0 million term note.  The proceeds from the $1 million term note, netof fees and expenses from the 2007 refinancing, are required to be held in arestricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment.  As of December 31, 2007the outstanding balance on this note was $657,000.  Interest is payable monthly at the prime rateplus 2.0% and the principal is payable in full on September 30, 2009.  As part of the 2007 restructuring, theCompany issued Laurus a 10-year option to purchase 5,000,000 shares at anexercise price of $0.01 per share.

 

In 2007 Laurus required that the Company grant Roger Gower,the Company’s CEO, an option for 1,000,000 shares, as incentive for him toremain with the Company.  On March 20,2007, the Compensation Committee of the Company approved the grant to Mr. Gowerof a non-qualified stock option to purchase 1,000,000 shares of common stock ata price of $0.26 per share, the closing sale price on the day of grant.  The option becomes fully vested on March 20,2008 and has a term of 10 years.

 

On December 6, 2007,the Company entered into an agreement with Laurus to extend the maturity datesfor all of the notes issued by the Company to Laurus, from dates starting in February 2008to September 30, 2009.  These noteshad an aggregate principal amount of $11,124,000 as of December 31,2007.  The agreement also extends to January 1,2009 the commencement date for principal payments under the $5,250,000term-note, and reduces the monthly principal payments prior to the maturitydate from $87,500 per month to $44,000 per month.  In consideration forthe extension by Laurus of the note maturity dates, the Company granted Laurusa ten-year warrant to purchase 3,500,000 shares of common stock with an exerciseprice of $.01 per share.  Laurus has agreed in the transaction documentsthat it will not sell any shares acquired by it under the 3,500,000 sharewarrant, or under the 5,000,000 share warrant granted to it as part of the March 2007refinancing, prior to January 1, 2009.  Laurus has also agreed thatsales by it of Company common stock underlying the 2007 warrants on any tradingday after January 1, 2009 will not exceed 20% of the aggregate number ofshares of Company common stock sold on that day.The table below details thewarrants and options issued to Laurus in connection with prior financings:

 
| ** **                                          | ** ** | **Grant Date**     | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|
| ** **                                          | ** ** | **December  2007** | ** ** | **March  2007** | ** ** | **February  2006** | ** ** | **April  2005** | ** ** | **January  2005** | ** ** | **March  2004** | ** ** |
| Number of shares                                    |       | 3,500,000          |       | 5,000,000 |   | 2,500,000 |   | 2,556,651 |   | 150,000 |   | 400,000 |   |
| Exercise Price                                      |       | $                  | 0.01       |   | $ | 0.01 |   | $ | 0.01 |   | $ | 0.01 |   | $ | 0.67 |   | $2.30 - $2.88 |   |
| Dividend yield                                      |       | 0.00               | %          | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |
| Expected volatility                                 |       | 98.61              | %          | 88.63 | % | 122.09 | % | 95.33 | % | 93.13 | % | 98.51 | % |
| Risk-free interest rate                             |       | 3.53               | %          | 4.54 | % | 4.62 | % | 3.90 | % | 3.71 | % | 2.98 | % |
| Expected life of warrants                           |       | 10.0 years         |       | 10.0 years |   | 10.0 years |   | 7.0 years |   | 3.5 years |   | 3.0 years |   |
| Discount on long-term debt                          |       | $                  | 620,000    |   | $ | 1,131,000 |   | $ | 821,000 |   | $ | 473,000 |   | $ | 51,000 |   | $ | 391,000 |   |
| Unexercised  warrants as of  December 31, 2007 |       | 3,500,000          |       | 5,000,000 |   | 1,860,000 |   | 785,084 |   | 150,000 |   | 400,000 |   |
|                                                     |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

24

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Our contractual obligations are as follows (in thousands):

 
| ** **                                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Future rental payments under noncancelable leases |       | $        | 265        |     | $          | 211      |       | $        | 180        |     | $          | 182            |       | $ | 61 |   | — |   |
|                                              |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Payments due under long term debt agreements      |       | —   |       | $        | 11,124     |     | —     |     | —     |     | —     |           | —     |   |
|                                                   |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |

 

For the year ended December 31,2007, no shares of common stock were issued through employee stock options andour stock purchase plan.  Warrants for1.2 million shares were exercised in 2007. For the year ended December 31, 2006, 150,000 shares of commonstock were issued through the exercise of employee stock options and our stockpurchase plan.  Additionally warrants for1.2 million of shares were exercised in 2006. For the year ended December 31, 2005, no shares of common stockwere issued through the exercise of employee stock options and our stockpurchase plan.

 

All remaining principal and interest due from the Company toLaurus on the existing financing agreements becomes due and payable in full on September 30,2009.  In the event that we are unable torepay or refinance our debt in 2009, or if we are unable to extend therepayment of the $800,000 over-advance in 2008, Laurus could potentially take anumber of actions as secured creditor which would have a material negativeimpact on the Company and its shareholders, including foreclosure, a forcedsale of all or part of the Company, and/or liquidation. Further, if futurefinancing requirements are satisfied through the issuance of equity or debtinstruments, shareholders may experience additional dilution in terms of theirpercentage of ownership of our securities.

 

**FederalTax Matters**

 

We paid only nominalfederal and state income taxes in the years ended December 31, 2007, 2006and 2005.  At December 31, 2007, wehad federal net operating loss carryforwards for tax reporting purposes of approximately$102.8 million.

 

**ITEM 7A . Quantitative AndQualitative Disclosures About Market Risk**

 

The vast majority of our transactions are denominated in U.S.dollars; as such, fluctuations in foreign currency exchange rates havehistorically had little impact on us. Inflation has not been a significant factor in our operations in any ofthe periods presented, and it is not expected to affect operations in thefuture.  A 1% increase in interest rateswould increase our interest expense by $100,000 per year.  Our short term revolving line of credit andlong-term convertible debt carried interest at the prime rate plus 2.5%.  There is no material market risk relating toour long-term debt.

 

**Impact of New AccountingStandards**

 

In June 2006, the Financial Accounting Standards Boardissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109,*orFIN 48.  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, *Accountingfor Income Taxes*.  FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  Thispronouncement also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. We adopted the provisions of FIN 48 on January 1, 2007, the firstday of our 2007 fiscal year.  Theadoption of this pronouncement does not have a material impact on our financialposition or results of operations.

 

25

----

 

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS No. 157”), which iseffective for interim and annual reporting periods beginning after November 15,2007.  This statement provides adefinition of fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements for future transactions.  This statement is effective for us on January 1,2008, the first day of our 2008 fiscal year. The Company has not yet assessed the impact of this Statement on theCompany’s financial statements.

 

In February 2007, the FASB issued Statement of FinancialAccounting Standards No. 159, “*The Fair Value Option forFinancial Assets and Financial Liabilities*” (“SFAS 159”).  The Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  SFAS 159 will be effective for the firstfiscal year that begins after November 15, 2007.  The Company has not yet assessed the impactof this Statement on the Company’s financial statements.

 

**ITEM 8. Consolidated Financial Statements and Supplementary Data**

 

See ConsolidatedFinancial Statements included elsewhere in this Annual Report on Form 10-Kfor the year ended December 31, 2007. The financial information by quarter is included in Note 10 of thisAnnual Report on Form 10-K.

 

**ITEM 9. Changes in and Disagreements with Accountants on Accounting  and Financial Disclosure**

 

On December 8, 2005, the Registrant’s independent publicaccountants, Virchow, Krause & Company, LLP (“Virchow Krause”),formally notified the Registrant that it will resign, effective with thecompletion of the audit for the fiscal year ending December 31, 2005.

 

Also on December 8, 2005, the Board of Directors, pursuantto the recommendation of the Audit Committee, approved the retention of Olsen,Thielen & Co. Ltd. (“Olsen Thielen”), as the Registrant’s independentpublic accountants for the fiscal year ending December 31, 2006.

 

The audit report of Virchow Krause on the financial statementsof the Company for the year ended December 31, 2005 contains anexplanatory paragraph that raises substantial doubt about the Registrant’sability to continue as a going concern. The audit reports of Virchow Krause on the financial statements of theRegistrant for the last two fiscal years ended December 31, 2005, did notcontain any other adverse opinion or disclaimer of opinion, nor were thoseopinions otherwise qualified or modified as to audit scope or accountingprinciples.  During the Registrant’s twomost recent fiscal years ended December 31, 2005, and during thesubsequent interim period preceding the resignation of Virchow Krause, therewas no disagreement between the Registrant and Virchow Krause on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure which, if not resolved to Virchow Krause’s satisfaction,would have caused Virchow Krause to make reference to the subject matter of thedisagreement in connection with its reports. During the Registrant’s two most recent fiscal years and the subsequentinterim period through December 8, 2005, there were no reportable events,as that term is defined by Item 304 of Regulation S-K.

 

No consultations occurred between the Registrant and OlsenThielen during the two most recent fiscal years ended December 31, 2005,and during the subsequent interim period preceding the resignation of VirchowKrause, regarding either (1) the application of accounting principles to aspecified transaction, either completed or proposed, or the type of auditopinion that might be rendered on the Registrant’s financial statements, or (2) anymatter that was the subject of a disagreement or a reportable event.

 

**ITEM 9A.  Controls andProcedures**

 

(a)                Evaluation of disclosurecontrols and procedures.

 

26

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The Company’s management carried out an evaluation,under the supervision and with the participation of the Company’s ChiefExecutive Officer and the Company’s Chief Financial Officer (principalfinancial officer), of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31,2007, pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Company’sChief Executive Officer and the Company’s Chief Financial Officer (principalfinancial officer) concluded that the Company’s disclosure controls andprocedures as of December 31, 2007 were effective to ensure thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the SEC, andare designed to ensure that information required to be disclosed by us in thesereports is accumulated and communicated to our management, as appropriate toallow timely decisions regarding disclosures.

 

We will consider furtheractions and continue to evaluate the effectiveness of our disclosure controlsand internal controls and procedures on an ongoing basis, taking correctiveaction as appropriate.  Management doesnot expect that disclosure controls and procedures or internal controls canprevent all errors and all fraud.  Acontrol system, no matter how well conceived and operated, can provide onlyreasonable and not absolute assurance that the objectives of the control systemare met.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs.  While management believes that its disclosurecontrols and procedures provide reasonable assurance that fraud can be detectedand prevented, because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, have been detected.

 

(b)         Management’s annual reporton internal controls over financial reporting.

 

Our management isresponsible for establishing and maintaining adequate control over financialreporting, as such term is defined in Rule 13a-15(f) of the ExchangeAct.  Under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, we conducted an evaluation of the effectiveness of ourinternal control over financial reporting as of December 31, 2007.  In conducting its evaluation, our managementused the criteria set forth by the framework in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on that evaluation,management believes our internal control over financial reporting was effectiveas of December 31, 2007.

 

The certification of theCompany’s Principal Executive Officer and Principal Financial Officer attachedas Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, inparagraph 4 of such certifications, information concerning the Company’sdisclosure controls and procedures and internal controls over financialreporting.  Such certifications should beread in conjunction with the information contained in the Item 9A for a morecomplete understanding of the matters covered by such certifications.

 

This annual report doesnot include an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting.  Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this annual report.

 

(c)          Changes in internal controlsover financial reporting.

 

No changes in the Company’s internal control overfinancial reporting have occurred during the fourth quarter of 2007 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**ITEM 9B.  Other Information**

 

This item is not applicable.

 

27

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**PART III**

 

**ITEM 10. Directors, Executive Officers, and Corporate Governance**

 

Theinformation required by this item is incorporated by reference from the ProxyStatement to be filed no later than 120 days following our December 31,2007 year-end.

 

**ITEM 11. Executive Compensation**

 

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

 

**ITEM 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

 

The information required under this item is herebyincorporated by reference from the Proxy Statement.

 

**ITEM 13. Certain Relationships and Related Transactions and Director Independence**

 

The information required under this item is herebyincorporated by reference from the Proxy Statement.

 

**ITEM 14. Principal Accountant Fee and Services**

 

The information required under this item is herebyincorporated by reference from the Proxy statement.

 

**ITEM 15.  Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 
| **(a)1. Consolidated Financial Statements**                                                                                                                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Index to Consolidated Financial Statements                                                                                                                        |
| Reports of Independent Registered Public Accounting  Firm                                                                                                         |
| Consolidated Balance Sheets as of December 31,  2007, and December 31, 2006                                                                             |
| Consolidated Statements of Operations for the Years  Ended December 31, 2007, December 31, 2006, and December 31,  2005                            |
| Consolidated Statements of Changes in Stockholders’  Deficit for the Years Ended December 31, 2007, December 31, 2006,  and December 31, 2005 |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2007, December 31, 2006, and December 31,  2005                            |
| Notes to Consolidated Financial Statements                                                                                                                        |
| Signatures and Certificates                                                                                                                                       |

 

**(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. |   | Stock Option Plan for  Outside Directors as amended through April 10, 2001. (10)                                           |
| 10F. |   | Incentive Stock Option  Plan as amended through April 10, 2001. (10)                                                       |
| 10G. |   | 2004 Incentive Stock  Plan. (16)                                                                                                |
| 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)                                                                    |

 

28

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| 10X. |   | Agreement for Payment  of Interest with Stock, effective June 30, 2003. (12)                                                                                                                                                                                                                                 |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10Y  |   | Accounts Receivable  Financing Agreement with Silicon Valley Bank (13)                                                                                                                                                                                                                                            |
| 10Z  |   | Security Agreement with  Laurus Master Fund, Ltd. dated March 9, 2004. (15)                                                                                                                                                                                                                                  |
| 10AA |   | Securities Purchase  Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)                                                                                                                                                                                                                       |
| 10BB |   | Secured Convertible  Minimum Borrowing Note with Laurus Master Fund, Ltd. dated March 9,  2004. (15)                                                                                                                                                                                                         |
| 10CC |   | Secured Revolving Note  with Laurus Master Fund, Ltd dated March 9, 2004. (15)                                                                                                                                                                                                                               |
| 10DD |   | Secured Convertible  Term Note with Laurus Master Fund, Ltd dated March 9, 2004. (15)                                                                                                                                                                                                                        |
| 10EE |   | Minimum Borrowing Note  Registration Rights Agreement with Laurus Master Fund, Ltd. dated  March 9, 2004. (15)                                                                                                                                                                                               |
| 10FF |   | Registration Rights  Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)                                                                                                                                                                                                                       |
| 10GG |   | Common Stock Purchase  Warrant with Laurus Master Fund, Ltd. dated March 9, 2004. (15)                                                                                                                                                                                                                       |
| 10HH |   | Amendment No. 1 by  and between Micro Component Technology, Inc. and Laurus Master Fund,  Ltd. dated January 28, 2005 to Secured Convertible Term Note, Secured  Revolving Note, Registration Rights Agreement and Minimum Borrowing Note  Registration Rights Agreement. (Schedules omitted) (17) |
| 10II |   | Common Stock Purchase  Warrant with Laurus Master Fund, Ltd. dated January 28, 2005. (17)                                                                                                                                                                                                                    |
| 10JJ |   | Second Agreement for  Payment of Interest with Stock, effective January 31, 2005 (18).                                                                                                                                                                                                                       |
| 10KK |   | Security and Purchase  Agreement with Laurus Master Fund, Ltd. effective February 17, 2006  (19).                                                                                                                                                                                                            |
| 10LL |   | Secured Non-Convertible  Revolving Note with Laurus Master Fund, Ltd. effective February 17, 2006  (19).                                                                                                                                                                                                     |
| 10MM |   | Secured Non-Convertible  Term Note with Laurus Master Fund, Ltd. effective February 17, 2006  (19).                                                                                                                                                                                                          |
| 10NN |   | Offer to Reduce Note  Conversion Price to 10% Senior Subordinate Convertible Notes dated  August 28, 2006 (20).                                                                                                                                                                                              |
| 10OO |   | Consulting agreement  made between Micro Component Technology, Inc. and a member of the Board  of Directors, Pat Verderico dated October 18, 2006 (21).                                                                                                                                                 |
| 10PP |   | Employee Stock Option  Agreement dated March 20, 2007(22).                                                                                                                                                                                                                                                   |
| 10QQ |   | Securities Purchase  Agreement with Laurus Master Fund, Ltd. effective March 29, 2007 (23).                                                                                                                                                                                                                  |
| 10RR |   | Amendment to the  Secured Non-Convertible Revolving Note with Laurus Master Fund, Ltd.  effective March 29, 2007 (23).                                                                                                                                                                                       |
| 10SS |   | Secured Term Note with  Laurus Master Fund, Ltd. effective March 29, 2007 (23).                                                                                                                                                                                                                              |
| 10TT |   | Common Stock Purchase  Warrant with Laurus Master Fund, Ltd. effective March 29, 2007 (23).                                                                                                                                                                                                                  |
| 10UU |   | Restricted Account  Agreement with Laurus Master Fund, Ltd. dated March 29, 2007 (23).                                                                                                                                                                                                                       |
| 10VV |   | Restricted Account Side  Letter with Laurus Master Fund, Ltd. dated March 29, 2007 (23).                                                                                                                                                                                                                     |
| 10WW |   | Common Stock Purchase  Warrant with Laurus Master Fund, Ltd. effective December 6, 2007 (24).                                                                                                                                                                                                                |
| 10XX |   | Common Stock Purchase  Warrant with Valens Offshore SPV I, Ltd. effective December 6, 2007  (24).                                                                                                                                                                                                            |
| 10YY |   | Common Stock Purchase  Warrant with Valens U.S. SPV I, Ltd. effective December 6, 2007 (24).                                                                                                                                                                                                                 |
| 10ZZ |   | Common Stock Purchase  Warrant with Psource Structured Debt Limited effective December 6, 2007  (24).                                                                                                                                                                                                        |
| 10AB |   | Omnibus Amendment with  Laurus Master Fund, Ltd., Valens Offshore SPV I, Ltd., Valens U.S. SPV I, LLC  and Psource Structured Debt Limited effective December 6, 2007 (24).                                                                                                                                  |
| 10AC |   | Waiver of Registration  Rights effective March 25, 2008 (25)                                                                                                                                                                                                                                                 |
| 10AD |   | Amended and Restated  Overadvance Waiver effective March 25, 2008 (25)                                                                                                                                                                                                                                       |
| 21.  |   | Revised Listing of  Subsidiaries of Micro Component Technology, Inc. (11).                                                                                                                                                                                                                                   |
| 23.1 |   | Consent of Olsen  Thielen & Co. Ltd. (filed herewith).                                                                                                                                                                                                                                                   |
| 23.2 |   | Consent of Virchow,  Krause & Company, LLP (filed herewith).                                                                                                                                                                                                                                             |
| 31.1 |   | Certification of Chief  Executive Officer (filed herewith).                                                                                                                                                                                                                                                       |
| 31.2 |   | Certification of Chief  Financial Officer (filed herewith).                                                                                                                                                                                                                                                       |
| 32.0 |   | Section 1350  Certification (filed herewith).                                                                                                                                                                                                                                                                |

----

| (1)    |   | Incorporated by  reference to the exhibits to the registration statement on Form S-1  filed by MCT on August 24, 1993, as amended, SEC File Number 33-67846.                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                |
| (2)    |   | Incorporated by  reference to the report on Form 10-Q filed by MCT for the quarter ended  March 25, 1995, SEC File No. 0-22384.                                                      |
|   |   |                                                                                                                                                                                                |
| (3)    |   | Incorporated by  reference to the report on Form 10-Q filed by MCT for the quarter ended  September 30, 1995, SEC File No. 0-22384.                                                  |
|   |   |                                                                                                                                                                                                |
| (4)    |   | Incorporated by  reference to the exhibits to the Post-Effective Amendment to Registration  Statement on Form S-8 filed by MCT on July 15, 1996, as amended,  SEC File No. 33-85766. |

 

29

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| (5)    |   | Incorporated by  reference to the exhibits to the report on Form 10-K filed by MCT for  the fiscal year ended June 29, 1996, SEC File No. 0-22384.                                          |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                       |
| (6)    |   | Incorporated by  reference to the report on Form 10-Q filed by MCT for the quarter ended  September 28, 1996, SEC File No. 0-22384.                                                         |
|   |   |                                                                                                                                                                                                       |
| (7)    |   | Incorporated by  reference to the exhibits to the Post-Effective Amendment No. 1 to the  Registration Statement on Form S-1 filed by MCT on November 18,  1996, SEC File No. 33-98940. |
|   |   |                                                                                                                                                                                                       |
| (8)    |   | Incorporated by reference  to the Registration Statement on Form S-1, as amended, filed by Aseco  Corporation on January 29, 1993, SEC File No. 33-57644.                                   |
|   |   |                                                                                                                                                                                                       |
| (9)    |   | Incorporated by  reference to the exhibits to the Registration Statement on Form S-8  filed by MCT on January 31, 2000, SEC File No. 333-95765.                                             |
|   |   |                                                                                                                                                                                                       |
| (10)   |   | Incorporated by  reference to the definitive proxy materials for the 2001 Annual Stockholders  Meeting, filed April 30, 2001.                                                                         |
|   |   |                                                                                                                                                                                                       |
| (11)   |   | Incorporated by  reference to the report on Form 10-K filed by MCT for the period ended  December 31, 2001, SEC File No. 0-22384.                                                           |
|   |   |                                                                                                                                                                                                       |
| (12)   |   | Incorporated by  reference to the report on Form 10-Q filed by MCT for the quarterly  period ended June 28, 2003, SEC File No. 0-22384.                                                     |
|   |   |                                                                                                                                                                                                       |
| (13)   |   | Incorporated by  reference to the report on Form 10-Q filed by MCT for the quarterly  period ended September 27, 2003, SEC File No. 0-22384.                                                |
|   |   |                                                                                                                                                                                                       |
| (14)   |   | Incorporated by  reference to the report on Form 10-K filed by MCT for the period ended  December 31, 2002, SEC File No. 0-22384.                                                           |
|   |   |                                                                                                                                                                                                       |
| (15)   |   | Incorporated by  reference to the report on Form 10-K filed by MCT for the period ended  December 31, 2003, SEC File No. 0-22384.                                                           |
|   |   |                                                                                                                                                                                                       |
| (16)   |   | Incorporated by  reference to the exhibits to the Registration Statement on Form S-8  filed by MCT on July 16, 2004, SEC File No. 333-117407.                                               |
|   |   |                                                                                                                                                                                                       |
| (17)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on February 3,  2005.                                                                                                          |
|   |   |                                                                                                                                                                                                       |
| (18)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on February 24,  2005.                                                                                                         |
|   |   |                                                                                                                                                                                                       |
| (19)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on February 25,  2006.                                                                                                         |
|   |   |                                                                                                                                                                                                       |
| (20)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on September 7,  2006.                                                                                                         |
|   |   |                                                                                                                                                                                                       |
| (21)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on October 18,  2006.                                                                                                          |
|   |   |                                                                                                                                                                                                       |
| (22)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on March 23, 2007.                                                                                                             |
|   |   |                                                                                                                                                                                                       |
| (23)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on April 2, 2007.                                                                                                              |
|   |   |                                                                                                                                                                                                       |
| (24)   |   | Incorporated by  reference to the report on Form 8-K filed by MCT on December 12,  2007.                                                                                                         |
|   |   |                                                                                                                                                                                                       |
| (25)   |   | Incorporated by reference to the report  on Form 8-K filed by MCT on March 27, 2008.                                                                                                             |

 

30

----

 

 

 

 

 

**MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

 

**Index to Consolidated FinancialStatements**

 
|                                                                                                                                                              |   |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Index to Consolidated Financial Statements                                                                                                                        |   | F-1    |
| Report of Independent Registered Public Accounting  Firm                                                                                                          |   | F-2    |
| Report of Independent Registered Public Accounting  Firm                                                                                                          |   | F-3    |
| Consolidated Balance Sheets as of December 31,  2007, and December 31, 2006                                                                             |   | F-4    |
| Consolidated Statements of Operations for the Years  Ended December 31, 2007, December 31, 2006, and December 31,  2005                            |   | F-5    |
| Consolidated Statements of Changes in Stockholders’  Deficit for the Years Ended December 31, 2007, December 31, 2006,  and December 31, 2005 |   | F-6    |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2007, December 31, 2006, and December 31,  2005                            |   | F-7    |
| Notes to Consolidated Financial Statements                                                                                                                        |   | F-8    |
| Signatures and Certifications                                                                                                                                     |   | F-22   |

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Audit Committee,Stockholders and Board of Directors of

Micro ComponentTechnology, Inc. and Subsidiaries

St. Paul, MN

 

We have audited theaccompanying consolidated balance sheets of Micro Component Technology, Inc.and Subsidiaries as of December 31, 2007 and 2006 and the relatedconsolidated statements of operations, stockholders’ deficit and cash flows forthe years then ended.  These consolidatedfinancial statements are the responsibility of the company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  The company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis for designingaudit procedures that are appropriate in the circumstances, but not for thepurpose of expressing an opinion on the effective of the company’s internalcontrol over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the consolidated financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall consolidated financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Micro Component Technology, Inc.and Subsidiaries as of December 31, 2007 and 2006, and the results oftheir operations and their cash flows for the years then ended in conformitywith U.S. generally accepted accounting principles.

 

The accompanyingconsolidated financial statements have been prepared assuming that the companywill continue as a going concern.  Asdiscussed in Note 1 to the consolidated financial statements, the company hassuffered recurring losses from operations and has a stockholders’ deficit.  These factors raise substantial doubt aboutits ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note1.  The consolidated financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.

 

/s/ Olsen, Thielen & Co. Ltd.

 

St. Paul, Minnesota

March 28, 2008

 

F-2

----

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Shareholders,Audit Committee and Board of Directors

Micro ComponentTechnology, Inc. and Subsidiaries

St. Paul, MN

 

We have audited theaccompanying consolidated statements of operations, shareholders’ deficit andcash flows of Micro Component Technology, Inc. and Subsidiaries for theyear ended December 31, 2005.  Theseconsolidated financial statements are the responsibility of the company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis,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 consolidated financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of Micro ComponentTechnology, Inc. and Subsidiaries for the year ended December 31,2005 in conformity with U.S. generally accepted accounting principles.

 

The accompanyingconsolidated financial statements have been prepared assuming that the companywill continue as a going concern.  Asdiscussed in Note 1 to the consolidated financial statements, the company hassuffered recurring losses from operations and has a stockholders’ deficit.  These factors raise substantial doubt aboutits ability to continue as a going concern. Managements plans in regard to these matters are also described in Note1.  The consolidated financial statementsdo not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Virchow,Krause & Company, LLP

 

Minneapolis, Minnesota

February 3, 2006

 

(except for Note 5, as towhich the date is February 17, 2006)

 

F-3

----

 

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

(in thousands,except share and per share amounts)

 
| ** **                                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                            | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| **Assets**                                                                                            |       |                  |       |                  |       |
| Current assets:                                                                                       |       |                  |       |                  |       |
| Cash and cash  equivalents                                                                            |       | $                     | 373        |                  | $          | 200 |   |
| Accounts  receivable, less allowance for doubtful accounts of $121 and $126,  respectively            |       | 3,044                 |       | 2,816                 |       |
| Inventories                                                                                           |       | 1,671                 |       | 2,016                 |       |
| Other                                                                                                 |       | 108                   |       | 169                   |       |
| Total current  assets                                                                                 |       | 5,196                 |       | 5.201                 |       |
|                                                                                                  |       |                  |       |                  |       |
| Property, plant and equipment, net                                                                    |       | 114                   |       | 91                    |       |
| Debt issuance costs, net of accumulated amortization  of $1,518 and $1,383, respectively              |       | 167                   |       | 246                   |       |
| Other assets                                                                                          |       | 32                    |       | 18                    |       |
| Total assets                                                                                          |       | $                     | 5,509      |                  | $          | 5,556 |   |
|                                                                                                  |       |                  |       |                  |       |
| **Liabilities and Stockholders’ Deficit**                                                        |       |                  |       |                  |       |
| Current liabilities:                                                                                  |       |                  |       |                  |       |
| Current portion  of long-term debt                                                                    |       | $                     | —     |                  | $          | 228 |   |
| Bank line of  credit                                                                                  |       | —                |       | 3,906                 |       |
| Accounts payable                                                                                      |       | 698                   |       | 440                   |       |
| Accrued  compensation                                                                                 |       | 481                   |       | 413                   |       |
| Accrued interest                                                                                      |       | 158                   |       | 144                   |       |
| Accrued warranty                                                                                      |       | 114                   |       | 101                   |       |
| Customer  prepayments and unearned service revenue                                                    |       | 229                   |       | 382                   |       |
| Other accrued  liabilities                                                                            |       | 158                   |       | 251                   |       |
| Total current  liabilities                                                                            |       | 1,838                 |       | 5,865                 |       |
|                                                                                                  |       |                  |       |                  |       |
| Long-term debt, net of discounts of $1,804 and $974,  respectively                                    |       | 9,320                 |       | 5,506                 |       |
|                                                                                                  |       |                  |       |                  |       |
| Total liabilities                                                                                     |       | 11,158                |       | 11,371                |       |
|                                                                                                  |       |                  |       |                  |       |
| Commitments and contingencies (Note 7)                                                                |       |                  |       |                  |       |
|                                                                                                  |       |                  |       |                  |       |
| Stockholders’ deficit:                                                                           |       |                  |       |                  |       |
| Preferred stock,  $.01 par value, 1,000,000 authorized, none issued and outstanding                   |       |                  |       |                  |       |
| Common stock,  $.01 par value, 100,000,000 authorized 37,876,889 and 36,665,322 issued,  respectively |       | 379                   |       | 367                   |       |
| Additional  paid-in capital                                                                           |       | 104,207               |       | 102,459               |       |
| Accumulated  deficit                                                                                  |       | (110,235              | )          | (108,641              | )          |
| Total  stockholders’ deficit                                                                     |       | (5,649                | )          | (5,815                | )          |
| Total liabilities and stockholders’ deficit                                                      |       | $                     | 5,509      |                  | $          | 5,556 |   |

 

See Notes to Consolidated Financial Statements.

 

F-4

----

 

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(in thousands,except per share data)

 
| ** **                                                                      | ** ** | **Years Ended**  | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                      | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                                                                       |       | $                     | 14,614     |   | $ | 12,214 |   | $ | 7,069 |   |
| Cost of sales:                                                                  |       |                  |       |   |   |   |   |
| Product                                                                         |       | 7,461                 |       | 6,162 |   | 4,012 |   |
| Inventory  reserve adjustments                                                  |       | 285                   |       | 171 |   | 525 |   |
| Total cost of  sales                                                            |       | 7,746                 |       | 6,333 |   | 4,537 |   |
| Gross profit                                                                    |       | 6,868                 |       | 5,881 |   | 2,532 |   |
| Operating expenses:                                                             |       |                  |       |   |   |   |   |
| Selling,  general, and administrative                                           |       | 4,311                 |       | 4,095 |   | 4,213 |   |
| Research and  development                                                       |       | 1,884                 |       | 2,041 |   | 1,980 |   |
| Restructuring  charge                                                           |       | 137                   |       | — |   | 107 |   |
| Total operating  expenses                                                       |       | 6,332                 |       | 6,136 |   | 6,300 |   |
|                                                                            |       |                  |       |   |   |   |   |
| Income (loss) from operations                                                   |       | 536                   |       | (255 | ) | (3,768 | ) |
|                                                                            |       |                  |       |   |   |   |   |
| Other income (expense):                                                         |       |                  |       |   |   |   |   |
| Interest income                                                                 |       | 10                    |       | 11 |   | 13 |   |
| Interest expense                                                                |       | (1,141                | )          | (1,196 | ) | (827 | ) |
| Interest expense  — amortization of warrant discounts and debt issue costs |       | (1,055                | )          | (808 | ) | (420 | ) |
| Interest expense  — debt conversion expense                                |       | —                |       | (1,363 | ) | — |   |
| Other income  (expense)                                                         |       | 56                    |       | (42 | ) | (101 | ) |
|                                                                            |       |                  |       |   |   |   |   |
| Loss before income taxes                                                        |       | (1,594                | )          | (3,653 | ) | (5,103 | ) |
| Income tax provision                                                            |       | —                |       | — |   | — |   |
|                                                                            |       |                  |       |   |   |   |   |
| Net loss                                                                        |       | $                     | (1,594     | ) | $ | (3,653 | ) | $ | (5,103 | ) |
|                                                                            |       |                  |       |   |   |   |   |
| Net loss per common share:                                                      |       |                  |       |   |   |   |   |
| Basic and  diluted                                                              |       | $                     | (0.04      | ) | $ | (0.12 | ) | $ | (0.20 | ) |
|                                                                            |       |                  |       |   |   |   |   |
| Weighted average common and common equivalent shares  outstanding:              |       |                  |       |   |   |   |   |
| Basic                                                                           |       | 37,130                |       | 30,642 |   | 25,894 |   |
| Diluted                                                                         |       | 37,130                |       | 30,642 |   | 25,894 |   |

 

See Notes toConsolidated Financial Statements.

 

F-5

----

 

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’DEFICIT**

(in thousands,except share data)

 
| ** **                                                                    | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | **Cumulative** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|----------------|------------|----------------|------------|
| ** **                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | **Other** | ** ** |
| ** **                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** | **Additional** | ** ** | **Compre-**    | ** ** | ** ** | ** ** | **Compre-** | ** ** |
| ** **                                                                    | ** ** | ** **            | ** ** | **Par**    | ** ** | **Paid-in**    | ** ** | **hensive**    | ** ** | **Accumulated** | ** ** | **hensive** | ** ** |
| ** **                                                                    | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Loss**       | ** ** | **Deficit** | ** ** | **Loss** | ** ** |
| Balance at  December 31, 2004                                            |       | 25,566,511            |       | $          | 256        |           | $          | 97,022         |       | $ | — |   | $ | (99,885 | ) | $ | (69 | ) |
| Net loss                                                                      |       |                  |       |       |       |           |       | $              | (5,103     | ) | (5,103 | ) |   |   |
| Cumulative  translation adjustments                                           |       | —                |       | —     |       | —         |       | 69             |       |   |   | 69 |   |
| Shares issued in  lieu of interest                                            |       | 648,874               |       | 6          |       | 124            |       |           |       |   |   |   |   |
| Discounts on  long-term debt                                                  |       | —                |       | —     |       | 524            |       |           |       |   |   |   |   |
| Comprehensive  loss                                                           |       |                  |       |       |       |           |       | $              | (5,034     | ) |   |   |   |   |
|                                                                          |       |                  |       |       |       |           |       |           |       |   |   |   |   |
| Balance at  December 31, 2005                                            |       | 26,215,385            |       | $          | 262        |           | $          | 97,670         |       | — |   | $ | (104,988 | ) | $ | — |   |
| Net loss                                                                      |       |                  |       |       |       |           |       | $              | (3,653     | ) | (3,653 | ) |   |   |
| Shares issued in  lieu of interest                                            |       | 1,304,714             |       | 13         |       | 303            |       |           |       |   |   |   |   |
| Discounts on  long-term debt                                                  |       | —                |       | —     |       | 821            |       |           |       |   |   |   |   |
| Shares issued on  conversion of 10% senior subordinated convertible debt, net |       | 7,795,223             |       | 78         |       | 3,613          |       |           |       |   |   |   |   |
| FAS 123R  Compensation expense                                                |       | —                |       | —     |       | 4              |       |           |       |   |   |   |   |
| Shares issued on  exercise of options / warrants, net                         |       | 1,350,000             |       | 14         |       | 48             |       |           |       |   |   |   |   |
| Comprehensive  loss                                                           |       |                  |       |       |       |           |       | $              | (3,653     | ) |   |   |   |   |
|                                                                          |       |                  |       |       |       |           |       |           |       |   |   |   |   |
| Balance at  December 31, 2006                                            |       | 36,665,322            |       | $          | 367        |           | $          | 102,459        |       |   |   | $ | (108,641 | ) |   |   |
| Net loss                                                                      |       |                  |       |       |       |           |       | $              | (1,594     | ) | (1,594 | ) |   |   |
| Discounts on  long-term debt                                                  |       | —                |       | —     |       | 1,751          |       |           |       |   |   |   |   |
| FAS 123R  Compensation expense                                                |       | —                |       | —     |       | 10             |       |           |       |   |   |   |   |
| Shares issued on  exercise of options / warrants, net                         |       | 1,211,567             |       | 12         |       | —         |       |           |       |   |   |   |   |
| Stock  registration fees                                                      |       | —                |       | —     |       | (13            | )          |           |       |   |   |   |   |
| Comprehensive  loss                                                           |       |                  |       |       |       |           |       | $              | (1,594     | ) |   |   |   |   |
|                                                                          |       |                  |       |       |       |           |       |           |       |   |   |   |   |
| Balance at  December 31, 2007                                            |       | 37,876,889            |       | $          | 379        |           | $          | 104,207        |       |   |   | $ | (110,235 | ) | $ | — |   |

 

See Notes toConsolidated Financial Statements.

 

F-6

----

 

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

###### **CONSOLIDATED STATEMENTS OF CASHFLOWS**

(in thousands)

 
| ** **                                                                   | ** ** | **Years Ended**  | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **2007**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                        |       |                  |       |   |   |   |   |
| Net loss                                                                     |       | $                     | (1,594     | ) | $ | (3,653 | ) | $ | (5,103 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                  |       |   |   |   |   |
| Depreciation                                                                 |       | 82                    |       | 91 |   | 191 |   |
| Amortization                                                                 |       | 1,056                 |       | 813 |   | 420 |   |
| Share-based  compensation expense                                            |       | 10                    |       | 4 |   | — |   |
| Inventory  reserve adjustments                                               |       | 285                   |       | 171 |   | 525 |   |
| Loss on disposal  of property and equipment                                  |       | —                |       | 1 |   | — |   |
| Changes in  operating assets and liabilities:                                |       |                  |       |   |   |   |   |
| Accounts  receivable                                                         |       | (228                  | )          | (1,155 | ) | 374 |   |
| Inventories                                                                  |       | 60                    |       | 7 |   | 275 |   |
| Other assets                                                                 |       | 47                    |       | 3 |   | 33 |   |
| Accounts payable                                                             |       | 258                   |       | 15 |   | (99 | ) |
| Other accrued  liabilities                                                   |       | (151                  | )          | 507 |   | 138 |   |
| Net cash used in  operating activities                                       |       | (175                  | )          | (3,196 | ) | (3,246 | ) |
|                                                                         |       |                  |       |   |   |   |   |
| Cash flows from investing activities:                                        |       |                  |       |   |   |   |   |
| Additions to  property, plant and equipment                                  |       | (105                  | )          | (36 | ) | (33 | ) |
| Proceeds from  disposition of property                                       |       | —                |       | — |   | 28 |   |
| Net cash used in  investing activities                                       |       | (105                  | )          | (36 | ) | (5 | ) |
|                                                                         |       |                  |       |   |   |   |   |
| Cash flows from financing activities:                                        |       |                  |       |   |   |   |   |
| Proceeds on  long-term debt, net of debt issue costs                         |       | 602                   |       | 4,903 |   | 2,397 |   |
| Payments on  long-term debt, net of stock issued                             |       | (228                  | )          | (4,198 | ) | (315 | ) |
| Proceeds on line  of credit                                                  |       | 80                    |       | 1,234 |   | 1,011 |   |
| Proceeds from  issuance of stock                                             |       | 12                    |       | 66 |   | — |   |
| Stock  registration fees                                                     |       | (13                   | )          | (9 | ) | — |   |
| Debt conversion  expense                                                     |       | —                |       | 1,359 |   | — |   |
| Net cash  provided by financing activities                                   |       | 453                   |       | 3,355 |   | 3,093 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Effects of exchange rate changes                                             |       | —                |       | — |   | 69 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                         |       | 173                   |       | 123 |   | (89 | ) |
|                                                                         |       |                  |       |   |   |   |   |
| Cash and cash equivalents at beginning of period                             |       | 200                   |       | 77 |   | 166 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Cash and cash equivalents at end of period                                   |       | $                     | 373        |   | $ | 200 |   | $ | 77 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Supplemental disclosure:                                                     |       |                  |       |   |   |   |   |
| Non-cash  investing and financing activities:                                |       |                  |       |   |   |   |   |
| Stock issued in  lieu of interest                                            |       | $                     | —     |   | $ | 316 |   | $ | 130 |   |
| Discount on  issuance of long-term debt                                      |       | 1,751                 |       | 821 |   | 524 |   |
| Stock issued in  conversion of 10% senior subordinated debt                  |       | —                |       | 2,335 |   | — |   |
| Conversion of  accounts payable into long term debt                          |       | —                |       | — |   | 450 |   |
| Debt Issue Costs                                                             |       | 56                    |       | 347 |   | 104 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Cash paid for  interest                                                      |       | $                     | 1,128      |   | $ | 968 |   | $ | 503 |   |

 

See Notes to Consolidated Financial Statements.

 

F-7

----

 

 

 

 

 

**MICRO COMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**NOTE 1 - DESCRIPTION OF BUSINESS ANDSIGNIFICANT ACCOUNTING POLICIES**

 

***Business***

*** ***

We design, manufacture, market and service automated testhandling equipment for the semiconductor industry.  Our handlers are designed to handle mostsemiconductor 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 1972 andis headquartered in St. Paul, Minnesota.

 

***Basis of Presentation***

*** ***

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

 

Our consolidated financialstatements have been prepared on the assumption that we will continue as agoing concern, which contemplates the realization of assets and liquidation ofliabilities in the normal course of business.  The Company has suffered recurring losses from operations and has astockholders’ deficit.  These factorsraise substantial doubt about the Company’s ability to continue as a goingconcern.

 

As of December 31, 2007, we had cash and cash equivalentsof $373,000, working capital of $3.4 million, assets totaling $5.5 million,liabilities totaling $11.1 million and an accumulated deficit of $110.2million.  We expect to continue to expendcash and incur operating losses at the current net sales levels, but to alesser extent than the twelve months ended December 31, 2007 as certainoperating expenses are expected to decline from 2007 levels. Our ability to generatecash and operating income is dependent on increasing our customer base toexpand the penetration of our product technology and the realization of ourlower operating expense targets.

 

Beginning May 1,2008, principal on the $800,000 over-advance in excess of the borrowing base onthe working capital line of credit is repayable in $100,000 monthlypayments.  If we are able to extend themonthly $100,000 over-advance payments starting May 1, 2008, the Companybelieves that the combination of the extension, reduced spending and increasingour customer base to further enable the penetration of our product technologywill provide the cash necessary to meet our operating, working capital andcapital resource obligations through 2008.

 

***Use of Estimates***

*** ***

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires that we make estimates and assumptions that affect amounts reportedtherein.  Due to the inherent uncertaintyinvolved in making estimates, actual results reported in future periods mightdiffer from those estimates.

 

***Revenue Recognition***

*** ***

UnderSAB 104, our revenue is recognized upon shipment, as our terms are FOB shippingpoint, for established products that have previously satisfied existingcustomer performance specifications and that provide for full payment tied toshipment.  Revenue for products that havenot previously satisfied customer performance specifications or from saleswhere all or a portion of customer payment is based upon acceptance are onlyrecognized upon customer acceptance.  Therelated inventory costs are offset against the deferred revenue and reported as“deferred revenue in excess of costs incurred” in the consolidated balancesheet.  Product warranty and installationcosts are accrued in the period sales are recognized.  Installation services are considered to beperfunctory as defined under SAB 104 and average less than 5% of the contractprice.  Revenue related to spare parts isrecognized upon shipment.  Revenuerelated to maintenance and service contracts are deferred and amortized to earningson a straight-line basis over the life of the service contract.  Custom integration software revenue is recognizedon a project basis with milestone acceptance provisions.  Shipping and handling costs are billed to thecustomer and included in the net revenue with the cost of shipment and handlingcharged to cost of goods sold.

 

F-8

----

 

***Research and DevelopmentExpenses***

*** ***

Research anddevelopment expenses for new product development are charged to expense asincurred.

 

***Financial Instruments***

*** ***

The carryingamounts for all financial instruments approximates fair value.  The carrying amounts for cash and cash equivalents,accounts receivable, accounts payable and accrued liabilities approximates fairvalue because of the short maturity of these instruments.  The fair value of note payable and long-termdebt approximates the carrying amounts based upon the Company’s expected borrowingrate for debt with similar remaining maturities and comparable risk.

 

***Cash and Cash Equivalents***

*** ***

We consider allhighly liquid investments purchased with original maturities of 90 days or lessto be cash equivalents.  We place ourtemporary cash investments with high credit quality financialinstitutions.  At times such investmentsmay be in excess of the Federal Deposit Insurance Corporation (FDIC) insurancelimit.

 

***Accounts Receivable***

*** ***

We review customers’ credit history before extending unsecured creditand establish an allowance for doubtful accounts based upon factors surroundingthe credit risk of specific customers and other information. Invoice terms canvary from net 30 days, to percentage amounts of the total customer purchase ordertied to acceptance criteria.  The Companydoes not accrue interest on past due accounts receivable.  The Company writes off receivables when theyare deemed uncollectible after all collection attempts have failed.  Accounts receivable are shown net of anallowance for doubtful accounts of $121,000 and $126,000 at December 31,2007 and 2006, respectively.

 

***Inventories***

*** ***

Inventories arestated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”) method.  Provisions to reduce inventories to the lowerof cost or market are made based on a review of excess and obsoleteinventories, estimates of future sales, examination of historical consumptionrates and the related value of component parts.

 

***Property, Plant andEquipment***

*** ***

Property, plantand equipment are stated at cost. Depreciation is provided by the straight-line method over the estimateduseful lives of the assets for financial reporting and accelerated methods fortax purposes.  Leasehold improvements areamortized over the shorter of the estimated useful life or the lease term forfinancial reporting purposes.  Estimatedlives used in computing book depreciation are as follows:

 

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

 

***Impairment of Long-LivedAssets***

*** ***

We periodically evaluatethe carrying value of long-lived assets for potential impairment.  We consider projected future operatingresults, cash flows, trends, and other circumstances in making such estimatesand evaluations.  When the carrying valueof any long-lived asset exceeds its projected undiscounted cash flows, impairmentis recognized to reduce the carrying value to its fair market value.

 

***Product Warranty***

*** ***

At the time theproduct is sold, estimated costs of warranty obligations to customers arecharged to expense and a related accrual is established.

*** ***

***F-9***

----

*** ***

***Income Taxes***

*** ***

We account forincome taxes in accordance with the provisions of Statement of FinancialAccounting Standards (SFAS) No. 109*, Accounting for IncomeTaxes*.  Deferred income taxesare recorded based on differences in the bases of assets and liabilitiesbetween the financial statements 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-Based Compensation***

*** ***

The Company adopted Statement ofFinancial Accounting Standards (SFAS) No. 123R “Share-Based Payment”, on January 1,2006.  This statement requires us torecognize the cost of employee and director services received in exchange forthe stock options it has awarded.  UnderSFAS 123R, we are required to recognize compensation expense over an award’svesting period based on the award’s fair value at the date of grant.  We have elected to adopt SFAS 123R on amodified prospective basis; accordingly the financial statements for periodsprior to January 1, 2006 do not include stock-based compensation costscalculated under the fair value method. As a result of the adoption of SFAS 123R, we incurred a compensationexpense of $10,000 and $4,000 for years ended December 31, 2007 and2006.  Total deferred compensationexpense not yet recognized is $298,000 to be recognized $202,000, $34,000,$31,000 and $31,000 for the years 2008, 2009, 2010 and 2011 repectively.

 

If compensation cost forour stock option and employee stock purchase plans had been accounted for in accordancewith SFAS 123R, our net loss and net loss per share would have been as followsfor the year ended December 31, 2005:

 

| Net loss, in thousands:            |   |   |   |
|------------------------------------|--------|--------|--------|
| As reported                        |   | $      | (5,103 | ) |
| Fair value  compensation expense   |   | (184   | )      |
| Pro forma                          |   | $      | (5,287 | ) |
| Net loss per share — basic:   |   |   |   |
| As reported                        |   | $      | (0.20  | ) |
| Fair value  compensation expense   |   | (0.01  | )      |
| Pro forma                          |   | $      | (0.21  | ) |
| Net loss per share — diluted: |   |   |   |
| As reported                        |   | $      | (0.20  | ) |
| Fair value  compensation expense   |   | (0.01  | )      |
| Pro forma                          |   | $      | (0.21  | ) |
| Stock Based Compensation:          |   |   |   |
| As reported                        |   | $      | — |   |
| Fair value  compensation expense   |   | (184   | )      |
| Pro forma                          |   | $      | (184   | ) |

 

The fair value of options granted under the stock option andemployee stock purchase plans for the years ended December 31, 2007, 2006,and 2005 was estimated on the date of grant using the Black-Scholes Mertonoption pricing model with the following weighted average assumptions and results:

 

| ** **                              | ** ** | **Years Ended** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **Dec. 31,**    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                              | ** ** | **2007**             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                    |       |                 |       |   |   |   |   |
| Dividend yield                          |       | 0.00                 | %          | 0.00 | % | 0.00 | % |
| Expected volatility                     |       | 91.28                | %          | 91.89 | % | 94.31 | % |
| Risk-free interest rate                 |       | 4.33                 | %          | 4.99 | % | 3.89 | % |
| Expected life of options                |       | 3.5 years            |       | 3.5 years |   | 3.5 years |   |
| Fair value per share of options granted |       | $                    | 0.16       |   | $ | 0.32 |   | $ | 0.21 |   |
|                                         |            |                      |            |  |  |  |  |  |  |  |

*** ***

***F-10***

----

*** ***

***Foreign Currency Translation***

*** ***

Assets and liabilities ofthe foreign subsidiary are translated to U.S. dollars at year-end rates, andthe statements of operations are translated at average exchange rates duringthe year.  Translation adjustmentsarising from the translation of the foreign affiliates’ net assets into U.S.dollars were recorded in cumulative other comprehensive income until 1999.  During 1999, the foreign subsidiary’sfunctional currency changed to the U.S. dollar due principally to a significantshift in the amount of activity denominated in U.S. dollars versus the local currency.  All translation adjustments are now recordedin the consolidated statements of operations. For the years ended December 31, 2007 and 2006 there are nocumulative translation adjustments.  Forthe year ended December 31, 2005, we wrote-off cumulative translationadjustments of $69,000.

 

***Shipping and Handling***

*** ***

Shipping and handling charges billed tocustomers are recorded as revenue. Shipping and handling costs are recorded within cost of sales on theincome statement.

 

***Presentation of TaxesCollected from Customers***

*** ***

Sales taxes areimposed on most of the Company’s sales to nonexempt customers.  The Company collects the taxes from customersand remits the entire amounts to governmental authorities.  The Company’s accounting policy is to excludethe taxes collected and remitted from revenues and expenses.

 

***New Accounting Standards***

*** ***

InJune 2006, the Financial Accounting Standards Board issued FASBInterpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109,*orFIN 48.  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109, *Accountingfor Income Taxes*.  FIN 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return.  Thispronouncement also provides guidance on derecognition, classification, interestand penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginningafter December 15, 2006; therefore, the Company has adopted the newrequirements for fiscal 2007.  Theadoption of this pronouncement does not have a material impact on our financialposition or results of operations.

 

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements*” (“SFAS No. 157”), which is effective for interimand annual reporting periods beginning after November 15, 2007.  This statement provides a definition of fairvalue, establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements for future transactions.  The Company has not yet assessed the impactof this Statement on the Company’s financial statements.

 

InFebruary 2007, the FASB issued Statement of Financial Accounting StandardsNo. 159, “*The Fair Value Option for Financial Assetsand Financial Liabilities*” (“SFAS 159”).  The Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value thatare not currently required to be measured at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  SFAS 159 will be effective for the firstfiscal year that begins after November 15, 2007.  The Company has not yet assessed the impactof this Statement on the Company’s financial statements.

 

**NOTE 2 -LOSS PER COMMON SHARE**

 

Loss per common share iscomputed in accordance with SFAS No. 128, *Earnings PerShare*.  Basic loss per shareis computed using the weighted average number of common shares outstandingduring each period.  Diluted earnings pershare include the dilutive effect of common shares potentially issuable uponthe exercise of stock options, warrants outstanding and the conversion ofconvertible debt.  The following tablereconciles the denominators used in computing basic and diluted loss per sharefor the periods reported (in thousands):

 

F-11

----

 
| ** **                                    | ** ** | **Years Ended**  | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                    | ** ** | **2007 (1)**          | ** ** | **2006 (1)** | ** ** | **2005 (1)** | ** ** |
| Weighted average common shares outstanding    |       | 37,130                |       | 30,642 |   | 25,894 |   |
| Effect of dilutive stock options and warrants |       | —                |       | — |   | — |   |
| Effect of convertible debt                    |       | —                |       | — |   | — |   |
|                                          |       | 37,130                |       | 30,642 |   | 25,894 |   |

----

(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 14,988,831 shares at December 31, 2007,5,915,398 shares at December 31, 2006 and 5,013,398 shares at December 31,2005.

 

**NOTE 3 -RESTRUCTURING CHARGES**

 

The restructuring charges described below were incurred andpaid within the years as set forth below.

 

**2007Restructuring Charges**

 

During the second quarter of 2007, we restructured our Penang, Malaysiamanufacturing operation. The restructuring plan included the reduction of ourlease facility from 54,000 square feet to 10,000 square feet, a workforcereduction of approximately 28 positions in our Malaysian manufacturingoperation, and outsourcing manufacturing of certain fabricated parts.  We recorded a restructuring charge in thesecond quarter of 2007 of $137,000 or 0.9% of net sales, primarily for cashexpenditures for termination benefits and related costs.

 

**2005Restructuring Charges**

 

 During the secondquarter of 2005, in response to the continuing downturn in the semiconductorcapital equipment market, we reduced our workforce across all functional areasby approximately 7% resulting in a restructuring charge of $67,000.  This charge reflected severance and otherbenefit costs associated with this reduction. This workforce reduction affected a total of seven employees across allfunctional areas.

 

During the third quarter of 2005, in connection with ourrestructuring activities, we reduced our workforce within manufacturing andsales by approximately 2% resulting in a restructuring charge of $40,000.  This charge reflected severance and other benefitcosts associated with this reduction. This workforce reduction affected a total of two employees.

 

**NOTE 4 - BALANCE SHEETINFORMATION**

 

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

 

| ** **        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Beginning balance |       | $                     | 126        |                  | $          | 148 |   |
| Provisions        |       | —                |       | —                |       |
| Write offs        |       | (5                    | )          | (22                   | )          |
| Ending balance    |       | $                     | 121        |                  | $          | 126 |   |

 

Provisions are charged to selling, general and administrative expense.

 

Major components of inventories were as follows (in thousands):

 

| ** **      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Raw materials   |       | $                     | 1,149      |                  | $          | 1,314 |   |
| Work-in-process |       | 280                   |       | 377                   |       |
| Finished goods  |       | 242                   |       | 325                   |       |
|            |       | $                     | 1,671      |                  | $          | 2,016 |   |

 

F-12

----

 

In accordance with accounting principles generally accepted in theUnited States of America, we value our inventories at the lower of cost ormarket.

 

Thefollowing table providesthe inventory reserves for the years ended December 31, 2007 and 2006.

 
| ** **                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Inventory reserve balance — beginning     |       | $        | 5,613      |     | $          | 7,401 |   |
| Release of inventory reserve on sale of goods  |       | (286     | )          | —   |       |
| Release of inventory reserve on scrap of goods |       | (1,284   | )          | (1,959   | )          |
| Additional inventory reserve                   |       | 285      |       | 171      |       |
| Inventory reserve balance — ending        |       | $        | 4,328      |     | $          | 5,613 |   |

 

We provide a standard thirteen month warranty program for ourequipment products. We record provisions for warranty claims for these productsbased upon historical claim performance. The following table provides the expense recorded and charges againstour reserves for the years ended December 31, 2007 and 2006.

 
| ** **                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Accrued warranty balance — beginning |       | $        | 101        |     | $          | 153 |   |
| Provision                                 |       | 101      |       | 32       |       |
| Warranty claims                           |       | (88      | )          | (84      | )          |
| Accrued warranty balance — ending    |       | $        | 114        |     | $          | 101 |   |

 

F-13

----

 

Property, plant and equipment were as follows (in thousands):

 
| ** **                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Leasehold improvements        |       | $                     | 168        |                  | $          | 193 |   |
| Machinery and equipment       |       | 1,986                 |       | 2,049                 |       |
| Furniture and fixtures        |       | 219                   |       | 208                   |       |
|                          |       | 2,373                 |       | 2,450                 |       |
| Less accumulated depreciation |       | (2,259                | )          | (2,359                | )          |
|                          |       | $                     | 114        |                  | $          | 91 |   |

 

#### **NOTE 5 - LONG-TERM DEBT**

####  

Long-term debt and financing obligations were as follows (inthousands):

 
| ** **                                                                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                 | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Long-term Laurus notes, net of discounts of $1,804  and $974, respectively |       | $                     | 9,320      |                  | $          | 5,506 |   |
| Long-term California lease                                                 |       | —                |       | 228                   |       |
| Less: current portion                                                      |       | —                |       | (228                  | )          |
| Total long-term debt                                                       |       | $                     | 9,320      |                  | $          | 5,506 |   |

 

OnMarch 9, 2004, we completed a $5.0 million financing transaction with aninstitutional lender, Laurus Master Fund, Ltd. (“Laurus”), secured by all ofthe assets of the Company.  The financing included a $3.0 million workingcapital line of credit and a $2.0 million long-term note.  The notes werepartially convertible into shares of our common stock.  In connection withthe transaction, we issued to Laurus a seven-year warrant to purchase 400,000shares of common stock at exercise prices ranging from $2.30 to $2.88 pershare.  The secured loan in existence at that time with a prior lender wasterminated.  As a result of the 2004financing, we recognized debt issue costs of $343,000 and amortized these costsover the term of the note.

 

OnJanuary 28, 2005, we completed an amendment to the financing agreementwith Laurus to defer payments on the long-term convertible note.  As partof this amendment, the conversion prices on both notes were reduced.  Wealso issued Laurus at that time a seven-year warrant to purchase 150,000 sharesof common stock at $.67 per share.

 

OnApril 29, 2005, we completed another financing transaction with Laurus inwhich we borrowed an additional $2.5 million, and which was convertible intoshares of common stock.  We also issued Laurus at that time an option topurchase 2,556,651 shares of common stock at an exercise price of $.01 pershare.  We received net proceeds of approximately $2.4 million at theclosing.  As a result of the 2005refinancing, we recognized debt issue costs of $104,000 and amortized thesecosts over the term of the note.

 

On February 17, 2006, we restructured the financing withLaurus, and increased the total maximum secured indebtedness with Laurus to$9.25 million.  Thefinancing included increasing the working capital line of credit to $4.0 million.  TwoLaurus notes, $1.67 million and $2.33 million, were replaced by one note of$5.25 million.  We recognized debt issuecosts of $347,000 and are amortizing these costs over the term of thenote.  $205,000 of remaining unamortizeddebt issue costs related to the two Laurus notes were expensed.  The Company also issued Laurus a 10-yearoption to purchase 2,500,000 shares at an exercise price of $.01 pershare.  As a result of the new financing with Laurus, the conversion pricefor all of the Noteholders who accepted the prior restructuring agreements wasreduced to $0.56 per share.

 

OnMarch 29, 2007, we restructured the financing with Laurus, and increasedthe total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  As a result of the 2007 financing, werecognized debt issue costs of $56,000 and are amortizing these costs over theterm of the note.  Interest ispayable monthly on the term note at the prime rate plus 2.5%.  The note isnon-convertible and payable in full on September 30, 2009.  Beginning January 1, 2009, we are requiredto make monthly payments of $44,000 until September 30, 2009, at whichtime the entire remaining principal and accrued interest is due and payable infull.  In addition to the $5.25 million note, there is a $4.0 millionworking capital line of credit, which is payable in full on September 30,2009.  Interest is payable monthly on the line at the prime rate plus 

 

F-14

----

 

2.5%. As of March 28, 2008, there as an $800,000 over-advance in excess of theborrowing base on the working capital line of credit.  Principal on the over-advance is repayable in$100,000 monthly payments beginning on May 1, 2008.

 

The restructured financing includes an additional $1.0 millionterm note.  The proceeds from the $1million term note, net of fees and expenses from the 2007 refinancing, arerequired to be held in a restricted account at a bank, and will only bereleased by the bank to the Company, upon approval of Laurus in its discretion,for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and theprincipal is payable in full on September 30, 2009.  As of December 31, 2007 the outstandingbalance on this note is $657,000.  Aspart of the 2007 restructuring, the Company also issued Laurus a 10-year optionto purchase 5,000,000 shares at an exercise price of $0.01 per share.

 

As part of the refinancing, Laurus required that the Companygrant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, asincentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Companyapproved the grant to Mr. Gower of a non-qualified stock option topurchase 1,000,000 shares of common stock at a price of $0.26 per share, theclosing sale price on the day of grant. The option becomes fully vested on March 20, 2008 and has a term of10 years.

 

On December 6, 2007,the Company entered into an agreement with to extend the maturity dates for allof the notes issued by the Company to Laurus from dates starting in February 2008to September 30, 2009.  These notes had an aggregate principal amountof $11,124,000 as of  December 31,2007.  The agreement also extends to January 1,2009 the commencement date for principal payments under the $5,250,000term-note, and reduces the monthly principal payments prior to the maturitydate from $87,500 per month to $44,000 per month.  In consideration forthe extension by Laurus of the note maturity dates, the Company granted Laurusa ten-year warrant to purchase 3,500,000 shares of common stock with anexercise price of $.01 per share.  Laurus has agreed in the transactiondocuments that it will not sell any shares acquired by it under the 3,500,000share warrant, or under the 5,000,000 share warrant granted to it as part of theMarch 2007 refinancing, prior to January 1, 2009.  Laurus hasalso agreed that sales by it of Company common stock underlying the 2007warrants on any trading day after January 1, 2009 will not exceed 20% ofthe aggregate number of shares of Company common stock sold on that day.  As a result of the December 2007agreement to extend the maturity dates of the notes, all Laurus debt has beenreclassified as a long-term liability.

 

In December 2001, we issued$10.0 million of 10% Senior Subordinated Convertible Notes originally due in2006 to a group of accredited investors. These Notes were initially convertible into our common stock at a conversionprice equal to $2.60 per share.  TheNotes are redeemable by us at any time after January 3, 2004 as long asthe market price of our common stock equals or exceeds 150% of the conversionprice.  Proceeds from 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.  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 andregulations, maintain a market for our common stock, and provide the Noteholders with copies of our SEC reports and certain other information. There areno financial covenants related to these Notes. On June 30, 2003, wecompleted the restructuring of $9.29 million, or 92.9%, of our 10% SeniorSubordinated Convertible Notes, wherein the participating noteholders agreed toaccept stock in lieu of cash for the next four semi-annual interest paymentdates beginning June 30, 2003 through December 31, 2004, and theconversion price for the Notes was reduced to $1.00 per share.  On February 25, 2005, we completeda second amendment to the agreement with the holders of our 10% SeniorSubordinated Convertible Notes, wherein holders of 80% of the remaining Notes,representing $2.9 million, agreed to continue to accept stock in payment ofinterest for the remaining four interest payments through December 24,2006.  As part of this amendment, weagreed to reduce the Note conversion price to $0.85 per share, and use our bestefforts to register the shares with the SEC. On April 29, 2005, we completed another financing transaction withLaurus.  As a result of the new financingwith Laurus, the conversion price for all of the Noteholders who accepted theprior restructuring agreements was at that time reduced to $0.61 per share.  On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 millionin principal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.

 

F-15

----

 

As of December 24, 2006, an additional $65,000 inprincipal amount of the Notes was satisfied by cash payments by the Company ata discount.  There is currently $1.2 million in principal amount of theNotes outstanding, represented by one Note now held by Laurus.  The Notehas a conversion price of $.50 per share, and is due and payable in full on September 30,2009.

 

Asmentioned, certain note holders agreed to accept MCT stock in payment ofinterest in 2006 and 2005.  The amount ofstock issued was calculated using the using the average stock price for tendays prior to the interest payment date. To account for these transactions, interest expense was recognized basedon the note’s interest rate, offset by amounts in Common Stock and AdditionalPaid-in Capital for the issuance of stock.

 

| ** ** | ** ** | **Interest expense** | ** ** | **# of shares issued in  payment of interest** | ** ** | **Stock price average** | ** ** |
|------------|------------|----------------------|------------|------------------------------------------------|------------|-------------------------|------------|
| 2006       |       | 316,000              |       | 1,380,724                                      |       | $                       | 0.23       |   |
| 2005       |       | 130,000              |       | 648,874                                        |       | $                       | 0.20       |   |

 

On April 11, 2005, judgmentwas entered against the Company in Superior Court of California in the amount of $379,000 plus legal and court costs for a totalamount of $547,000 in a lawsuit brought by a prior landlord.  The Company reached an agreement with thelandlord that allowed the Company to pay the judgment over a 30-month periodfor a total amount of $443,000 plus interest at 10% per annum.  During 2007 this judgment was paid in full.

 

Payments due under debtobligations, including additional amounts borrowed subsequent to year-end areas follows: 2008 - $0, 2009 - $11,424,000; 2010 - $0; 2011 - $0; and 2012 - $0.

 

The Company incurred losses for the years ended December 31,2007, 2006, and 2005, respectively, and recorded no provision for income taxes.

 

The reconciliation ofincome tax computed at the U.S. federal statutory rate to income tax expense recordedin the consolidated financial statements was as follows:

 
| ** **                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Tax (benefit) at statutory rate    |       | (35.0                                       | )%         | (35.0 | )% | (35.0 | )% |
| Effect of graduated tax rates      |       | 1.0                                         |       | 1.0 |   | 1.0 |   |
| State taxes                        |       | (3.0                                        | )          | (3.0 | ) | (3.0 | ) |
| Adjustment for valuation allowance |       | 37.0                                        |       | 37.0 |   | 37.0 |   |
|                               |       | 0.0                                         | %          | 0.0 | % | 0.0 | % |

 

F-16

----

 

 

 

 

 

**NOTE 6 - INCOME TAXES**

 

As of December 31, 2007, we had federal net operatingloss (NOL) carryforwards totaling approximately $102.9 million and tax creditcarryforwards of approximately $117,000 which can be used to reduce future taxableincome.  Such tax loss and tax creditcarryforwards begin to expire in 2012. Changes in the ownership of the Company have placed limitations on theannual usage of these NOLs.  Futurechanges in ownership may place additional limitations on these losses.

 

The components of thedeferred tax asset is as follows:

 
| ** **                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| Net operating loss carryforwards |       | $                     | 35,381     |                  | $          | 34,289 |   |
| Inventories                      |       | 1,779                 |       | 2,318                 |       |
| Accrued expenses                 |       | 137                   |       | 208                   |       |
| Other                            |       | 229                   |       | 233                   |       |
| Valuation allowance              |       | (37,526               | )          | (37,048               | )          |
|                             |       | $                     | —     |                  | $          | — |   |

 

The Company has recorded a full valuation allowance againstthe asset because, in the opinion of management, it is more likely than notthat some portion or all of the deferred tax assets will not be realized.

 

**NOTE 7 - COMMITMENTSAND CONTINGENCIES**

 

We lease certainfacilities and equipment under various operating leases.  We occupy approximately 24,029 square feet ofleased space in St. Paul, Minnesota, for our principal executive offices andresearch and product development activities. This lease expires on April 30, 2012 with a one-time option toterminate the lease on April 30, 2010 with a termination fee of two monthsgross rent.  We occupy approximately10,000 square feet of leased space in Penang, Malaysia, which is utilized as amanufacturing center. This lease expires in June 2009.  We also occupy approximately 1,300 squarefeet of leased space in the Philippines in support of our applicationsengineering and software development activities.  This lease expires Autgust 14, 2008.

 

Total rent expensecharged to operations, primarily for facilities, was $431,000, $582,000 and$615,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

 

The future minimum rental payments at December 31, 2007,due under noncancelable operating leases, are as follows: 2008 - $265,000; 2009- $211,000; 2010 - $180,000; 2011 - $182,000; 2012 - $61,000 and $0 thereafter.

 

We have an employment agreement with our Chief ExecutiveOfficer that may be terminated upon 60 days written notice by eitherparty.  If we terminate the agreement, weshall continue to pay his salary in effect at date of termination for 12 monthsthereafter.  We also have agreements withthree other executive officers that provide for severance pay and other remunerationif their employment is terminated or duties significantly diminished as aresult of a change of control.

 

F-17

----

 

**NOTE 8 -STOCK OPTION AND BONUS PLANS AND WARRANTS TO PURCHASE COMMON STOCK**

 

The Board of Directorspreviously reserved a total of 2,600,000 shares of common stock under the 1993Incentive Stock Options Plan for key employees. This plan expired in April 2003 except for outstanding options. In June of2004, the Board of Directors and shareholders approved the 2004 Incentive StockPlan and the reservation of 880,000 shares. In June of 2007, an amendment to the 2004 Incentive Stock Plan toincrease the number of shares reserved for issuance under the Plan from 880,000to 1,880,000 was approved  by the Boardof Directors and shareholders.  Optionsunder the two plans expire five to ten years from the date of grant andgenerally vest over a two-year or four-year period.  If an individual ceases employment, he/shehas 90 days to exercise vested options.  Optionsgranted in excess of the $100,000 annual IRS limitations become non-qualified.The Compensation Committee of the Board of Directors at their discretion cangrant non-qualified options and restricted stock to eligible employees.  In 2004 the Board of Directors granted155,000 non-qualified options, which are included in the stock option tablebelow.

 

In fiscal 1996, our Board of Directors and our shareholdersapproved the Stock Option Plan for Outside Directors.  A total of 570,000 shares was reserved forissuance under the plan.  In June of2007, the Board of Directors and shareholders approved an amendment to toincrease the number of shares reserved for issuance under the Stock Option Planfor Outside Directors from 570,000 to 670,000. Each person who becomes an outside director will automatically begranted an option to purchase 10,000 shares. In addition, each outside director will also automatically be granted anoption to purchase 10,000 shares immediately upon each reelection as adirector, or on the anniversary of the prior year’s grant in any year in whichthere is no meeting of the stockholders at which directors are elected.  The period within which an option must beexercised will be the earlier of (1) ten years from the date of the 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.

 

We have alsoreserved 140,000 shares of common stock for the grant of non-qualified stockoptions for outside directors, consultants, advisors and employees.

 

F-18

----

 

Shares subjectto options under these plans were as follows:

 
| ** **                            | ** ** | ** ** | ** ** | ** **           | ** **     | **Weighted**       | ** ** |
|---------------------------------------|------------|------------|------------|----------------------|----------------|--------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **           | ** **     | **Average**        | ** ** |
| ** **                            | ** ** | ** ** | ** ** | ** **           | ** **     | **Exercise**       | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **Exercise**         | ** **     | **Price Per** | ** ** |
| **Options**                           | ** ** | **Shares** | ** ** | **Price Range** | ** **     | **Share**          | ** ** |
| Outstanding at December 31, 2004 |       | 2,723,546  |       | $                    | 0.69 to $11.25 |               | $          | 2.12 |   |
|                                  |       |       |       |                 |           |               |       |
| Granted                               |       | 890,000    |       | $                    | 0.16 to $0.36  |               | $          | 1.23 |   |
| Expired                               |       | (1,941,311 | )          | $                    | 0.36 to $9.25  |               | $          | 1.98 |   |
|                                  |       |       |       |                 |           |               |       |
| Outstanding at December 31, 2005 |       | 1,672,235  |       | $                    | 0.16 to 11.25  |               | $          | 1.33 |   |
|                                  |       |       |       |                 |           |               |       |
| Granted                               |       | 40,000     |       | $                    | 0.50           |               | $          | 0.50 |   |
| Exercised                             |       | (150,000   | )          | $                    | 0.36           |               | $          | 0.36 |   |
| Expired                               |       | (288,000   | )          | $                    | 0.69 to $4.00  |               | $          | 1.82 |   |
|                                  |       |       |       |                 |           |               |       |
| Outstanding at December 31, 2006 |       | 1,274,235  |       | $                    | 0.16 to 11.25  |               | $          | 1.30 |   |
|                                  |       |       |       |                 |           |               |       |
| Granted                               |       | 1,825,000  |       | $                    | 0.24 to $0.27  |               | $          | 0.25 |   |
| Expired                               |       | (40,000    | )          | $                    | 3.25 to $3.38  |               | $          | 3.34 |   |
|                                  |       |       |       |                 |           |               |       |
| Outstanding at December 31, 2007 |       | 3,059,235  |       | $                    | 0.16 to 11.25  |               | $          | 0.65 |   |
|                                  |       |       |       |                 |           |               |       |
| Exercisable at December 31, 2007 |       | 1,214,235  |       | $                    | 0.16 to 11.25  |               | $          | 1.28 |   |

 

Optionsoutstanding at December 31, 2007 had exercise prices ranging from $0.16 to$11.25 per share as summarized in the following table:

 
| ** **        | ** ** | **Number**                | ** ** | **Weighted**  | ** ** | **Weighted**                  | ** ** | **Number**                | ** ** |
|-------------------|------------|---------------------------|------------|---------------|------------|-------------------------------|------------|---------------------------|------------|
| **Range of** | ** ** | **Outstanding**           | ** ** | **Average**   | ** ** | **Average**                   | ** ** | **Exercisable**           | ** ** |
| **Exercise**      | ** ** | **at Dec. 31,** | ** ** | **Remaining** | ** ** | **Exercise**                  | ** ** | **at Dec. 31,** | ** ** |
| **Prices**        | ** ** | **2007**                  | ** ** | **Life**      | ** ** | **Price Per Share** | ** ** | **2007**                  | ** ** |
| ** **        | ** ** | ** **                | ** ** | ** **    | ** ** | ** **                    | ** ** | ** **                | ** ** |
| $0.16 to $1.56    |       | 2,811,235                 |       | 0.4 year      |       | $                             | 0.36       |                      | 966,235    |   |
| $1.84 to $2.95    |       | 168,000                   |       | 4.3 years     |       | $                             | 2.57       |                      | 168,000    |   |
| $3.19 to $4.00    |       | 10,000                    |       | 4.1 years     |       | $                             | 3.19       |                      | 10,000     |   |
| $5.44 to $7.75    |       | 60,000                    |       | 2.2 years     |       | $                             | 7.13       |                      | 60,000     |   |
| $9.25 to $11.25   |       | 10,000                    |       | 2.2 years     |       | $                             | 11.25      |                      | 10,000     |   |
| $0.16 to $11.25   |       | 3,059,235                 |       | 0.7 years     |       | $                             | 0.66       |                      | 1,214,235  |   |

 

At December 31, 2007 and 2006, 695,000 and 725,000shares, respectively, were available for future grants under the terms of theseplans.  In December of 2004, theCompensation Committee of the Board of Directors approved the acceleration ofthe vesting of all of the then outstanding options under all plans.  At the time of this approval all optionexercise prices exceeded the public market price of the underlying commonshares.  This action resulted in1,029,500 shares being accelerated with respect to their original vestingdates.

 

In February 1996, the Board of Directors adoptedthe Employee Stock Purchase Plan and reserved 300,000 shares of common stockfor issuance under the Plan.  ThisEmployee Stock Purchase Plan has expired.

 

Under the Note Purchase Agreement associated with the issuance of the 10% Senior Subordinated ConvertibleNotes and the Security Agreement associated with our Revolving Line of Creditand Term Note (each discussed in Note 5 in Notes to Consolidated FinancialStatements contained elsewhere herein) we are prohibited from paying dividends.

 

F-19

----

 

The table below details the warrants and options issued to Laurus inconnection with prior financings:

 
| ** **                                         | ** ** | **Grant Date**     | ** ** |
|----------------------------------------------------|------------|--------------------|------------|
| ** **                                         | ** ** | **December  2007** | ** ** | **March  2007** | ** ** | **February  2006** | ** ** | **April  2005** | ** ** | **January  2005** | ** ** | **March  2004** | ** ** |
| Number of shares                                   |       | 3,500,000          |       | 5,000,000 |   | 2,500,000 |   | 2,556,651 |   | 150,000 |   | 400,000 |   |
| Exercise Price                                     |       | $                  | 0.01       |   | $ | 0.01 |   | $ | 0.01 |   | $ | 0.01 |   | $ | 0.67 |   | $ | 2.30 - $2.88 |   |
| Dividend yield                                     |       | 0.00               | %          | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % |
| Expected volatility                                |       | 98.61              | %          | 88.63 | % | 122.09 | % | 95.33 | % | 93.13 | % | 98.51 | % |
| Risk-free interest rate                            |       | 3.53               | %          | 4.54 | % | 4.62 | % | 3.90 | % | 3.71 | % | 2.98 | % |
| Expected life of warrants                          |       | 10.0 years         |       | 10.0 years |   | 10.0 years |   | 7.0 years |   | 3.5 years |   | 3.0 years |   |
| Discount on long-term debt                         |       | $                  | 620,000    |   | $ | 1,131,000 |   | $ | 821,000 |   | $ | 473,000 |   | $ | 51,000 |   | $ | 391,000 |   |
| Unexercised  warrants as of December 31, 2007 |       | 3,500,000          |       | 5,000,000 |   | 1,860,000 |   | 785,084 |   | 150,000 |   | 400,000 |   |

 

**NOTE 9 - SEGMENT, GEOGRAPHIC, CUSTOMERINFORMATION AND CONCENTRATION OF CREDIT RISK**

 

We operate in oneindustry segment supplying automated equipment test handlers to thesemiconductor industry.  Net sales tocustomers located in the three geographic regions in which we operate aresummarized as follows (in thousands):

 
| ** **    | ** ** | **Years Ended** | ** ** |
|---------------|------------|----------------------|------------|
| ** **    | ** ** | **Dec. 31,**    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **    | ** ** | **2007**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States |       | $                    | 1,043      |   | $ | 1,594 |   | $ | 1,205 |   |
| Asia          |       | 13,523               |       | 10,264 |   | 5,550 |   |
| Europe        |       | 48                   |       | 356 |   | 314 |   |
|          |       | $                    | 14,614     |   | $ | 12,214 |   | $ | 7,069 |   |

 

Althoughour primary manufacturing facility is located in Penang, Malaysia, we do nothold a material amount of long-lived assets outside of the United States.  Of our inventory reflected on the Companybalance sheet as of December 31, 2007, $0.8 million was located in ourfacility in Penang, Malaysia.

 

During the year ended December 31,2007 our top ten customers accounted for approximately 96% of net sales withthree customers accounting for approximately 68.1% and one customer accountingfor approximately 39.2% of net sales. During the year ended December 31, 2006 our top ten customersaccounted for approximately 95% of net sales with three customers accountingfor approximately 67.2% of net sales and one customer accounting forapproximately 47.8% of net sales.  Duringthe year ended December 31, 2005 our top ten customers accounted forapproximately 92% of net sales with three customers accounting forapproximately 53.3% of net sales and one customer accounting for approximately33% of net sales.  As of December 31,2007, two customers accounted for 59.0% of our total net accounts receivable.

 

**NOTE 10 — UNAUDITEDQUARTERLY RESULTS**

 

***QuarterlyResults***

 

The following tablespresent selected unaudited quarterly operating results for the eight fiscalquarters ended December 31, 2007, as well as the data expressed as apercentage of net sales.  We believe thatall necessary adjustments have been 

 

F-20

----

 

included to presentfairly the quarterly information when read in conjunction with our consolidatedfinancial statements.  The operatingresults for any quarter are not necessarily indicative of the results for anysubsequent period.

 
| ** **                                                         | ** ** | **Quarter Ended**                                             | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Dec. 31**                                                   | ** ** | **Sept. 29** | ** ** | **June 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **July 1** | ** ** | **April 1** | ** ** |
| ** **                                                         | ** ** | **2007**                                                           | ** ** | **2007** | ** ** | **2007** | ** ** | **2007** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| ** **                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
| Net sales                                                          |       | $                                                                  | 3,710      |   | $ | 3,567 |   | $ | 3,960 |   | $ | 3,377 |   | $ | 2,884 |   | $ | 3,279 |   | $ | 3,676 |   | $ | 2,375 |   |
| Cost of sales                                                      |       | 2,409                                                              |       | 1,858 |   | 1,875 |   | 1,604 |   | 1,763 |   | 1,770 |   | 1,619 |   | 1,181 |   |
| Gross profit                                                       |       | 1,301                                                              |       | 1,709 |   | 2,085 |   | 1,773 |   | 1,121 |   | 1,509 |   | 2,057 |   | 1,194 |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative                               |       | 1,006                                                              |       | 1,079 |   | 1,121 |   | 1,105 |   | 1,038 |   | 1,074 |   | 1,038 |   | 945 |   |
| Research and  development                                          |       | 463                                                                |       | 437 |   | 484 |   | 500 |   | 511 |   | 487 |   | 525 |   | 518 |   |
| Restructuring  charge                                              |       | —                                                             |       | — |   | 137 |   | — |   | — |   | — |   | — |   | — |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations                                      |       | (168                                                               | )          | 193 |   | 343 |   | 168 |   | (428 | ) | (52 | ) | 494 |   | (269 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest, net                                                      |       | (576                                                               | )          | (603 | ) | (593 | ) | (414 | ) | (265 | ) | (1,822 | ) | (459 | ) | (810 | ) |
| Other income and (expense)                                         |       | (21                                                                | )          | 20 |   | (30 | ) | 87 |   | (5 | ) | (5 | ) | (28 | ) | (4 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                  |       | $                                                                  | (765       | ) | $ | (390 | ) | $ | (280 | ) | $ | (159 | ) | $ | (698 | ) | $ | (1,879 | ) | $ | 7 |   | $ | (1,083 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share: (1)                                   |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |       | $                                                                  | (0.02      | ) | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.02 | ) | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.04 | ) |
| Diluted                                                            |       | $                                                             | (0.02      | ) | $  | (0.01 | ) | $  | (0.01 | ) | $  | (0.00 | ) | $  | (0.02 | ) | $  | (0.06 | ) | $  | (0.00 | ) | $  | (0.04 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average common and common equivalent shares  outstanding: |       |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |       | 37,877                                                             |       | 37,290 |   | 36,665 |   | 36,665 |   | 36,644 |   | 31,141 |   | 27,490 |   | 27,225 |   |
| Diluted                                                            |       | 37,877                                                             |       | 37,290 |   | 36,665 |   | 36,665 |   | 36,644 |   | 31,141 |   | 27,490 |   | 27,225 |   |

 
| ** **                           | ** ** | **Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **Dec. 31**       | ** ** | **Sept. 29** | ** ** | **June 30** | ** ** | **Mar 31** | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **July 1** | ** ** | **April 1** | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2007** | ** ** | **2007** | ** ** | **2007** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
| **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                        |       | 64.9                   |       | 52.1 |   | 47.3 |   | 47.5 |   | 61.1 |   | 54.0 |   | 44.0 |   | 49.7 |   |
| Gross profit                         |       | 35.1                   |       | 47.9 |   | 52.7 |   | 52.5 |   | 38.9 |   | 46.0 |   | 56.0 |   | 50.3 |   |
| Operating expenses:                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative |       | 27.1                   |       | 30.2 |   | 28.3 |   | 32.7 |   | 36.0 |   | 32.8 |   | 28.2 |   | 39.8 |   |
| Research and  development            |       | 12.5                   |       | 12.3 |   | 12.2 |   | 14.8 |   | 17.7 |   | 14.9 |   | 14.3 |   | 21.8 |   |
| Restructuring  charge                |       | —                 |       | — |   | 3.5 |   | — |   | — |   | — |   | — |   | — |   |
| Income (loss) from operations        |       | (4.5                   | )          | 5.4 |   | 8.7 |   | 5.0 |   | (14.8 | ) | (1.7 | ) | 13.5 |   | (11.3 | ) |
|                                 |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest, net                        |       | (15.5                  | )          | (16.9 | ) | (15.0 | ) | (12.3 | ) | (9.2 | ) | (55.5 | ) | (12.5 | ) | (34.1 | ) |
| Other income and (expense)           |       | (0.6                   | )          | 0.6 |   | (0.8 | ) | 2.6 |   | (0.2 | ) | (0.2 | ) | (0.8 | ) | (0.2 | ) |
| Net income (loss)                    |       | (20.6                  | )%         | (10.9 | )% | (7.1 | )% | (4.7 | )% | (24.2 | )% | (57.4 | )% | 0.2 | % | (45.6 | )% |

----

1.               Thesum of income (loss) per share for the fiscal quarters may differ from annualloss per share due to the required method of computing weighted average numberof shares in the respective periods.

 

F-21

----

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned; thereunto duly authorized, in the City of St. Paul,State of Minnesota, on March 28, 2008.

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

 

Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe registrant in the capacities indicated on March 28, 2008.

 
| **Signature**           | ** ** | **Capacity**                        |
|-------------------------|------------|-------------------------------------|
|                    |       |                                |
| /s/Roger E. Gower       |       | President, Chief Executive Officer, |
| Roger E. Gower          |       | Chairman of the Board and Director  |
|                    |       |                                |
| /s/Bruce R. Ficks       |       | Chief Financial Officer             |
| Bruce R. Ficks          |       |                                |
|                    |       |                                |
| /s/David M. Sugishita   |       | Director                            |
| David M. Sugishita      |       |                                |
|                    |       |                                |
| /s/Donald R. VanLuvanee |       | Director                            |
| Donald R. VanLuvanee    |       |                                |
|                    |       |                                |
| /s/Patrick Verderico    |       | Director                            |
| Patrick Verderico       |       |                                |

 

F-22

----