**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**ý****  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the year ended December 31, 2004**

 

**OR**

 

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

 

**Commissionfile number 0-22384**

 

**MICROCOMPONENT TECHNOLOGY, INC.**

(Exact name of registrant as specified in itscharter)

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

 

Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months, and (2) has been subjectto such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant 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. o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No ý

 

The aggregate market value of the common stock heldby non-affiliates of the Registrant as of June 26, 2004 (the business dayof the Registrant’s most recently completed second fiscal quarter), was $12.5million based upon the closing price of $1.38 on that date for the shares.

 

Number of shares outstanding of the Registrant’sCommon stock, as of****March 15,2005,****is 25,566,511.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive ProxyStatement for the annual meeting of stockholders (the “Proxy Statement”) to befiled within 120 days after the Registrant’s fiscal year ended December 31,2004, are incorporated by reference into Part III.

 

 

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

 

**TABLE OF CONTENTS**

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

 

2

----

 

**PART I**

 

This Form 10-K contains certain forward-lookingstatements.  For this purpose, anystatements contained in this Form 10-K that are not statements of historicalfact may be deemed to be forward-looking statements.  Without limiting the foregoing, words such as“may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” orcomparable terminology are intended to identify forward-lookingstatements.  These statements by theirnature involve substantial risks and uncertainties, and actual results maydiffer materially depending on a variety of factors, including those set forthin the section below entitled “Risk Factors.”****

 

**ITEM1.  Business**

 

**General**

 

Unless the context otherwise requires, references inthis Report on Form 10-K to “MCT”, “ We”, “Us”, “Registrant” and the “Company”refer to Micro Component Technology, Inc. and its consolidatedsubsidiaries. MCT was incorporated in Minnesota on June 20, 1972, wasreorganized as a Delaware corporation on June 28, 1983 and reorganized asa 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 trademarks used in this Form 10-K are:  MCT, Infinity Systems, Aseco, ***Tapestry***®, SmartSolutions, SmartMark, SmartSort, SmartTrak, Isocut, MCT 5100, MCT 7632, S-170and S-130.  All other trademarks or tradenames referred to in this Form 10-K are the property of their respectiveowners.

 

**Background**

 

On January 31, 2000, we completed ouracquisition of Aseco Corporation, a Massachusetts based manufacturer ofhandling equipment.  The acquisition wasstructured as a stock-for-stock purchase and was accounted for using thepurchase method of accounting.  Thepurchase price totaled $24.0 million, consisting of 2.6 million shares of MCTcommon stock valued at $22.5 million issued to former Aseco shareholders and$1.5 million of acquisition-related costs.

 

On April 11, 2000, our Board of Directorselected to change our fiscal year end to a year ending on December 31,effective December 31, 1999.  Ourinterim thirteen-week quarters each end on a Saturday.

 

On August 16, 2000, we issued 3,000,000 sharesof common stock, and on September 18, 2000, we issued 290,000 shares of commonstock, in a public stock offering. Proceeds from the offering totaled $19.7 million.

 

On December 24, 2001, we issued $10.0 millionof 10% Senior Subordinated Convertible Notes due in 2006 to a group ofaccredited investors.  These Notes areconvertible into MCT common stock. The conversion price was initially $2.60 pershare, and was reduced first to $1.00 and then to $0.85 per share forsubstantially all of the remaining Notes. The reduction in conversion price was offered to Noteholders inexchange for their agreement to receive common stock in lieu of cash interestpayments through maturity in 2006.  TheNotes are redeemable by MCT at any time after January 3, 2004 as long asthe market price of our commonstock equals or exceeds 150% of the conversion price.  Proceeds of the Notes, net of debt issuancecosts, totaled $9.2 million.  Holders ofthe Notes have standard registration rights if they convert the Notes to commonstock.

 

On March 7, 2003 and March 26, 2003,pursuant to a private equity placement with a group of accredited investors, weissued a total of 3,166,869 shares of common stock, which resulted in netproceeds to us of approximately $1.1 million. Stock issuance costs associated with this offering totaled approximately$241,000.  As

 

3

----

 

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.

 

On June 30, 2003, we completed the restructuringof $9.29 million, or 92.9%, of our 10% Senior Subordinated Convertible Notes,wherein the participating noteholders agreed to accept stock in lieu of cashfor the next four semi-annual interest payment dates beginning June 30,2003 through December 31, 2004, and we agreed to reduce the conversionprice to $1.00 per share.

 

On March 9, 2004 we completed a $5.0 millionsecured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 long-term convertible note.   Inconnection with the execution of this credit facility, we issued to the lendera seven-year warrant to purchase 400,000 shares of our common stock at exerciseprices ranging from $2.30 to $2.88.  Ourexisting secured lending relationship was terminated as a result of thistransaction.  This credit facility issecured by all the assets of the Company. As of December 31, 2004, $1.7 million and $1.7 million wereoutstanding on the secured working line of credit and long-term convertiblenote, respectively.

 

On January 28, 2005, we completed an amendmentto the financing agreement with the lender whereby our payments under thelong-term convertible note have been deferred for one year, resulting in$800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-tem convertible note has also been extended for oneyear from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to boththe $3.0 million secured working capital line of credit and the $2.0 long-termconvertible note were reduced to $0.60 and $0.56, respectively.  Additionally, we issued the lender aseven-year warrant to purchase 150,000 shares of common stock at a price of$0.67.

 

On February 25, 2005, we completed a secondamendment to the agreement with the holders of our 10% Senior SubordinatedConvertible Notes, wherein holders of 80% of the remaining Notes, representing$2.9 million, agreed to continue to accept stock in payment of interest for theremaining four interest payments through December 24, 2006.  As part of this amendment, we agreed toreduce the Note conversion price to $0.85 per share, and use our best effortsto register the shares with the SEC.

 

**Introduction**

 

We are a leading supplier of integrated automationsolutions for the global semiconductor test and assembly industry.  We offer complete and comprehensive equipmentautomation solutions for the test, laser mark and mark inspect for the back-endof the semiconductor manufacturing process that significantly improve ourcustomers’ productivity, yield and throughput. Our solutions include our series of integrated Smart Solutions,automated test handlers, factory automation software and equipment integrationservices.  Our customers include manyleading semiconductor companies such as Microchip Technologies, Analog Devices,National Semiconductor, Phillips Semiconductor, Cypress Semiconductor and STMicroelectronics and many of the leading back-end contract test and assemblycompanies including Amkor and NS Electronics Bangkok.  We believe we have one of the world’s largestinstalled bases of handlers used to test semiconductor devices.

 

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

 

Beginning in 1999, we broadened our strategy fromthat of a test handler manufacturer to also a provider of comprehensiveequipment automation solutions for the back-end of the semiconductormanufacturing process.  Consistent withthis 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

 

4

----

 

ourintegrated equipment Smart Solutions product suite.  In January 2000, we completed ouracquisition of Aseco, which provided us with increased machine vision androbotics engineering technology critical to the handling of strips and wafers.

 

**Industry Overview**

 

The semiconductor device industry had growntremendously over the ten-year period ending in the year 2000. This growth hadbeen driven by traditional semiconductor markets like personal computers anddata processing, and more recently by the proliferation of semiconductordevices in telecommunications, wireless communications, and consumerelectronics, as well as Internet infrastructure equipment.  However, the semiconductor capital equipmentmarket, in which we compete, has historically been subject to cyclical periodsof high growth and contraction.  In thelatter part of 2000, the semiconductor capital equipment market went into adeep and prolonged downturn, which continued through most of 2003.  Late in 2003, the market began to show signsof stabilization and moderate growth. However, in the third quarter of 2004, worldwide bookings in thesemiconductor capital equipment market again weakened and this market conditionhas continued through the end of 2004. When and if the markets stabilize andreturn to positive growth, there are no assurances that they will return totheir historical growth rates.

 

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

 

Initially, semiconductor manufacturers concentratedtheir efforts on improving the more expensive front-end wafer fabricationprocess.  They improved the front-end byfirst automating the individual production tools and more recently byintegrating the various production tools through factory automationsoftware.  Tool automation wassignificant because it replaced most human handling of the wafers with robotics,resulting in dramatically increased yields. Factory automation software is significantly improving productivity,yield and throughput in the front-end by utilizing powerful productionscheduling, materials handling and process tool control software.

 

Automation and process improvement of back-end toolsand facilities has severely lagged the front-end.  Over the last several years’ manufacturersbegan to seek automation and process solutions for the back-end productionprocess.  This is because, historically,the cost of back-end assembly and test processes was only a small portion ofthe total semiconductor device cost and traditional processes were able toprovide adequate throughput.  Today thecost of back-end assembly and test per semiconductor device often equals orexceeds the wafer fabrication cost per semiconductor device.  We believe that as manufacturers seek toraise the standards of yield, productivity, throughput and cost reduction inthe back-end, the growth rate of the newly developing back-end automationmarket could increase rapidly.

 

**Traditional Semiconductor Manufacturing Process**

 

Semiconductor devices arrive for test in strip orwafer format, with each strip or wafer containing multiple individualdevices.  Until recently, most semiconductormanufacturers believed it was necessary to test individual semiconductordevices after they were singulated, or cut from the strip or wafer.  However, as semiconductor device and packagesizes have shrunk, they have become extremely difficult to handleindividually.  For example, manufacturers’chip scale packages, or CSPs, are nearly the same size as the die theypackage.  Traditional handling tools donot have the precision to adequately address the various semiconductor devicesize and chip-scale packaging technologies demanded by manufacturers.  As a result, handling tools designed forsingulated processes have become a bottleneck to throughput.

 

5

----

 

Manufacturers now acknowledge that post-test singulationcan be done, in certain package formats, without damage to the device.  This understanding permits manufacturers toprocess, handle, and test multiple devices while still in strip or waferformat.  Strip handling increases processflexibility by permitting the handling and testing of a variety of packages,substrates and semiconductor device sizes. In addition, strip handlingsignificantly increases throughput by reducing the number of process steps andby allowing the tester to easily test multiple semiconductor devices inparallel.  We believe that asmanufacturers seek to increase productivity, yield and throughput, they willincreasingly adopt strip test processing. Consequently, we believe strip test processing technology will becritical to any back-end automation strategy and will facilitate re-tooling ofmany back end processes.

 

In implementing broader automation strategies in theback-end, manufacturers face other significant challenges besides thedevelopment of strip processing tools. For example, production tools in the back-end historically have notcommunicated well with one another, if at all, and the transitions betweenproduction steps have not been integrated. This lack of communication and integration has prevented back-endmanufacturers from realizing many of the benefits of factory automation and hasprevented the collection of critical process data.

 

**Our Solution**

 

We seek to provide our customers comprehensiveequipment automation solutions for their test and assembly processes.  By deploying our products and services, ourcustomers are able to improve their production yields, factory throughput, toolproductivity and utilization while reducing product cost.  The key components of our solution are:

 

• Tapestry series automated strip handler,

• Smart Solutions integrated equipment productseries,

• Infinity Systems factory automation softwareand equipment integration services, and

• Line of traditional test handlers forsingulated processes.

 

Oursolution provides the following benefits to our customers:

 

***Flexibility toaddress new form factors, including wafers and strips.***  Webelieve that our Tapestry series of handlers are among the first handlerscapable of processing semiconductor devices in strip or wafer formats.  Tapestry provides increased flexibility,permitting the handling and testing of a variety of packages, substrates andsemiconductor device types.  Depending onthe application, we believe that our Tapestry handler’s throughput capabilityis three to ten times greater than existing singulated handling optionsavailable today.

 

***Ability tocollect 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.

 

***Deployment ofintegrated, comprehensive solutions.***  Oursuite of equipment automation tools, software products and services addressesthe varied automation needs of individual back-end manufacturingfacilities.  Our factory automationsoftware has the ability to integrate production tools from variousmanufacturers into one total solution. This allows our customers to fulfill a significant portion of their testand assembly automation needs through a single supplier, thereby simplifyingtraining, maintenance, capacity expansion and supplier accountability.

 

***Worldwide serviceand support engineering.***  We provide worldwide serviceand support engineering to our customers as part of the purchase of all of ourproducts, which includes comprehensive installation support.

 

6

----

 

Asour products have expanded to offer greater functionality, we have providedapplication engineering support so that our customers can take advantage ofthese advances to improve their processes.

 

**Strategy**

 

Our objective is to be the leading supplier for thenewly developing market of automated solutions for the semiconductor test andassembly market.  Key elements of ourstrategy include:

 

***Providingcomprehensive automated solutions.***  Today, we provide equipmentautomation solutions for the test and assembly portion of the semiconductormanufacturing process, including test, laser mark, mark inspect, and otherprocesses.  In addition, we are expandingour automation solutions to include equipment integration solutions compatiblewith products from a greater number of other equipment manufacturers such astrim, form and singulation system providers. We have enhanced the software component of our automation solutions byadding data analysis and report generating capabilities to increase ourcustomer’s ability to improve their manufacturing process.  In the future we plan to expand the SmartSolution suite of products to handle other processes within the semiconductortest and assembly area.

 

***Capitalizing onemerging chip scale packaging, or CSP, process development.***  OurSmart Solutions and Tapestry products already meet initial chip scale packageprocess requirements through strip handling. However, the vast numbers of new chip scale packages, recentlyintroduced, have imposed additional requirements on semiconductor test andassembly processes, including the ability to perform multi-pass testing andstacked die testing.  As a leader inproviding equipment automation solutions that address chip scale packagingtechnologies, we are continuing development of next-generation handling andequipment automation solutions for advanced semiconductor device packaging.

 

***Strengthening keycustomer relationships.***  Our customers include many ofthe world’s leading providers of semiconductor devices as well as major third-partytest and assembly companies.  We expectthat our customers will look to us to help resolve their process as well asautomation problems throughout the back-end.  As we solve our customers’ diverse needs, we will deepen our presentcustomer relationships and also build our knowledge base so that we can developsimilar relationships with others in the semiconductor manufacturing industry.

 

***Leveraging ourstrong 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 InfinitySystems’ pursuit of factory automation software sales.

 

***Continuing todevelop and support existing singulated test handling solutions and products.***  Webelieve that we have one of the largest installed bases of traditional testhandlers in the world.  We intend tosupport our customers who use singulated test handling with new productintroductions for specialty applications.

 

**Products**

 

***AutomationProducts***

 

***Smart Solutions****.*  OurSmart Solutions equipment suite of products, once integrated with a tester, aredesigned to automate the entire test process from the point where thesemiconductor devices have been packaged, through test, laser mark, inspection,singulation and sort, to the point of shipment to the customer.  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.

 

7

----

 
| **Automation Product Category** | ** ** | **Product Name**                    | ** ** | **Introduced**             | ** ** | **Applications**                                                                                                                                                                           |
|---------------------------------|------------|-------------------------------------|------------|----------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |       |                                |       |                       |       |                                                                                                                                                                                       |
| Smart Solutions                 |       | Tapestry SC                         |       | July 2003             |       | A next generation handling system for semiconductor devices that are  in strip or wafer package formats.                                                                                   |
|                            |       |                                |       |                       |       |                                                                                                                                                                                       |
|                            |       | Tapestry                            |       | 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.                                                                        |
|                            |       |                                |       |                       |       |                                                                                                                                                                                       |
|                            |       | SmartMark                           |       | May 2000                   |       | An automated 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.                                                                                 |
|                            |       |                                |       |                       |       |                                                                                                                                                                                       |
|                            |       | Input/Output Module (Slotted)       |       | February 1999         |       | Automatic loading and unloading module of strips contained in a  slotted magazine assembly.                                                                                                |
|                            |       |                                |       |                       |       |                                                                                                                                                                                       |
| ** **                      |       | Input/Output Module (Stacked)       |       | May 2000                   |       | Automated loading and unloading of strips contained in a stacked  magazine assembly.                                                                                                       |
| ** **                      |       |                                |       |                       |       |                                                                                                                                                                                       |
| Automation Software             |       | Infinity Systems Software Solutions |       | Acquired in June 1999 |       | Manufacturing software control systems for semiconductor assembly and  test plants including equipment integration through overall factory and  corporate information systems integration. |

 

Our Smart Solutions equipment product family wasintroduced to meet the anticipated evolution of back-end manufacturing fromsingulated handling to strip processing through the final stages of assemblyand electrical test.  Additionally, ourSmart Solutions products are designed with electronic strip mapping capabilityas a cornerstone.  As high-densitysemiconductor strips with tiny chip scale packages become the standard,electronic strip mapping addresses the problem of manually tracking individualsemiconductor devices within the strip. The new Smart Solutions systems provide customers enhanced performancein either stand-alone or integrated assembly lines.  The current average selling price for SmartSolutions products vary from $300,000 for a single module and can approachapproximately  $1.0 million for a fullyconfigured system that includes all of the components.

 

Tapestry SC, introduced in July 2003, is ournext generation system for semiconductor devices that are in strip format.  The system is targeted to meet the growingneed for lower cost of ownership, greater flexibility, easier use, increasedprocess control, faster set-up and changeover times.  The Tapestry SC has several optional featuresand can be targeted at several different applications with the potential to addadditional options and / or capability at a later time.  The Tapestry SC is compatible andcomplementary to the Tapestry PH-1.

 

Tapestry, our strip handling system introduced in February 1999,is the flagship of the Smart Solution product family.  Tapestry is a versatile, high volume,parallel test handling and thermal conditioning system for semiconductordevices that are in strip format. Thermal conditioning is required to ensure that a semiconductor devicecan operate normally in a wide range of temperatures.  Tapestry can condition devices attemperatures ranging from –40 degrees centigrade to +130 degrees centigrade.  The system is capable of handling fine pitchchip scale packages as well as traditional leaded semiconductor devices instrip format.  Using standard industryinterfaces, the system is designed to function as a stand-alone system, or canbe integrated into an in-line process with our other Smart Solution products orequipment of other manufacturers.

 

SmartMark SC, introduced in September 2004, isour next generation high-speed laser marker for integration with strip handlingor for marking strips with 2D codes. This system takes advantage of the same base system that is used withour Tapestry SC, allowing for lower costs of production and a common platformof spare parts for our customers, thus lowering overall customer costs.

 

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

 

8

----

 

Our suite of Smart Solution equipment productsincludes additional modules to assist companies in automating the back-end ofthe semiconductor manufacturing process using the new strip format.  These include the input/output devices forboth slotted and stacked magazines used with strips.

 

***AutomationSoftware. **** *Infinity Systems Software Solutions provide highly sophisticatedsystems integration services to the semiconductor test and assemblyindustry.  Infinity Systems’ solutionsassist 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, efficientsoftware development 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.

 

***SingulatedHandling Products***

 

We also provide more traditional singulated handlingproducts utilizing gravity-feed technology. As a result of our shift in product strategy to strip-based solutions,we will build our singulated products only when a sales order exists and iftechnology permits.  We continue tosupport these products for our installed base of systems for consumable andspare parts.

 
| **Singulated Handling Products** | ** ** | **Product Name** | ** ** | **Introduced**      | ** ** | **Applications**                                                                                              |
|----------------------------------|------------|------------------|------------|---------------------|------------|---------------------------------------------------------------------------------------------------------------|
| Gravity Feed                     |       | 5100             |       | December 1996  |       | High-speed dual site test handler for small outline surface-mount  packages, utilizing tube input and output. |
|                             |       |             |       |                |       |                                                                                                          |
|                             |       | 5105             |       | July 2002      |       | Optimized system for testing RF devices based on the 5100 design.                                             |
|                             |       |             |       |                |       |                                                                                                          |
|                             |       | S-170            |       | September 1997 |       | Single site test handler for large surface-mount packages, utilizing  tray input and output.                  |
|                             |       |             |       |                |       |                                                                                                          |
|                             |       | S-130            |       | January 1987   |       | Single site test handler for small outline surface-mount packages,  utilizing tube input and output.          |
|                             |       |             |       |                |       |                                                                                                          |
|                             |       | 4610             |       | April 1985     |       | Dual site test handler for large surface-mount packages, utilizing  tube input and output.                    |

 

Our gravity-feed handling products are designed fortest handling of surface mount semiconductor devices that are transported inbulk or in plastic tubes.  Our handlersrely on gravity to move untested semiconductor devices from the top of thehandler, where the temperature of the semiconductor device is modified totemperatures ranging from –55 degrees centigrade to +155 degrees centigrade,depending on the handler, to the test site and then to the output bins based onthe quality of the semiconductor device.

 

Our 5100/5105 gravity feed handlers are capable oftesting one or two devices in parallel with throughput of up to 14,400 devicesper hour with an index time of only 0.5 seconds.  It can be configured to handle a variety ofdevices with several different kits for varying customer requirements.

 

***OtherProducts and Services***

 

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

 

**Research and Development**

 

As an important element of our business strategy, wework closely with our customers to develop new products and enhancements ofexisting products to meet the evolving needs of the test and assembly market,particularly with respect to emerging semiconductor devices, while striving toprovide the lowest cost of test.  Theseefforts, historically focused on test handler products, have resulted in thesuccessful introduction of several new product platforms, including our 5100,S-130 and S-170, the Tapestry and Tapestry SC strip testing and associatedhandling modules, and our SmartMark products.

 

9

----

 

Although we rely primarily on our internalengineering capabilities to develop new products and enhance existing products,we also utilize contract services to enhance our technical capabilities ortemporarily expand our resources.  Inaddition, we work closely with several manufacturers of products that areincorporated into our products or are complementary to our products when webelieve a higher quality, lower cost product would result.

 

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

 

Our research and development expenses were $2.8million, $2.4 million, and $4.2 million in the years ended December 31,2004, 2003 and 2002, respectively.  Ourcombined resources totaled 25 employees and contractors in research anddevelopment, or approximately 25% of our entire workforce, at December 31,2004. We expect research and development expenses to decline in 2005 relativeto 2004 levels, subject to mandated increases due to customer requirements forsystem related products.

 

**Customers**

 

Our customers include many of the leading manufacturersof semiconductor 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 Amkor Technology, Inc. accounted for 28%, 20% and 19% of ournet sales, respectively, in the year ended December 31, 2004.  Microchip Technologies and Analog Devicesaccounted for 32% and 9% of our net sales, respectively, in the year ended December 31,2003.  Analog Devices and NationalSystems accounted for 16% and 15% of our net sales, respectively, in the year endedDecember 31, 2002.

 

Our customers tend to limit the number of qualifiedequipment vendors they purchase from in order to gain the efficiencies ofstandardization 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 futuregenerations of semiconductor devices.

 

**Marketing, Sales and Worldwide Support**

 

We market our products primarily to semiconductormanufacturers and third party test and assembly companies through our own salesforce and in selected markets through independent sales representatives anddistributors.  Our automation solutions,however, are marketed directly by our employees to the key personnel atcustomers and potential customers who are in charge of capital equipment forthe entire back-end.  These salesfrequently involve major decisions by the customer as to the configuration andoperation of its entire back-end operation. Consequently, the sales cycle for Smart Solutions products may be longerthan for our traditional handler products as the average order amount isgenerally larger.

 

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

 

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

 

10

----

 

**Manufacturing and Suppliers**

 

In 2002, we began the transition of ourmanufacturing operations from our St. Paul, Minnesota facility to Penang,Malaysia.  This was completed in early2003.  It is our belief that our newMalaysian operations will provide cost savings as well as an increased presencein our prime sales geographical area.  Wecombine proprietary software and components developed in our facilities withcomponents and subassemblies obtained from outside suppliers.  We have established relationships withsuppliers in Malaysia which allow us to out-source manufacturing of ourcomponents to a number of different suppliers. We do not maintain any long-termsupply agreements with any of our key suppliers.

 

**Competition**

 

The semiconductor device testing and assemblyequipment industry is highly competitive, and the market for our automationproducts and services is expected to become more competitive.  We face substantial competition throughoutthe world primarily from manufacturers in Asia, the United States andJapan.  The companies that we are awareof that currently offer a production grade strip handling solution comparableto our Tapestry products are Fico BV, ASM International, Electroglas, Tesec,Rasco, Multitest and Cohu, Inc., whose products were introduced between 1995and 2003.   Our primary competitors inthe traditional handler market are Advantest Corporation, Aetrium Incorporated,Cohu, Inc., Multitest Electronics Systems GmbH, and Rasco AG.  Many of these competitors are considerablylarger and have considerably greater financial resources than we do.

 

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

 

**Intellectual Property Rights**

 

We attempt to protect the proprietary aspects of ourproducts with patents, trademarks and copyrights, as well as contractual andother trade secret protection strategies. We have five patents issued and active in the U.S.

 

We have developed and are using a number oftrademarks, slogans and other commercial symbols to advertise and sell ourproducts.  Six of our product marks havebeen registered with the U.S. Patent and Trademark Office.  Our proprietary computer programs areprotected under federal copyright law as unpublished original works.  We also maintain the secrecy of our softwaresource codes through licensing and other restrictions.

 

We frequently review our inventions and attempt todetermine which inventions will provide substantial differentiation between ourproducts and those of our competitors. In certain cases, we may also choose to keep an invention or process atrade secret.  Key employees are requiredto enter into nondisclosure and invention assignment agreements, and customers,vendors and other third parties also must agree to nondisclosure restrictionsprior to disclosure of our trade secrets or other confidential or proprietaryinformation.

 

The intellectual property position of anymanufacturer, including us, is subject to uncertainties and may involve complexlegal and factual issues.  Allowed claimsfor our existing or future patents issued may be challenged, invalidated orcircumvented, and any rights granted by those patents may not provide us withadequate protection.  Additionally, itmay be possible for competitors or customers to copy aspects of our products orto obtain information that we may regard as a trade secret.  Litigation may be necessary in the future toenforce our patents and other intellectual property rights or to defend usagainst claims of infringement.

 

11

----

 

**Backlog**

 

At December 31, 2004, our backlog of unfilledorders for which a purchase order number has been assigned by the customer andfor which a delivery schedule has been specified was $1.3 million.  At December 31, 2003, our backlog was$5.1 million.  A significant portion ofthe backlog at December 31, 2004, is expected to be shipped in the nexttwo quarters.  Since a large majority ofthe shipments made in a given quarter are usually made during the latter partof the quarter, and since a significant portion of shipments in a given quarterare booked during that same quarter, backlog as of a date in the middle of thequarter 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 Bulletin 104(SAB 104) discussed in our revenue recognition policy in Note 1 of Notes toConsolidated Financial Statements included elsewhere herein.

 

**Employees**

 

At December 31, 2004, we had a total of 100employees in the following areas: 34 in manufacturing, 25 in engineering and researchand development, 19 in sales, marketing, application engineering and service,and 22 in administration.  Our workforceremained relatively stable during 2004. Many of our employees are highly skilled, and we believe our futuresuccess will depend in large part on our ability to attract and retain similaremployees.  None of our employees arecovered by a collective bargaining agreement, and we have experienced no workstoppages.  We consider our relationshipwith our employees to be good.

 

**Seasonality in Quarterly Operating Results**

 

During each quarter, we customarily sell arelatively small number of systems that carry a high average sellingprice.  Although we believe our sales arenot seasonal in nature, a small change in the number of products ordered and/orshipped and accepted in a quarter can have a significant impact on results ofoperations for that particular quarter. Moreover, production difficulties could delay shipments.  Accordingly, our operating results may varysignificantly from quarter to quarter and could be adversely affected for aparticular quarter if shipments and customer acceptances for that quarter werelower than anticipated.  Our quarterlyoperating results may also be affected by, among other factors, the timing ofnew product introductions, fluctuations in the semiconductor market and theactions of competitors.

 

**Financial Information about Foreign and DomesticOperations and Export Sales**

 

We operate in three geographic areas.  Summarized data for our operations are includedin Note 12 of Notes to Consolidated Financial Statements, included elsewhereherein.

 

# **ITEM 2.  Properties**

#  

We occupy approximately 22,000 square feet of leasedspace in St. Paul, Minnesota, for our principal executive offices and researchand product development activities.  Thislease expires in 2007.   We occupyapproximately 54,000 square feet of leased space in Penang, Malaysia, which isutilized as a manufacturing center. This lease expires in 2007.  We occupy approximately 4,000 square feet ofleased space in the Philippines in support of our applications engineering andsoftware development activities.  Thislease expires in 2006.  We believe thatour current and committed facilities are adequate to support our growth for atleast the next twelve months.

 

**ITEM 3.  LegalProceedings**

 

On November 18, 2004, a motion for summaryjudgment was granted against the Company in the amount of $379,000 in a lawsuitbrought by a prior landlord in California.  The Company has requested thelandlord to agree to accept payments of a discounted amount over three yearswith interest and attorney’s fees, in exchange for the Company’s agreement notto appeal the order.  There is no assurance that such an agreement will bemade

 

12

----

 

withthe landlord.  If not, the Company will either appeal the order or makearrangements for payment.  As of December 31, 2004, we have recorded$450,000 in other accrued liabilities with respect to this matter, allowing forestimated legal fees and interest.

 

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

 

There were no matters submitted to a vote of thesecurity holders during the quarter ended December 31, 2004.

 

**PART II**

 

**ITEM 5.  Market forRegistrant’s Common Stock, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

 

Our common stock is traded on the OTC Bulletin Boardunder the symbol MCTI.  The followingtable sets forth, for the periods indicated, the high and low closing saleprices per share of our common stock, as reported by the OTC BulletinBoard.  The share prices represent pricesestablished between broker – dealers and therefore do not reflect prices ofactual transactions.

 
| ** **                          | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------|------------|----------|------------|---------|------------|
| Year ended December 31,  2004: |       |     |       |    |       |
| First  Quarter                      |       | $        | 2.07       |    | $          | 1.27 |   |
| Second  Quarter                     |       | 1.70     |       | 1.08    |       |
| Third  Quarter                      |       | 1.26     |       | 0.63    |       |
| Fourth  Quarter                     |       | 0.72     |       | 0.33    |       |
|                                |       |     |       |    |       |
| Year ended December 31,  2003: |       |     |       |    |       |
| First  Quarter                      |       | $        | 0.68       |    | $          | 0.29 |   |
| Second  Quarter                     |       | 0.57     |       | 0.37    |       |
| Third  Quarter                      |       | 0.95     |       | 0.46    |       |
| Fourth Quarter                      |       | 1.52     |       | 0.84    |       |

 

The approximate number of holders of record of ourcommon stock as of December 31, 2004 was 322.

 

We have never declared or paid any cash dividends onour common stock and do not anticipate paying any cash dividends in theforeseeable future.  We currently intendto retain future earnings to fund the development and growth of our business.

 

Under the Note Purchase Agreement  associated with the issuance of the 10%Senior Subordinated Convertible Notes and the Security Agreement associatedwith our revolving lines of credit and Term Note (each discussed in Note 7 inNotes to Consolidated Financial Statements contained elsewhere herein) we areprohibited from paying dividends.

 

13

----

 

**ITEM 6.  SelectedConsolidated Financial Data**

 
| ** **                                           | ** **         | **SELECTED CONSOLIDATED FINANCIAL DATA****Years Ended** | ** **         |
|------------------------------------------------------|--------------------|---------------------------------------------------------|--------------------|
| ** **                                           | **Dec. 31,  2004** | ** **                                              | **Dec. 31,  2003** | ** ** | **Dec. 31,  2002** | ** ** | **Dec. 31,  2001** | ** ** | **Dec. 31,  2000 (1)** | ** ** |
| ** **                                           | ** **         | **(in thousands, except per share data )**              | ** **         |
| **Consolidated  Statement of Operations Data:**      | ** **         | ** **                                              | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                            |               | $                                                       | 14,602             |   | $ | 11,123 |   | $ | 12,211 |   | $ | 25,406 |   | $ | 49,902 |   |
| Cost of sales:                                       |               |                                                    |               |   |   |   |   |   |   |   |   |
| Product                                              |               | 7,286                                                   |               | 6,295 |   | 7,604 |   | 15,832 |   | 26,905 |   |
| Inventory revaluation                                |               | —                                                  |               | — |   | 913 |   | 8,092 |   | 3,979 |   |
| Total cost of sales                                  |               | 7,286                                                   |               | 6,295 |   | 8,517 |   | 23,924 |   | 30,884 |   |
| Gross Profit                                         |               | 7,316                                                   |               | 4,828 |   | 3,694 |   | 1,482 |   | 19,018 |   |
| Operating expenses:                                  |               |                                                    |               |   |   |   |   |   |   |   |   |
| Selling, general and  administrative                 |               | 5,596                                                   |               | 4,872 |   | 8,556 |   | 10,864 |   | 16,177 |   |
| Research and development                             |               | 2,841                                                   |               | 2,351 |   | 4,214 |   | 7,859 |   | 9,271 |   |
| Amortization of intangible  assets                   |               | —                                                  |               | — |   | — |   | 2,632 |   | 4,308 |   |
| Write-down of impaired  intangible assets            |               | —                                                  |               | — |   | — |   | 9,298 |   | 3,405 |   |
| Restructuring charges                                |               | 35                                                      |               | 266 |   | 207 |   | 2,444 |   | — |   |
| Loss from operations                                 |               | (1,156                                                  | )                  | (2,661 | ) | (9,283 | ) | (31,615 | ) | (14,143 | ) |
| Other income                                         |               | (892                                                    | )                  | (1,007 | ) | (1,047 | ) | 196 |   | (46 | ) |
| Loss before income taxes                             |               | (2,048                                                  | )                  | (3,668 | ) | (10,330 | ) | (31,419 | ) | (14,189 | ) |
| Income tax provision                                 |               | —                                                  |               | — |   | — |   | — |   | — |   |
| Net income (loss) before  cumulative effect          |               | (2,048                                                  | )                  | (3,668 | ) | (10,330 | ) | (31,419 | ) | (14,189 | ) |
| Cumulative effect of change  in accounting principle |               |                                                    |               | — |   | — |   | — |   | (1,264 | ) |
|                                                 |               |                                                    |               |   |   |   |   |   |   |   |   |
| Net income (loss)                                    |               | $                                                       | (2,048             | ) | $ | (3,668 | ) | $ | (10,330 | ) | $ | (31,419 | ) | $ | (15,453 | ) |
|                                                 |               |                                                    |               |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per  share:                    |               |                                                    |               |   |   |   |   |   |   |   |   |
| Continuing operations                                |               | $                                                       | (0.08              | ) | $ | (0.21 | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.23 | ) |
| Cumulative adjustment                                |               | —                                                  |               | — |   | — |   | — |   | (0.11 | ) |
| Net income (loss)                                    |               | $                                                       | (0.08              | ) | $ | (0.21 | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.34 | ) |
|                                                 |               |                                                    |               |   |   |   |   |   |   |   |   |
| Diluted earnings (loss) per  share:                  |               |                                                    |               |   |   |   |   |   |   |   |   |
| Continuing operations                                |               | $                                                       | (0.08              | ) | $ | (0.21 | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.23 | ) |
| Cumulative adjustment                                |               | —                                                  |               | — |   | — |   | — |   | (0.11 | ) |
| Net income (loss)                                    |               | $                                                       | (0.08              | ) | $ | (0.21 | ) | $ | (0.73 | ) | $ | (2.24 | ) | $ | (1.34 | ) |
|                                                 |               |                                                    |               |   |   |   |   |   |   |   |   |
| Weighted average shares  outstanding:                |               |                                                    |               |   |   |   |   |   |   |   |   |
| Basic                                                |               | 25,013                                                  |               | 17,606 |   | 14,125 |   | 14,027 |   | 11,531 |   |
| Diluted                                              |               | 25,013                                                  |               | 17,606 |   | 14,125 |   | 14,027 |   | 11.531 |   |
|                                                 |               |                                                    |               |   |   |   |   |   |   |   |   |
| **Selected  Balance Sheet Data:**                    |               |                                                    |               |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                            |               | $                                                       | 166                |   | $ | 1,078 |   | $ | 1,560 |   | $ | 11,086 |   | $ | 12,047 |   |
| Working capital                                      |               | 1,737                                                   |               | 1,618 |   | 2,861 |   | 12,907 |   | 22,347 |   |
| Total assets                                         |               | 6,122                                                   |               | 7,194 |   | 7,753 |   | 21,341 |   | 51,023 |   |
| Long-term debt                                       |               | 1,458                                                   |               | 195 |   | — |   | 33 |   | 37 |   |
| Convertible notes                                    |               | 3,630                                                   |               | 7,340 |   | 10,000 |   | 10,000 |   | — |   |
| Total stockholders equity (deficit)                  |               | $                                                       | (2,676             | ) | $ | (5,026 | ) | $ | (5,794 | ) | $ | 4,377 |   | $ | 35,592 |   |

 

----

Notes:

 

(1)          In December 1999, the Securities and Exchange Commission staffissued Staff Accounting Bulletin No. 101 (“SAB 101”), amended by StaffAccounting Bulletin 104 (“SAB 104”) which, among other things, establishes theSEC’s staff’s interpretation that if uncertainty exists about customeracceptance of a product, revenue should not be recognized until acceptanceoccurs.  In the fourth quarter of 2000,we changed our method of recognizing revenue to comply with SAB 104.  As a result of this change, we reported achange in accounting principle in accordance with APB Opinion No. 20 (APB 20),*Accounting Changes*, by a cumulativeeffect adjustment.

 

14

----

 

**ITEM 7.  Management’sDiscussion and Analysis of Results of Operations and Financial Condition**

 

*The following discussion of ourresults of operations and financial condition should be read together with theother financial information and consolidated financial statements included inthis document.  This discussion containsforward-looking statements that involve risks and uncertainties.  Our actual results could differ materiallyfrom those anticipated in the forward-looking statements as a result of avariety of factors, including those discussed in “Risk Factors” and elsewherein this document.*

 

**Overview**

 

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

 

Beginning in 1999 and continuing into 2000, webroadened our strategy from that of a test handler manufacturer to becoming aprovider of comprehensive equipment automation solutions for the back-end ofthe semiconductor manufacturing process. First, we developed and introduced in February 1999 our Tapestrystrip handler.  Tapestry combines striphandling capability with robotics, machine vision technology and critical software,enabling the testing and tracking of semiconductor devices in strip form andthe generation of 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.  Togetherwith a third party tester, our Smart Solutions equipment products including ourTapestry handler enable complete automation of the test, laser mark, markinspect and other processes of the back end.

 

The demand for our products and services is dependentupon growth in the semiconductor industry and the increasing automation needsof semiconductor manufacturers and independent test and assemblyfacilities.  In the fourth quarter of2000, the semiconductor industry went into a sharp downturn, which intensifiedand continued through 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. At this juncture, the return to sustained marketgrowth cannot be predicted in the short term. As we have disclosed in our Form 10-K for the year ended December 31,2003 and 2002 and each of our Forms 10-Q for the first three quarters of 2004and 2003, a continued or renewed market downturn might result in significantlosses, charges for inventory revaluation, or asset impairment or restructuringcharges.  Consequently, in response tothese changing market conditions, in addition to the actions taken in 2002, wetook the following additional steps in 2004 and 2003:

 

*Workforce and Facility CostReductions*

 

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 the reduction.  This workforce reduction affected a total of12 employees all within the manufacturing area.

 

During the first quarter of 2003, in response to thecontinued and prolonged downturn in the semiconductor capital equipmentindustry, we reduced our workforce across all functional areas by approximately24% at the time, resulting in a restructuring charge of $19,000.  This charge reflected severance and otherbenefit costs associated with this reduction. This workforce reduction affected a total of 26 employees across allfunctional 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

 

15

----

 

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 other benefit costs associated withthis reduction.  This workforce reductionaffected a total of four employees across all functional areas.

 

*Financing transactions*

 

On March 9, 2004 we completed a $5.0 millionsecured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 long-term convertible note. $750,000 of the secured working capital line of credit can be convertedto shares of our common stock by the lender under certain market conditions andat a price of $1.92 per share.  The $2.0million long-term convertible note is convertible to shares of our common stockat a price of $1.79.  In connection withthe execution of this credit facility, we issued to the lender a seven-yearwarrant to purchase 400,000 shares of our common stock at exercise pricesranging from $2.30 to $2.88.  The securedlending relationship at the time was terminated as a result of thistransaction.  This credit facility issecured by all the assets of the Company.

 

On January 28, 2005, we completed an amendmentto the financing agreement with the lender whereby our payments under thelong-term convertible note have been deferred for one year, resulting in$800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-tem convertible note has also been extended for oneyear from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to boththe $3.0 million secured working capital line of credit and the $2.0 long-termconvertible note were reduced to $0.60 and $0.56, respectively.  Additionally, we issued the lender aseven-year warrant to purchase 150,000 shares of common stock at a price of$0.67.

 

On March 7, 2003 and March 26, 2003,pursuant to a private equity placement with a group of accredited investors, weissued a total of 3,166,869 shares of common stock, which resulted in netproceeds to us of approximately $1.1 million. Stock issuance costs associated with this offering totaled approximately$241,000.  As part of this offering, wealso issued warrants to purchase 253,350 shares of common stock that have aterm of five years with an exercise price of $0.43 per share.

 

On June 30, 2003, we completed therestructuring of $9.29 million, or 92.9%, of our 10% Senior SubordinatedConvertible Notes, wherein the participating noteholders agreed to accept stockin lieu of cash for the next four semi-annual interest payment dates beginning June 30,2003 through December 31, 2004, and the conversion price was lowered to$1.00 per share.  On February 25, 2005,we completed a second amendment to the agreement with the holders of our 10%Senior Subordinated Convertible Notes, wherein holders of 80% of the remainingNotes, representing $2.9 million, agreed to continue to accept stock in paymentof interest 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.

 

In July of 2003, we completed negotiations withthe majority of our vendors to extend the payment terms of the total amountsowed to them at the time.  This resultedin $1.2 million of our payables, or 67% of our total accounts payable at thetime,  being restructured with a total of281 vendors.  Under the terms of theextended payment plan, we have agreed to make four to eight equal paymentsbeginning on July 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this planrepresented approximately 61% of our active vendors. As of December 31,2003, all  scheduled payments have beenmade in accordance with the terms of the extended payment plan.

 

Most industry forecasts are presently predictingthat capacity-driven purchases of capital equipment are expected to improve in2005.  However, the level of improvementand the ability for the market to sustain an improvement continues to beuncertain.  Therefore, we will continueto monitor the market and if required, examine opportunities to further reduceour costs through further consolidation of operations, limiting capitalexpenditures, monitoring inventory purchases and additional strategicrestructuring initiatives.  Certain ofthese types of actions

 

16

----

 

havethe potential for further charges in future periods.  The impact of a renewed contraction of thesemiconductor capital equipment market has the potential to have a materialadverse effect on our financial condition, results of operations, and cashflows.

 

**Critical Accounting Policies**

 

*Revenue Recognition*

 

Under SAB 104, we recognize revenue upon shipment,as our terms are FOB shipping point, for established equipment products thathave previously satisfied existing customer performance specifications and thatprovide for full payment tied to shipment. Revenue for products that have not previously satisfied customerperformance specifications or from sales where all or a portion of customerpayment is based upon acceptance are only recognized upon customeracceptance.  As such, in periods ofincreasing shipments, revenues will be deferred if the shipments are for newcustomers, new products or the payment terms are tied to acceptancecriteria.  Consequently, if theseconditions exist, we may report revenue levels that are not reflective ofactual shipment growth rates. Conversely, in periods of decreasing shipments, we potentially couldrecognize revenues related to shipments made in prior periods.  Consequently, if these conditions exist, wemay report revenue levels that are greater than actual shipments.  During the year ended December 31, 2004,revenue recorded approximated shipments.

 

*Allowance for Doubtful Accounts*

 

We record a provision for doubtful accounts based onspecific identification of our accounts receivable. This involves a degree ofjudgment based on discussion with our internal sales and marketing groups, ourcustomer base and the examination of the financial stability of ourcustomers.  There can be no assurance thatour estimates will 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 collectability of our accounts receivable due tothe impact that these conditions might have on our customer base.  For the year ended December 31, 2004, wecharged approximately $88,000 against the allowance for accounts receivablewrite-offs that we deemed to be uncollectible.

 

*Valuation of Inventories*

 

Our inventories are stated at the lower of cost ormarket.  Cost is determined by the first-in,first-out (“FIFO”) method.  We maintain astandard costing system for our inventories. Assumptions with respect to direct labor utilization, standard directand indirect cost rates, vendor pricing and utilization of factory capacitiesare formulated in the development of our standard costing system.  Sudden or continuing changes in thesemiconductor capital equipment market affecting our shipments can result insignificant production variances from our standard rates. These variancesdirectly impact our gross profit performance and may cause variability in grossprofits results from reporting period-to-reporting period.  Our labor and overhead rates are set forproduction rates that match typical market conditions.  Production variances are charged to cost ofsales each quarter as incurred. Material standards are based upon normalpurchase volumes.  Purchase pricevariances are charged to costs of sales each quarter as incurred.

 

Provisions to reduce inventories to the lower ofcost or market are made based on a review of excess and obsolete inventoriesthrough an examination of historical component consumption, current marketdemands and shifting product technology. Significant assumptions with respect to market trends and customerproduct acceptance are utilized to formulate our provision methods.  Sudden or continuing downward changes in thesemiconductor capital equipment market may cause us to record additionalinventory revaluation charges in future periods.  No revaluation was made to our inventoriesfor the year ended December 31, 2004 or 2003. For the year ended December 31,2002, $913,000 was provided for to reduce our inventories to lower of cost ormarket.  Pursuant to SAB Topic 5-BB,inventory revaluations establish a new cost basis for inventory.  Included in our gross margin dollars for theyears ended December 31, 2004 and 2003, were $1.5 million and $1.0 million,respectively, resulting from sales of products that had been previously writtendown to lower of cost or market.

 

17

----

 

*Accrued Warranty*

 

We provide a standard thirteen month warrantyprogram for our equipment products. We record provisions for warranty claimsfor 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.

 

**Results of Operations**

 

The following table sets forth, for the periodsindicated, certain items in our statements of operations as a percentage of netsales:

 
| ** **                          | ** ** | **Years Ended**    | ** ** |
|-------------------------------------|------------|--------------------|------------|
| ** **                          | ** ** | **Dec. 31,  2004** | ** ** | **Dec. 31,  2003** | ** ** | **Dec. 31,  2002** | ** ** |
| ** **                          | ** ** | ** **         | ** ** | ** ** |
| Net sales                           |       | 100.0              | %          | 100.0 | % | 100.0 | % |
| Cost of  sales                      |       | 49.9               |       | 56.6 |   | 69.7 |   |
| Gross profit                        |       | 50.1               |       | 43.4 |   | 30.3 |   |
| Operating  expenses:                |       |               |       |   |   |   |   |
| Selling,  general and adminstrative |       | 38.3               |       | 43.8 |   | 70.1 |   |
| Research and  development           |       | 19.5               |       | 21.1 |   | 34.5 |   |
| Restructuring  charge               |       | 0.2                |       | 2.4 |   | 1.7 |   |
| Total  operating expenses           |       | 58.0               |       | 67.3 |   | 106.3 |   |
| Loss from  operations               |       | (7.9               | )          | (23.9 | ) | (76.0 | ) |
| Other  expense                      |       | (6.1               | )          | (9.1 | ) | (8.6 | ) |
| Net loss                            |       | (14.0              | )%         | (33.0 | )% | (84.6 | )% |

 

 

***Year Ended December 31, 2004versus Year Ended December 31, 2003***

 

Net Sales. Net sales for the year ended December 31, 2004 increased  $3.5 million or 31.3% to $14.6 million,compared to net sales of $11.1 million for the prior year.  Product acceptance requirements related toproduct and customer mix resulted in a net increase to revenues of less than$0.1 million over shipments for the year ended December 31, 2004, whilethese same factors caused a net increase to revenues of $.01 million overshipments in  2003.  Sales of our Tapestry and Smart Solutionsstrip-based products increased $2.5 million or 44.6% over the prior yearperiod, while sales of singulated device handler products also increased $0.9million or 86.9% from the prior year period. Sales of our Tapestry and Smart Solutions strip-based product made up54.6.% of our net sales for the year ended December 31, 2004 compared to49.6% in the prior year period.

 

Net sales to Asia comprised approximately 72.8% ofour net sales for the year ended December 31, 2004.  Net sales to customers in the United Statesrepresented approximately 19.0% and net sales to customers in Europerepresented approximately 8.2% for year ended December 31, 2004.  Comparatively, net sales to customers in Asiacomprised approximately 62.8% of our net sales for the year ended December 31,2003.  Net sales to customers in theUnited States represented approximately 33.5% and net sales to customers inEurope represented approximately 3.7% for year ended December 31, 2003.

 

*Gross Profit.*  Grossprofit increased $2.5 million to $7.3 million or 50.1% of net sales from $4.8million or 43.4% of net sales, for the comparable period in the prioryear.  The increase in gross margin inthe current year

 

18

----

 

periodprimarily resulted from the many restructuring efforts that we have completedduring 2003 coupled with our lower cost of operations associated with ourPenang, Malaysia facility and higher net sales levels. This has  resulted in lower fixed costs being spreadover a larger number of products contributing to the overall improvement ingross profit performance.  Additionally,for the year ended December 31, 2004, we benefited from approximately $1.5million in gross margin dollars resulting from sales of products that had beenpreviously written down to lower of cost or market.   However, the recent contraction of themarket for semiconductor capital equipment has the potential to negativelyimpact our gross margin contribution in future periods as well as changes insales mix.

 

*Selling, General andAdministrative Expense.*  Selling, general and administrative expensein 2004 was $5.6 million, or 38.3% of net sales compared to $4.9 million, or43.8% of net sales in the prior year. The increase in expense for the current year is a result of the costsrequired in connection with the higher net sales levels.  However, the expense increases were at alower rate than the increase in net sales, resulting in a decline in the percentageto sales.  Selling, general andadministrative expense is expected to decline in 2005 from 2004 levels due therecent retraction in the semiconductor capital equipment market.

 

*Research and Development Expense*. Research and development expense in 2004 was $2.8 million, or 19.5% ofnet sales compared to $2.4 million, or 21.1% of net sales in 2003.  The increase in expense for the current yearis a direct result of certain development activities that resulted in theintroduction of new product and existing product enhancements during theyear.  However, the expense increaseswere at a lower rate than the increase in net sales, resulting in a decline inthe percentage to sales.  We expectresearch and development expenses to decline in 2005 due to the completion ofthese development projects, subject to impacts resulting from marketrequirements.

 

*Restructuring Charge. *Due to the retraction of the semiconductor capital equipment market inthe second half of 2004, we reduced out workforce by 11%.   The restructuring charge totaled $35,000 or0.2% of net sales for the current year period. This charge reflected severance and other benefit costs associated withthe reduction.  This workforce reductionaffected a total of 12 employees all within the manufacturing area.

 

*Other Income (Expense).* Interest income for the year ended December 31, 2004 was $6,000compared to $5,000 for the comparable period in the prior year.  This decrease resulted from the decrease ininvestment in interest-bearing cash and cash equivalents.  Interest expense and other totaled $0.9million or 6.2% of net sales in the current year, compared to $1.2 million or11.0% of net sales for the comparable period in the prior year.  The decline in interest expense and otherresulted from lower average debt levels due to conversions of our 10% seniorconvertible debt.  In connection with thetransfer of our manufacturing operations to Penang, we sold certain fixed andother assets from our St. Paul, Minnesota facility resulting in a gain on saleof $209,000 or 1.9% of net sales for the year ended December 31,2003.  For the year ended December 31,2004, certain assets were disposed of resulting in a loss on sale of $12,000.

 

*Income Tax Provision.* During both 2004 and 2003, we incurred minimal tax liabilities.  We have recorded valuation allowances againstall benefits associated with net operating loss carry forwards due touncertainty regarding their ultimate utilization.

 

*Net Loss.*  Netloss for the year ended December 31, 2004 was $ 2.0 million, or $0.08 perbasic and diluted share, as compared to net loss of $3.7 million, or $ 0.21 perbasic and diluted share for the comparable prior year period.

 

19

----

 

***Year Ended December 31, 2003versus Year Ended December 31, 2002***

 

*Net Sales*.  Netsales for the year ended December 31, 2003 decreased  $1.1 million or  8.9% to $11.1 million, compared to net salesof $12.2 million for the prior year. Product acceptance requirements related to product and customer mixresulted in a net increase to revenues of $0.1 million over shipments for theyear ended December 31, 2003, while these same factors caused a netincrease to revenues of $2.6 million over shipments in  2002. Current year product sales, especially capacity-related singulateddevice handler products, continued to be severely impacted by the continueddownturn in the semiconductor capital equipment market, offset by increases inour Tapestry and other Smart Solution products. Sales of our Tapestry and Smart Solutions strip-based products increased$0.3 million or 5.13% over the prior year period, while sales of singulateddevice handler products decreased $1.2 million or 52.5% from the prior yearperiod.  Sales of our Tapestry and SmartSolutions strip-based product made up 49.6.% of our net sales for the yearended December 31, 2003 compared to 43.0% in the prior year period.  If the recent market stabilization fails tohold, it is likely that net sales would be adversely impacted in futureperiods.

 

Net sales to Asia comprised approximately 62.8% ofour net sales for the year ended December 31, 2003.  Net sales to customers in the United Statesrepresented approximately 33.5% and net sales to customers in Europerepresented approximately 3.7% for year ended December 31, 2003.  Comparatively, net sales to customers in Asiacomprised approximately 61.6% of our net sales for the year ended December 31,2002.  Net sales to customers in theUnited States represented approximately 29.0% and net sales to customers inEurope represented approximately 9.4% for year ended December 31, 2002.

 

*Gross Profit*.  Forthe year ended December 31, 2002, we recorded an inventory revaluationcharge of $913,000.  Exclusive of thisprior year change, gross profit in the current year period increased by $0.2million to $4.8 million or 43.4% of net sales from $4.6 million or 37.7% of netsales in the prior year.  Inclusive ofthe inventory revaluation charges in the prior year, gross profit margin in theprior year was 30.3% compared to the current year level of 43.4%.  The improvement in our gross margincontribution resulted from the many cost reduction initiatives that we haveundertaken in response to the downturn in the semiconductor capital equipmentmarket, including the shift of our operations to Penang, Malaysia.  Additionally, for the year ended December 31,2003, we benefited from approximately $1.0 million in gross margin dollarsresulting from sales of products that had been previously written down to lowerof cost or market.

 

*Selling, General andAdministrative Expense.*  Selling, general and administrative expensein 2003 was $4.9 million, or 43.8% of net sales compared to $8.6 million, or70.1% of net sales in the prior year. The decrease in expense for the current year is a result of the costreduction measures that we have performed throughout all of 2002 and continuinginto 2003.  These factors alsosignificantly contribute to the decrease in selling, general and administrativeexpense as a percentage of net sales in the current year from the prior yearperiod.  Selling, general andadministrative expense is expected to decline in 2004 from 2003 levels due therestructuring efforts that were completed in 2003.

 

*Research and Development Expense.* Research and development expense in 2003 was $2.4 million, or 21.1% ofnet sales compared to $4.2 million, or 34.5% of net sales in 2002.  The decrease in expense for the current yearis a result of the cost reduction measures that we performed throughout all of2002 and continuing into 2003.  Thesefactors also significantly contribute to the decrease in research anddevelopment expense as a percentage of net sales in the current year from theprior year period.  We expect researchand development expenses to remain consistent with 2003 levels, subject toimpacts resulting from market requirements.

 

*Restructuring Charge.*  Inour continuing response to the downturn in the semiconductor capital equipmentmarket, we made further reductions to our workforce throughout 2003.  The restructuring charge totaled $266,000 or2.4% of net sales for the current year period. This charge resulted from reductions of our workforce across allfunctional areas in the first and second quarter of 2003.  This charge reflects severance and otherbenefits costs paid in 2003 related to exit activities commenced in 2002.  However, certain criterion under EITF 94-3were not satisfied for these 2003 severance and benefit costs to be accrued at December 31,2002.  This workforce reduction affected30 employees, across all functional areas. Additionally included in this chargeare restructuring

 

20

----

 

costsassociated with our St. Paul facility for $227,000 resulting from therestructuring of our master lease agreement related to this facility.

 

*Other Income (Expense).* Interest income for the year ended December 31, 2003 was $5,000compared to $102,000 for the comparable period in the prior year.  This decrease resulted from the decrease ininvestment in interest-bearing cash and cash equivalents.  In connection with the transfer of ourmanufacturing operations to Penang, we sold certain fixed and other assets fromour St. Paul, Minnesota facility resulting in a gain on sale of $209,000 or1.9% of net sales for the current year period. Interest expense and other totaled $1.2 million or 11.0% of net sales inthe current year, compared to $1.1 million or 9.4% of net sales for thecomparable period in the prior year.  Theinterest expense resulted from our 10% Senior Subordinated Convertible Notes,which were issued in December of 2001, the amortization of debt issuancecosts associated with the note offering and interest associated with our bankline of credit.

 

*Income Tax Provision.* During both 2003 and 2002, we incurred minimal tax liabilities.  We have recorded valuation allowances againstall benefits associated with net operating loss carry forwards due touncertainty regarding their ultimate utilization.

 

*Net Loss.*  Netloss for the year ended December 31, 2003 was $ 3.7 million, or $0.21 perdiluted share, as compared to net loss of $10.3 million, or $ 0.73 per dilutedshare for the comparable prior year period.

 

21

----

 

***Quarterly Results***

 

The following tables present selected unauditedquarterly operating results for the eight fiscal quarters ended December 31,2004, as well as the data expressed as a percentage of net sales.  We believe that all necessary adjustments havebeen included to present fairly the quarterly information when read inconjunction with our consolidated financial statements.  The operating results for any quarter are notnecessarily indicative of the results for any subsequent period.

 

(in thousands, except pershare data)

 
| ** **                                                         | ** ** | **Quarter Ended**** ** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **Dec. 31  2004**           | ** ** | **Sept. 25  2004** | ** ** | **June 26  2004** | ** ** | **Mar.27  2004** | ** ** | **Dec. 31  2003 (2)** | ** ** | **Sept. 27  2003** | ** ** | **June 28  2003** | ** ** | **Mar. 29  2003** | ** ** |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |       | $                           | 2,252      |   | 3,859 |   | $ | 4,223 |   | $ | 4,268 |   | $ | 3,738 |   | $ | 2,852 |   | $ | 2,333 |   | $ | 2,200 |   |
| Cost of sales                                                      |       | 1,394                       |       | 1,902 |   | 2,015 |   | 1,975 |   | 1,790 |   | 1,581 |   | 1,448 |   | 1,476 |   |
| Gross profit loss                                                  |       | 858                         |       | 1,957 |   | 2,208 |   | 2,293 |   | 1,948 |   | 1,271 |   | 885 |   | 724 |   |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                |       | 1,544                       |       | 1,442 |   | 1,337 |   | 1,273 |   | 1,072 |   | 1,177 |   | 1,290 |   | 1,333 |   |
| Research and development                                           |       | 731                         |       | 788 |   | 673 |   | 649 |   | 552 |   | 464 |   | 601 |   | 734 |   |
| Restructuring charge                                               |       | 35                          |       | — |   | — |   | — |   | — |   | — |   | 246 |   | 19 |   |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations                                      |       | (1,452                      | )          | (273 | ) | 198 |   | 371 |   | 324 |   | (371 | ) | (1,252 | ) | (1,362 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other expense                                                      |       | (305                        | )          | (203 | ) | (189 | ) | (195 | ) | (292 | ) | (330 | ) | (256 | ) | (129 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                  |       | $                           | (1,757     | ) | $ | (476 | ) | $ | 9 |   | $ | 176 |   | $ | 32 |   | $ | (701 | ) | $ | (1,508 | ) | $ | (1,491 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share: (1)                                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |       | $                           | (0.07      | ) | $ | (0.02 | ) | $ | 0.00 |   | $ | 0.01 |   | $ | 0.00 |   | $ | (0.04 | ) | $ | (0.09 | ) | $ | (0.10 | ) |
| Diluted                                                            |       | $                           | (0.07      | ) | $ | (0.02 | ) | $ | 0.00 |   | $ | 0.01 |   | $ | 0.01 |   | $ | (0.04 | ) | $ | (0.09 | ) | $ | (0.10 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  common and common equivalent shares outstanding: |       |                        |       |   |   |   |   |   |   |   |   |   |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |       | 25,269                      |       | 25,237 |   | 25,120 |   | 24,336 |   | 20,086 |   | 17,964 |   | 17,319 |   | 14,871 |   |
| Diluted                                                            |       | 25,269                      |       | 25,237 |   | 28,585 |   | 27,985 |   | 27,274 |   | 17,964 |   | 17,319 |   | 14,871 |   |

 
| ** **                          | ** ** | **Quarter Ended** | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **Dec. 31  2004** | ** ** | **Sept. 25  2004** | ** ** | **June 26  2004** | ** ** | **Mar. 27  2004** | ** ** | **Dec. 31  2003** | ** ** | **Sept. 27  2003** | ** ** | **June 28  2003** | ** ** | **Mar. 29  2003** | ** ** |
|                                |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **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                       |       | 61.9              |       | 49.3 |   | 47.7 |   | 46.3 |   | 47.9 |   | 55.4 |   | 62.1 |   | 67.1 |   |
| Gross profit                        |       | 38.1              |       | 50.7 |   | 52.3 |   | 53.7 |   | 52.1 |   | 44.6 |   | 37.9 |   | 32.9 |   |
| Operating expenses:                 |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       | 68.6              |       | 37.4 |   | 31.7 |   | 29.8 |   | 28.6 |   | 41.3 |   | 55.3 |   | 60.6 |   |
| Research and development            |       | 32.5              |       | 20.4 |   | 15.9 |   | 15.2 |   | 14.8 |   | 16.3 |   | 25.8 |   | 33.4 |   |
| Restructuring charge                |       | 1.6               |       | — |   | — |   | — |   | — |   | — |   | 10.5 |   | 0.8 |   |
| Income (loss) from operations       |       | (64.6             | )          | (7.1 | ) | 4.7 |   | 8.7 |   | 8.7 |   | (13.0 | ) | (53.7 | ) | (61.9 | ) |
| Other expense                       |       | (13.5             | )          | (5.2 | ) | (4.4 | ) | (4.6 | ) | (7.8 | ) | (11.6 | ) | (11.0 | ) | (5.9 | ) |
| Net income (loss)                   |       | (78.1             | )%         | (12.3 | % | 0.3 | % | 4.1 | % | 0.9 | % | (24.6 | )% | (64.7 | )% | (67.8 | )% |

 

22

----

 

----

(1)          The sum of income (loss) per share for the fiscal quarters may differfrom annual loss per share due to the required method of computing weightedaverage number of shares in the respective periods.

 

(2)          Diluted earnings per share includes an increase of $166,000 in netincome related to interest expense that would not have been incurred had theamount of outstanding senior convertible subordinated notes as of December 31,2003 been converted to equity pursuant to SFAS No. 128.

 

***Liquidity and Capital Resources***

 

The net loss and decreases in account payable andother accrued liabilities were the primary uses of cash in 2004.  The net loss and increase in accountsreceivable were the primary uses of cash in 2003. The net loss was the primaryuse of cash in 2002.  Cash used inoperations was $3.4 million, $2.2 million and $9.5 million in 2004, 2003 and 2002,respectively.

 

We record provisions for doubtful accounts based onspecific identification of our accounts receivable.  As a result of this examination, noprovisions were recorded for the year ended December 31, 2004; however, wewrote off approximately $88,000, which we deemed uncollectible.  We recorded no provisions for doubtfulaccounts for the years ended December 31, 2003 and December 31, 2002,respectively.

 

Capital expenditures totaled $.01 million, $0.1million and $0.2 million for the years ended December 31, 2004, 2003 and2002, respectively.  Capital purchasesfor all periods have been primarily for production and computer equipment andfor leasehold improvements.  As of December 31,2004, we had approximately $0.4 million in committed purchase ordersoutstanding with our vendors and budgeted capital expenditures for 2005 isapproximately $0.1 million.

 

On March 7, 2003 and March 26, 2003,pursuant to a private equity placement with a group of accredited investors, weissued a total of 3,166,869 shares of common stock, which resulted in netproceeds to us of approximately $1.1 million. Stock issuance costs associated with this offering totaled approximately$241,000.  As part of this offering, wealso issued warrants to purchase 253,350 shares of common stock that have aterm of five years with an exercise price of $0.43 per share.

 

On June 30, 2003, we completed therestructuring of $9.29 million, or 92.9%, of our 10% Senior SubordinatedConvertible Notes, wherein the participating noteholders agreed to accept stockin lieu of cash for the next four semi-annual interest payment dates beginning June 30,2003 through December 31, 2004. $10.0 million of the Notes were originally issued in December 2001,resulting in proceeds to us of $9.2 million. As part of this restructuring, the Company amended the Notes of theparticipating noteholders to reduce the conversion price from $2.60 per shareto $1.00 per share for the remainder of the term through December 2006.  The agreement also included standardanti-dilution provisions, and required the Company to register the shares withthe Securities and Exchange Commission. As of December 31, 2004, $6.4 million of the Notes have beenconverted to equity under this agreement, resulting in the issuance of6,370,081 shares of our common stock to the noteholders.

 

In July of 2003, we completed negotiations withthe majority of our vendors to extend the payment terms of the total amountsowed to them at the time.  This resultedin $1.2 million of our payables, or 67% of our total accounts payable at thetime,  being restructured with a total of281 vendors.  Under the terms of theextended payment plan, we have agreed to make four to eight equal paymentsbeginning on July 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this planrepresented approximately 61% of our active vendors. As of December 31,2004, $183,000 remains to be paid under this agreement, which is included inaccounts payable.

 

On March 9, 2004 we completed a $5.0 millionsecured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 long-term convertible note. $750,000 of the secured working capital line of credit can be convertedto shares of our common stock by the lender under certain market conditions andat a price of $1.92 per share.  The $2.0million long-term convertible note is convertible to shares of our common stockat a price of $1.79.  In connection 

 

23

----

 

withthe execution of this credit facility, we issued to the lender a seven-yearwarrant to purchase 400,000 shares of our common stock at exercise pricesranging from $2.30 to $2.88.  Ourexisting secured lending relationship was terminated as a result of thistransaction.  This credit facility issecured by all the assets of the Company.

 

Our contractual obligations as of December 31,2004 are as follows (in thousands):

 
| ** **                                         | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Future rental  payments under noncancelable leases |       | $        | 343.0      |     | $          | 283.0    |       | $        | 91.0       |     | —     |           | —     |   | — |   |
|                                               |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Payments due  under vendor payment plan            |       | $        | 183.0      |     | —     |     | —     |     | —     |     | —     |           | —     |   |
|                                               |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Payments due  under long term debt agreements      |       | $        | 66.7       |     | $          | 4,430.0  |       | $        | 800.0      |     | 66.7       |           | —     |   | — |   |
|                                               |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Payments  under settlement agreement               |       | $        | 450.0      |     | —     |     | —     |     | —     |     | —     |           | —     |   |

 

For the year ended December 31, 2004, we issuedapproximately 0.1 million shares of common stock due to the exercise ofemployee stock options, warrants and our stock purchase plan, which providedapproximately $21,000 in cash to us. For the year ended December 31, 2003,we issued approximately 0.2 million shares of common stock through the exerciseof employee stock options and our stock purchase plan, which providedapproximately $0.2 million in cash to us. For the year ended December 31, 2002, we issued approximately, 0.1million shares of common stock through the exercise of employee stock optionsand our stock purchase plan, which provided approximately $0.2 million in cashto us.

 

At December 31, 2004, we had a current ratio of1.47 and working capital of $1.7 million. At December 31, 2003, we had a current ratio of 1.35 and workingcapital of $1.6 million.

 

We estimate that we may need to raise additionalcapital through debt or equity offerings to support the continuing requirementsof the business due to the recent retraction of the semiconductor capitalequipment market and the potential impacts on our cash flows and results ofoperations that could result. There is no assurance that additional financing,if needed, will be available on terms and conditions acceptable or favorable tous, if at all. However, on January 28, 2005, we competed an amendment tothe financing agreement with our institutional lender whereby our paymentsunder the long-term convertible note has been deferred for one year, resultingin $800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-tem convertible note has also been extended for oneyear from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to boththe $3.0 million secured working capital line of credit and the $2.0 long-termconvertible note was reduced to $0.60 and $0.56, respectively.  Additionally, we issued the lender aseven-year warrant to purchase 150,000 shares of common stock at a price of $0.67.  On February 25, 2005, we completed a newrestructuring agreement with our 10% Senior Convertible Noteholders. Under theagreement, the Noteholders representing $2.9 million in debt, or 80% of thedebt existing as of December 31, 2004, have agreed to continue to acceptstock in lieu of cash for their interest payments for the remaining term of thenotes through December 2006.  Aspart of this agreement,

 

24

----

 

theconversion price of the underlying notes has been reduced from $1.00 per shareto $0.85 per share for the remaining term of the notes through December 2006.  This results in approximately $145,000 ofinterest expense scheduled to be paid in 2005 in cash to be satisfied throughthe issuance of shares of our common stock.

 

We believe that these transactions in combinationwith our existing line of credit will provide the cash necessary to meet ouroperating, working capital and capital resource obligations through all of2005.

 

**Federal Tax Matters**

 

We paid only nominal federal and state income taxesin the years ended December 31, 2004, 2003 and 2002.  At December 31, 2004, we had federal netoperating loss carryforwards for tax reporting purposes of approximately $93.0million, a portion of which is subject to annual limitation under Section 382of the Internal Revenue Code.

 

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

 

The vast majority of our transactions aredenominated in U.S. dollars; as such, fluctuations in foreign currency exchangerates have historically had little impact on us.  Inflation has not been a significant factorin our operations in any of the periods presented, and it is not expected toaffect operations in the future.  Anincrease in interest rates would not expose us to market risk in that we haveno debt tied to market interest rates. At December 31, 2004, our 10% Senior Convertible Notes carriedinterest at a fixed rate of 10%.  Ourshort term revolving line of credit and long-term convertible debt carriedinterest at the prime rate plus 1.75%. There is no material market risk relating to our long-term debt.

 

**Impact of New Accounting Standards**

 

***FASBInterpretation No. 46 –(Revised December 2003), Consolidation of VariableInterest Entities, an Interpretation of ARB No. 51 (FIN 46R***).  In December 2003,the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.46 (Revised December 2003), *Consolidationof Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46R)*.This standard replaces FIN 46, “*Consolidationof Variable Interest Entities*” that was issued on January 2003.  FIN 46R modifies or clarifies variousprovisions of FIN 46. FIN 46R addresses the consolidation of businessenterprises of variable interest entities. (VIEs), as defined by FIN 46R.  FIN 46R exempts certain entities from itsrequirements and provides for special effective dates for entities that havefully or partially applied FIN 46 prior to issuance of FIN 46R.  Otherwise, application of FIN 46R is requiredin financial statements of public entities that have interest in structurescommonly referred to as special purpose entities for periods ending after December 15,2003.  FIN 46R had no effect on ourfinancial statements for year ended December 31, 2004, as we had nointerests in special purpose entities. Application by us for all other types of VIEs is required in financialstatements for periods ending no later than the quarter ended in March of2005.  We do not expect the adoption ofFIN 46R to have a material effect on our financial statements.

 

***SFAS No. 151,Inventory Costs.***  In November 2004, FASB issued SFAS No.151 *Inventory Costs* amends theguidance in ARB No. 43, Chapter 4 *InventoryPricing*, to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage).Paragraph 5 pf ARB 43, Chapter 4, previously stated that under somecircumstances, items such as idle facility expense, excessive spoilage, doublefreight, and rehandling costs may be so abnormal as to require treatment as currentperiod charges.” SFAS No. 151 requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “soabnormal.” In addition, SFAS No, 151 requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities.  SFAS No. 151 shall be effective forinventory costs incurred during fiscal years beginning after June 15,2005. Earlier application is permitted for inventory costs incurred duringfiscal years beginning after the date SFAS No. 151 was issued. SFAS No. 151shall be applied prospectively.  We do not expect the adoption of SFAS No.151 to have a material effect on our financial statements.

 

25

----

 

***SFAS No. 153,Exchanges of Nonmonetary Assets.***  In December 2004, FASBissued SFAS No. 153 *Exchanges of NonmonetaryAssets* amends APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*. APB No. 29 is based on the principlethat exchanges of nonmonetary assets should be measured based on the fair valueof the assets exchanged. The guidance in that Opinion, however, includedcertain exceptions to that principle. SFAS No. 153 amends APB No. 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance. A nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange.  SFAS No. 153 shall beeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005. Earlier application is permitted for nonmonetaryasset exchanges occurring in fiscal periods beginning after the date SFAS No.153 was issued. SFAS No. 153 shall be applied prospectively.  We do notexpect the adoption of SFAS No. 153 to have a material effect on our financialstatements.

 

***SFAS No. 123(revised 2004), Share-Based Payment***.  In December 2004,FASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*, that focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based paymenttransactions.  This statement replaces SFAS No. 123, *Accounting for Stock-Based Compensation*,and supersedes APB Opinion No. 25, *Accountingfor Stock Issued to Employees*.  Beginning with our quarterlyperiod that begins June 26, 2006, we will be required to expense the fairvalue of employee stock options and similar awards.  As a public company,we are allowed to select from two alternative transition methods, each havingdifferent reporting implications.  The impact of SFAS No. 123R has notbeen determined at this time.

 

**Risk Factors**

 

*Cautionary Note RegardingForward-Looking Statements*

 

*This Report on Form 10-K containsforward-looking statements that have been made pursuant to the provisions ofthe Private Securities Litigation Reform Act of 1995.  These forward-looking statements are nothistorical facts, but rather are based on our current expectations, estimatesand projections about the semiconductor capital equipment industry, and ourbeliefs and assumptions.  We intend wordssuch as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates”and similar expressions to identify forward-looking statements.  These statements are not guarantees of futureperformance and are subject to certain risks, uncertainties and other factors,some of which are beyond 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 the following risk factors and elsewhere in thethis Report on Form 10-K. We caution you not to place undue reliance on theseforward-looking statements, which reflect our management’s view only as of thedate of this Report on Form 10-K.  We arenot obligated to update these statements or publicly release the result of anyrevisions to them to reflect events or circumstances after the date of thisReport on Form 10-K or to reflect the occurrence of unanticipated events.*

 

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

 

Our consolidated financial statement have beenprepared on the assumption that we will continue as a going concern, whichcontemplates the realization of assets and liquidation of liabilities in thenormal course of business.  The Report ofthe Independent Registered Public Accounting Firm included herein contains anexplanatory paragraph that raises substantial doubt about our ability tocontinue as a going concern.

 

As of December 31, 2004, we had cash and cashequivalents of $166,000, working capital of $1.7 million, assets totaling $6.1million, liabilities totaling $8.8 million, and incurred losses from continuingoperations of $2.0 million for the year then ended.  We expect to continue to expend cash andincur operating losses at the current net sales levels, but to a lesser extentthan the twelve months ended December 31, 2004 as certain operatingexpenses are expected to decline from 2004 levels. Our ability to generate cashand operating income is dependent on increasing our customer base to expand thepenetration of our product technology and the

 

26

----

 

realizationof our lower operating expense targets. It is uncertain whether we will be able to obtain a sufficient amount ofadditional capital, if needed, on acceptable terms, or at all.  Further, if future financing requirements aresatisfied through the issuance of equity or debt instruments, shareholders mayexperience additional dilution in terms of their percentage of ownership of oursecurities.  In the event that we areunable to obtain additional capital, our operations will be materiallynegatively impacted and we will be required to take actions that will harm ourbusiness, including potentially ceasing certain or all of our operations.

 

**The success of our new products depends upon customeracceptance of both the testing of semiconductor devices in strip form and theautomation of the back-end of the semiconductor manufacturing process.**

 

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

 

We introduced our Tapestry handling system in February 1999.  In May 2000, we introduced other SmartSolutions products, which provide additional process capability for handlingand testing semiconductor devices in strip form.  In July of 2003, we introduced ourTapestry SC, a second-generation system. In July of 2004, we introduced our Tapestry SC SmartMark, asecond-generation system. Our new products are attractive to customers only ifthe customers can see the value of automating the test and assembly portions oftheir semiconductor 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 of theiroperations.  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 industry business cyclescould have a negative impact on our operating results.**

 

Our business depends heavilyupon 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 our products.  Thus, a semiconductor industry downturn or slowdownsubstantially reduces our revenues and operating results and could hurt ourfinancial condition.  In the fourthquarter of 2000, the semiconductor capital equipment industry went into asevere downturn.  This downturnintensified and continued throughout most of 2003, which has adversely impactedour revenues, operating results and financial position over the last threeyears.  In late 2003, the marketstabilized through the first half of 2004. However, in mid-2004, the market again slowed and in some segmentscontracted up to 40% on a bookings level. Most industry forecasts expect a market stabilization in mid 2005;however, this cannot be predicted with great certainty or if the market willreturn to its historical growth rates.

 

**We have offered automation solutions and, unless weeffectively market our company as a provider of automation solutions, ourexpected 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.

 

We acquired an automation software business in June 1999and introduced our first suite of products to provide an automation solutionfor the testing portion of semiconductor manufacturing in May 2000.  The sales

 

27

----

 

fromthese operations make up less than 3%, 6% and 5% of net sales for the yearsended December 31, 2004, 2003 and 2002, respectively.  Our future success is dependent upon beingable 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 invest heavily in research and development effortsand our financial results depend upon the success of these efforts.**

 

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

 

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

 

**Our operating results often have large changes fromperiod to period, which may result in a decrease in our stock price.**

 

Our quarterly and annual operating results areaffected by a wide variety of factors that could adversely affect sales oroperating results or lead to significant variability in our operatingresults.  A variety of factors couldcause this variability, including the following:

 

•                  thecyclical nature of the semiconductor industry; 

•                  delaysin, or cancellation of, significant system purchases by customers; 

•                  delaysin the development, introduction and production of our products; 

•                  changesin the mix of our products and their gross margins; 

•                  newproduct introductions by competitors and competitive pricing pressures; 

•                  thetime required for us to adjust our operating expenses to respond to changes insales and market conditions; 

•                  thetiming of any future acquisitions and their effect on our financial results;

•                  componentshortages resulting in manufacturing delays; and 

•                  pressureby customers to reduce prices, shorten delivery times and extend payment terms.

 

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

 

**Our stock price is volatile and it may dropunexpectedly.**

 

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

 

•                  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;

 

28

----

 

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

•                  changesin the general economic conditions or developments in the semiconductorindustry which affect investorsconfidence;

•                  announcementsby us or our competitors of technological innovations or new or enhancedproducts and;

 

Additional factors, which may impact our results,include:

 

•                  Wedepend upon a few customers for the majority of our revenues and a reduction intheir orders could adversely affect us.

•                  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 or decreases in the trading price ofour common stock may adversely affect the ability to trade our shares.  In addition, these fluctuations couldadversely affect our ability to raise capital through future equity financing.

 

**ITEM 8.**** Consolidated Financial Statements andSupplementary Data**

 

See Consolidated Financial Statements includedelsewhere in this Annual Report on Form 10-K for the year ended December 31,2004.  The financial information byquarter is included in Item 7 of this Annual Report on Form 10-K.

 

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

 

This item is not applicable.

 

**ITEM 9A****.  Controls and Procedures**

 

(a)          Evaluation of disclosure controls and procedures.

 

Under the supervision and with the participation ofour management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, we evaluated the effectiveness of the design and operationof our disclosure controls and procedures (as defined in Rule 13a-15(e)under the Exchange Act) as of the end of period covered by this report.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that, as of theevaluation date, our disclosure controls and procedures are effective in timelyalerting them to the material information relating to us (or our consolidatedsubsidiaries) required to be included in our periodic SEC filings.

 

(b)         Changes in internal controls over financial reporting.

 

There were no significant changes made in ourinternal controls over financial reporting or, to our knowledge, in otherfactors that could materially affect these controls during the fourth quarter.

 

**ITEM 9B.**** Other Information**

 

This item is not applicable.

 

29

----

 

**PART III**

 

**ITEM 10.**** Directors and Executive Officers of theRegistrant**

 

The information required by this item concerningdirectors and executive officers is incorporated by reference from the ProxyStatement to be filed no later than 120 days following our December 31,2004 year-end.

 

**ITEM 11.****  Executive Compensation**

 

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

 

**ITEM 12. ****Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters**

 

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

 

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

 

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

 

**ITEM14. ****Principal Accountant Fee andServices**

 

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

 

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

 
| **(a)1.   Consolidated Financial Statements**                                                                                                           | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Index to  Consolidated Financial Statements                                                                                                                       |       |
| Reports of Independent Registered  Public Accounting Firm                                                                                                         |       |
| Report  of Independent Registered Public Accounting Firm                                                                                                          |       |
| Consolidated Balance  Sheets as of December 31, 2004, and December 31, 2003                                                                             |       |
| Consolidated  Statements of Operations for the Years Ended December 31, 2004,   December 31, 2003, and December 31, 2002                           |       |
| Consolidated  Statements of Changes in Stockholders’ Deficit for the Years Ended  December 31, 2004, December 31, 2003, and December 31, 2002 |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2004,  December 31, 2003, and December 31, 2002                            |       |
| Notes to  Consolidated Financial Statements                                                                                                                       |       |

 

**(a)3.  Exhibits**

 
| 3A.  |   | Bylaws of MCT. (7)                                                                                                        |
|------|--------|---------------------------------------------------------------------------------------------------------------------------|
| 3B.  |   | Articles of Incorporation of MCT. (7)                                                                                     |
| 3C.  |   | Articles of Amendment dated March 14, 2002 (11).                                                                     |
| 4.   |   | Specimen Certificate of Common stock. (1)                                                                                 |
| 10A. |   | Form of Non-Competition Agreement between MCT and certain senior  executive officers. (1)                                 |
| 10B. |   | Stock Purchase Agreement and Commission Agreement between MCT and  Cardine & Levy, dated September 25, 1995. (3) |
| 10C. |   | Employment Agreement with Roger E. Gower dated March 28, 1995.  (2)                                                  |
| 10D. |   | Employment Agreement with Dennis L. Nelson dated May 30, 1996. (5)                                                        |
| 10E  |   | Offer Letter to Thomas P. Maun dated July 15, 2002. (14)                                                             |
| 10F. |   | Stock Option Plan for Outside Directors as amended through April 10,  2001. (10)                                     |
| 10G. |   | Incentive Stock Option Plan as amended through April 10, 2001.  (10)                                                 |

 

30

----

 
| 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)                                                                                                                                                                                                                                                 |
| 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) (16) |
| 10II |   | Common Stock Purchase Warrant with Laurus Master Fund, Ltd. dated January 28,  2005.(16)                                                                                                                                                                                                          |
| 10JJ |   | Offer letter between Micro Component Technology, Inc. and Christopher  Buckley dated August 16, 2004 (filed herewith).                                                                                                                                                                            |
| 10KK |   | Second Agreement for Payment of Interest with Stock, effective January 31,  2005 (17).                                                                                                                                                                                                            |
| 21.  |   | Revised Listing of Subsidiaries of Micro Component Technology, Inc.  (11).                                                                                                                                                                                                                             |
| 23.1 |   | Consent of Virchow, Krause & Company, LLP (filed herewith).                                                                                                                                                                                                                                        |
| 23.2 |   | Consent of Deloitte & Touche 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 tothe registration statement on Form S-1 filed by MCT on August 24, 1993, asamended, SEC File Number 33-67846.

 

(2)                                  Incorporated by reference to the report onForm 10-Q filed by MCT for the quarter ended March 25, 1995, SEC File No.0-22384.

 

(3)                                  Incorporatedby 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 tothe Post-Effective Amendment to Registration Statement on Form S-8 filed by MCTon July 15, 1996, as amended, SEC File No. 33-85766.

 

(5)                                  Incorporated by reference to the exhibits tothe 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 onForm 10-Q filed by MCT for the quarter ended September 28, 1996, SEC FileNo. 0-22384.

 

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

 

31

----

 

(8)                                  Incorporated by reference to the RegistrationStatement on Form S-1, as amended, filed by Aseco Corporation on January 29,1993, SEC File No. 33-57644.

 

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

 

(10)                            Incorporated by reference to the definitiveproxy materials for the 2001 Annual Stockholders Meeting, filed April 30,2001.

 

(11)                            Incorporated by reference to the report onForm 10-K filed by MCT for the period ended December 31, 2001, SEC FileNo. 0-22384.

 

(12)                            Incorporated by reference to the report onForm 10-Q filed by MCT for the quarterly period ended June 28, 2003, SECFile No. 0-22384.

 

(13)                            Incorporated by reference to the report onForm 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 onForm 10-K filed by MCT for the period ended December 31, 2002, SEC FileNo. 0-22384.

 

(15)                            Incorporated by reference to the report on Form10-K filed by MCT for the period ended December 31, 2003, SEC File No.0-22384.

 

(16)                            Incorporatedby reference to the report on Form 8-K filed by MCT on February 3, 2005.

 

(17)                            Incorporatedby reference to the report on Form 8-K filed by MCT on February 25, 2005.

 

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

 

On October 27, 2004, we issued a pressrelease disclosing financial information regarding the quarter ended September 25,2004 for which a Form 8-K was filed on November 2, 2004.

 

32

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

 

**Index to Consolidated Financial Statements**

 
| Index to  Consolidated Financial Statements                                                                                                                       |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent Registered  Public Accounting Firm                                                                                                          |   |
| Report  of Independent Registered Public Accounting Firm                                                                                                          |   |
| Consolidated Balance  Sheets as of December 31, 2004, and December 31, 2003                                                                             |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2004,  December 31, 2003, and December 31, 2002                            |   |
| Consolidated  Statements of Changes in Stockholders’ Deficit for the Years Ended  December 31, 2004, December 31, 2003, and December 31, 2002 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2004,  December 31, 2003, and December 31, 2002                            |   |
| Notes to  Consolidated Financial Statements                                                                                                                       |   |

 

F-1

----

 

##### **REPORT OFINDEPENDENT****REGSITERED PUBLIC ACCOUNTING FIRM**

 

Tothe Audit Committee, Stockholders and Board of Directors of

MicroComponent Technology, Inc. and Subsidiaries

St.Paul, MN

 

 

Wehave audited the accompanying consolidated balance sheets of Micro ComponentTechnology, Inc. and Subsidiaries as of December 31, 2004 and 2003, andthe related consolidated statements of operations, stockholders’ deficit andcash flows for the years then ended. These consolidated financial statements are the responsibility of thecompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements based onour audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts and disclosuresin the consolidated financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management as well as evaluating the overallconsolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Micro ComponentTechnology, Inc. and Subsidiaries as of December 31, 2004 and 2003 and theresults of their operations and their cash flows for the years then ended, inconformity with U.S. generally accepted accounting principles.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, thecompany has suffered recurring losses from operations and has a stockholders’deficit.  These factors raise substantialdoubt about its ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note 1.  Theconsolidated financial statements do not include any adjustments that mightresult from the outcome of this uncertainty.

 

 

|   | /s/ Virchow, Krause & Company, LLP |
|--------|----------------------------------------|

 

Minneapolis,Minnesota

February 4,2005

(Exceptfor Note 13, as to which the date is February 25, 2005)

 

F-2

----

 

##### **REPORT OF INDEPENDENT REGSITERED PUBLIC ACCOUNTING FIRM**

#####  

##### Boardof Directors and Stockholders

##### MicroComponent Technology, Inc.

#####  

Wehave audited the accompanying consolidated statements of operations,stockholders’ deficit and cash flows for Micro Component Technology, Inc. andsubsidiaries (the Company) for the year ended December 31, 2002.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

Weconducted our audit in accordance with standards of the Public CompanyAccounting Oversight Board (United States of America). 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 includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial aspects, the results of its operations and its cash flows for the yearended December 31, 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 1 to the financial statements, the Company’s recurring lossesfrom operations and stockholders’ deficit raises substantial doubt about itsability to continue as a going concern. Management’s plans concerning these matters are also described in Note.1.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|

 

 

Minneapolis,Minnesota

February 17,2003

(March 26,2003 as to the first paragraph of Note 4)

 

F-3

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

(in thousands, except share andper share amounts)

 
| ** **                                                                                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                           |       |                        |       |                        |       |
| Current  assets:                                                                                     |       |                        |       |                        |       |
| Cash and  cash equivalents                                                                           |       | $                           | 166        |                        | $          | 1,078 |   |
| Accounts  receivable, less allowance for doubtful accounts of $215 and $303,  respectively           |       | 2,035                       |       | 1,539                       |       |
| Inventories                                                                                          |       | 3,057                       |       | 3,413                       |       |
| Other                                                                                                |       | 189                         |       | 273                         |       |
| Total  current assets                                                                                |       | 5,447                       |       | 6,303                       |       |
|                                                                                                 |       |                        |       |                        |       |
| Property,  plant and equipment, net                                                                  |       | 270                         |       | 336                         |       |
| Debt  issuance costs, net of accumulated amortization of $807 and $350,  respectively                |       | 371                         |       | 499                         |       |
| Other assets                                                                                         |       | 34                          |       | 56                          |       |
| Total assets                                                                                         |       | $                           | 6,122      |                        | $          | 7,194 |   |
|                                                                                                 |       |                        |       |                        |       |
| **Liabilities  and Stockholders’ Deficit**                                                      |       |                        |       |                        |       |
| Current  liabilities:                                                                                |       |                        |       |                        |       |
| Current  portion of long-term debt                                                                   |       | $                           | 67         |                        | $          | — |   |
| Bank line of  credit                                                                                 |       | 1,583                       |       | 348                         |       |
| Accounts  payable                                                                                    |       | 967                         |       | 1,518                       |       |
| Accrued  compensation                                                                                |       | 430                         |       | 469                         |       |
| Accrued  interest                                                                                    |       | 56                          |       | 370                         |       |
| Accrued  warranty                                                                                    |       | 162                         |       | 181                         |       |
| Customer  prepayments and unearned service revenue                                                   |       | 237                         |       | 1,410                       |       |
| Deferred  revenue in excess of costs incurred                                                        |       | —                      |       | 16                          |       |
| Other  accrued liabilities                                                                           |       | 208                         |       | 373                         |       |
| Total  current liabilities                                                                           |       | 3,710                       |       | 4,685                       |       |
|                                                                                                 |       |                        |       |                        |       |
| Long-term  portion of accounts payable                                                               |       | —                      |       | 195                         |       |
| Long-term  convertible note                                                                          |       | 1,458                       |       | —                      |       |
| 10% senior  subordinated convertible debt                                                            |       | 3,630                       |       | 7,340                       |       |
|                                                                                                 |       |                        |       |                        |       |
| Commitments  and contingencies (Note 10)                                                             |       |                        |       |                        |       |
|                                                                                                 |       |                        |       |                        |       |
| Stockholders’  deficit:                                                                         |       |                        |       |                        |       |
| Preferred  stock, $.01 par value, 1,000,000 authorized, none issued and outstanding                  |       |                        |       |                        |       |
| Common  stock, $.01 par value, 40,000,000 authorized 25,566,511 and 21,145,300  issued, respectively |       | 256                         |       | 212                         |       |
| Additional  paid-in capital                                                                          |       | 97,022                      |       | 92,668                      |       |
| Cumulative  other comprehensive loss                                                                 |       | (69                         | )          | (69                         | )          |
| Accumulated  deficit                                                                                 |       | (99,885                     | )          | (97,837                     | )          |
| Total  stockholders’ deficit                                                                    |       | (2,676                      | )          | (5,026                      | )          |
| Total  liabilities and stockholders’ deficit                                                    |       | $                           | 6,122      |                        | $          | 7,194 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-4

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per sharedata)

 
| ** **                                                         | ** ** | **Years Ended**             | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
|                                                               |       |                        |       |   |   |   |   |
| Net sales                                                          |       | $                           | 14,602     |   | $ | 11,123 |   | $ | 12,211 |   |
| Cost of  sales:                                                    |       |                        |       |   |   |   |   |
| Product                                                            |       | 7,286                       |       | 6,295 |   | 7,604 |   |
| Inventory  revaluation                                             |       | —                      |       | — |   | 913 |   |
| Total cost  of sales                                               |       | 7,286                       |       | 6,295 |   | 8,517 |   |
| Gross profit                                                       |       | 7,316                       |       | 4,828 |   | 3,694 |   |
|                                                               |       |                        |       |   |   |   |   |
| Operating expenses:                                                |       |                        |       |   |   |   |   |
| Selling,  general, and administrative                              |       | 5,596                       |       | 4,872 |   | 8,556 |   |
| Research and  development                                          |       | 2,841                       |       | 2,351 |   | 4,214 |   |
| Restructuring  charge                                              |       | 35                          |       | 266 |   | 207 |   |
| Total  operating expenses                                          |       | 8,472                       |       | 7,489 |   | 12,977 |   |
|                                                               |       |                        |       |   |   |   |   |
| Loss from operations                                               |       | (1,156                      | )          | (2,661 | ) | (9,283 | ) |
|                                                               |       |                        |       |   |   |   |   |
| Other income (expense):                                            |       |                        |       |   |   |   |   |
| Interest  income                                                   |       | 6                           |       | 5 |   | 102 |   |
| Interest  expense                                                  |       | (868                        | )          | (1,195 | ) | (1,175 | ) |
| Gain (loss)  on sale of property and equipment                     |       | 14                          |       | 209 |   | (17 | ) |
| Other income  (expense)                                            |       | (44                         | )          | (26 | ) | 43 |   |
|                                                               |       |                        |       |   |   |   |   |
| Loss before  income taxes                                          |       | (2,048                      | )          | (3,668 | ) | (10,330 | ) |
| Income tax  provision                                              |       | —                      |       | — |   | — |   |
|                                                               |       |                        |       |   |   |   |   |
| Net loss                                                           |       | $                           | (2,048     | ) | $ | (3,668 | ) | $ | (10,330 | ) |
|                                                               |       |                        |       |   |   |   |   |
| Net loss per  common share:                                        |       |                        |       |   |   |   |   |
| Basic and  diluted                                                 |       | $                           | (0.08      | ) | $ | (0.21 | ) | $ | (0.73 | ) |
|                                                               |       |                        |       |   |   |   |   |
| Weighted  average common and common equivalent shares outstanding: |       |                        |       |   |   |   |   |
| Basic                                                              |       | 25,013                      |       | 17,606 |   | 14,125 |   |
| Diluted                                                            |       | 25,013                      |       | 17,606 |   | 14,125 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

F-5

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

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

(in thousands, except share data)

 
| ** **                                                                    | ** ** | **Common Stock** | ** ** | **Comprehensive  Loss** | ** ** | **Accumulated  Deficit** | ** ** | **Cumulative  Other  Comprehesive  Loss** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|--------------------------|------------|-------------------------------------------|------------|
| ** **                                                                    | ** ** | ** **       | ** ** | **Additional**          |
| ** **                                                                    | ** ** | **Par**          | ** ** | **Paid-in**             |
| **Shares**                                                                    | ** ** | **Value**        | ** ** | **Capital**             |
|                                                                          |       |             |       |                    |       |                     |       |                                      |       |   |   |   |   |
| Balance at December 31,  2001                                            |       | 14,074,365       |       | $                       | 141        |                     | $          | 88,144                                    |       |   |   | $ | (83,839 | ) | $ | (69 | ) |
|                                                                          |       |             |       |                    |       |                     |       |                                      |       |   |   |   |   |
| Net loss                                                                      |       |             |       |                    |       |                     |       | $                                         | (10,330    | ) | (10,330 | ) |   |   |
| Shares  issued on exercise of options, net                                    |       | 49,176           |       | 1                       |       | 81                       |       |                                      |       |   |   |   |   |
| Shares  issued through employee stock purchase plan                           |       | 28,979           |       | —                  |       | 77                       |       |                                      |       |   |   |   |   |
| Comprehensive  loss                                                           |       |             |       |                    |       |                     |       | $                                         | (10,330    | ) |   |   |   |   |
|                                                                          |       |             |       |                    |       |                     |       |                                      |       |   |   |   |   |
| Balance at December 31,  2002                                            |       | 14,152,520       |       | $                       | 142        |                     | $          | 88,302                                    |       |   |   | $ | (94,169 | ) | $ | (69 | ) |
|                                                                          |       |             |       |                    |       |                     |       |                                      |       |   |   |   |   |
| Net loss                                                                      |       |             |       |                    |       |                     |       | $                                         | (3,668     | ) | (3,668 | ) |   |   |
| Shares  issued in private placement, net of offering costs                    |       | 3,166,869        |       | 32                      |       | 1,055                    |       |                                      |       |   |   |   |   |
| Shares  issued on conversion of 10% senior subordinated convertible debt, net |       | 2,660,081        |       | 27                      |       | 2,634                    |       |                                      |       |   |   |   |   |
| Shares issued  in lieu of interest                                            |       | 1,007,830        |       | 10                      |       | 543                      |       |                                      |       |   |   |   |   |
| Shares  issued on exercise of options, net                                    |       | 150,000          |       | 1                       |       | 181                      |       |                                      |       |   |   |   |   |
| Shares  issued through employee stock purchase plan                           |       | 8,000            |       | —                  |       | 3                        |       |                                      |       |   |   |   |   |
| Comprehensive  loss                                                           |       |             |       |                    |       |                     |       | $                                         | (3,668     | ) |   |   |   |   |
|                                                                          |       |             |       |                    |       |                     |       |                                      |       |   |   |   |   |
| Balance at December 31,  2003                                            |       | 21,145,300       |       | $                       | 212        |                     | $          | 92,668                                    |       |   |   | $ | (97,837 | ) | $ | (69 | ) |
| Net loss                                                                      |       |             |       |                    |       |                     |       | $                                         | (2,048     | ) | (2,048 | ) |   |   |
| Shares  issued on conversion of 10% senior subordinated convertible debt, net |       | 3,710,000        |       | 37                      |       | 3,673                    |       |                                      |       |   |   |   |   |
| Shares  issued in lieu of interest                                            |       | 654,260          |       | 7                       |       | 659                      |       |                                      |       |   |   |   |   |
| Shares  issued on exercise of options / warrants, net                         |       | 56,951           |       | —                  |       | 22                       |       |                                      |       |   |   |   |   |
| Comprehensive  loss                                                           |       |             |       |                    |       |                     |       | $                                         | (2,048     | ) |   |   |   |   |
|                                                                          |       |             |       |                    |       |                     |       |                                      |       |   |   |   |   |
| Balance at December 31,  2004                                            |       | 25,566,511       |       | $                       | 256        |                     | $          | 97,022                                    |       |   |   | $ | (99,885 | ) | $ | (69 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

F-6

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

###### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
| ** **                                                                   | ** ** | **Years Ended**             | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** | **December 31,  2002** | ** ** |
| Cash flows  from operating activities:                                       |       |                        |       |   |   |   |   |
| Net loss                                                                     |       | $                           | (2,048     | ) | $ | (3,668 | ) | $ | (10,330 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                        |       |   |   |   |   |
| Depreciation                                                                 |       | 450                         |       | 482 |   | 403 |   |
| Amortization                                                                 |       | 267                         |       | 180 |   | 167 |   |
| Inventory  revaluation                                                       |       | —                      |       | — |   | 913 |   |
| (Gain) loss  on disposal of property and equipment                           |       | 14                          |       | (209 | ) | 17 |   |
| Changes in  operating assets and liabilities:                                |       |                        |       |   |   |   |   |
| Accounts  receivable                                                         |       | (496                        | )          | (753 | ) | 2,350 |   |
| Inventories                                                                  |       | 107                         |       | 250 |   | 321 |   |
| Other assets                                                                 |       | 106                         |       | (56 | ) | 39 |   |
| Accounts  payable                                                            |       | (746                        | )          | 703 |   | (526 | ) |
| Accrued  restructuring costs                                                 |       | —                      |       | (153 | ) | (762 | ) |
| Other  accrued liabilities                                                   |       | (1,084                      | )          | 1,058 |   | (2,084 | ) |
| Net cash  used in operating activities                                       |       | (3,430                      | )          | (2,166 | ) | (9,492 | ) |
|                                                                         |       |                        |       |   |   |   |   |
| Cash flows  from investing activities:                                       |       |                        |       |   |   |   |   |
| Additions to  property, plant and equipment                                  |       | (149                        | )          | (111 | ) | (184 | ) |
| Proceeds  from disposition of property                                       |       |                        |       | 253 |   | 37 |   |
| Net cash  used in investing activities                                       |       | (149                        | )          | 142 |   | (147 | ) |
|                                                                         |       |                        |       |   |   |   |   |
| Cash flows  from financing activities:                                       |       |                        |       |   |   |   |   |
| Payments on  long-term debt                                                  |       | (267                        | )          | (29 | ) | (46 | ) |
| Payments on  bank line of credit                                             |       | (348                        | )          | — |   | — |   |
| Proceeds  from bank line of credit                                           |       |                        |       | 348 |   | — |   |
| Proceeds  from institutional line of credit, net of discounts                |       | 1,661                       |       | — |   | — |   |
| Issuance on  long-term convertible note, net of debt issue costs             |       | 1,657                       |       | — |   | — |   |
| Proceeds  from issuance of stock, net of stock issuance costs                |       | (36                         | )          | 1,223 |   | 159 |   |
| Net cash  provided by financing activities                                   |       | 2,667                       |       | 1,542 |   | 113 |   |
|                                                                         |       |                        |       |   |   |   |   |
| Net decrease  in cash and cash equivalents                                   |       | (912                        | )          | (482 | ) | (9,526 | ) |
|                                                                         |       |                        |       |   |   |   |   |
| Cash and  cash equivalents at beginning of period                            |       | 1,078                       |       | 1,560 |   | 11,086 |   |
|                                                                         |       |                        |       |   |   |   |   |
| Cash and  cash equivalents at end of period                                  |       | $                           | 166        |   | $ | 1,078 |   | $ | 1,560 |   |
|                                                                         |       |                        |       |   |   |   |   |
| Supplemental  disclosure:                                                    |       |                        |       |   |   |   |   |
| Non-cash  investing and financing activities:                                |       |                        |       |   |   |   |   |
| Stock issued  in lieu of interest                                            |       | $                           | 642        |   | $ | 553 |   | $ | — |   |
| Stock issued  in conversion of 10% senior subordinated debt                  |       | 3,710                       |       | 2,661 |   | — |   |
| Cash paid  for interest                                                      |       | $                           | 228        |   | $ | 591 |   | $ | 527 |   |

 

See Notes to Consolidated FinancialStatements.

 

F-7

----

 

**MICROCOMPONENT TECHNOLOGY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANTACCOUNTING POLICIES**

 

*Business*

 

We design, manufacture, market and service automatedtest handling equipment for the semiconductor industry.  Our handlers are designed to handle mostsemiconductor or integrated circuit device packages currently in production.  We operate in one business segment in threegeographic locations.

 

A network of offices and representatives supportsour customers across North America, Europe and Asia.  Our company was formed in 1972 and isheadquartered in St. Paul, Minnesota.

 

*Basis of Presentation*

 

The consolidated financial statements include theaccounts of the parent company and our subsidiaries after elimination of allsignificant intercompany balances and transactions.  All significant subsidiaries are 100% owned.

 

Our consolidated financial statements have beenprepared on the assumption that we will continue as a going concern, whichcontemplates the realization of assets and liquidation of liabilities in thenormal course of business.  Theindependent registered public accounting firm report included herein containsan explanatory paragraph that raises substantial doubt about our ability tocontinue as a going concern.  Thefinancial statements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the outcome of thisuncertainty.  In their reportaccompanying the consolidated financial statements, the predecessor independentauditors expressed an opinion that the Company’s recurring losses fromoperations and stockholders deficit raised substantial doubt about our abilityto continue as a going concern at the time of issuing our consolidatedfinancial statements as of and for the year ended December 31, 2002.  During 2003 and 2004, the Company continuedto incur net losses and negative cash flows from operating activities as in2002, and has an accumulated deficit of $2.7 million at December 31, 2004.

 

As of December 31, 2004, we had cash and cashequivalents of $166,000, working capital of $1.7 million, assets totaling $6.1million, liabilities totaling $8.8 million and incurred losses from continuingoperations of $2.0 million for the year then ended.  We expect to continue to expend cash andincur operating losses at the current net sales levels, but to a lesser extentthan the twelve months ended December 31, 2004 as certain operatingexpenses are expected to decline from 2004 levels. Our ability to generate cashand operating income is dependent on increasing our customer base to expand thepenetration of our product technology and the realization of our loweroperating expense targets.  In March of2003, the Company raised approximately $1.1 million pursuant to a privateequity placement with a group of accredited investors.  In June of 2003, the Company completed aone-year $2.5 million working capital line of credit agreement with abank.  In July of 2003, the Companycompleted the restructuring of its 10% Senior Subordinated Convertible Notes,wherein 92.9% of the investors agreed to take stock in lieu of cash for theirnext four semi-annual interest payments beginning June 30, 2003 through December 31,2004.  In July of 2003, the Companycompleted negotiations with the majority of our vendors to restructure theamounts owed to them wherein we would make four to eight equal quarterlypayments beginning in July of 2003 in satisfaction of their totalobligation. On March 9, 2004 we completed a $5.0 million secured financingtransaction with an institutional lender. Under the terms of the three-year agreement, we put in place a $3.0million secured working capital line of credit and a $2.0 long-term convertiblenote.  On January 28, 2005, wecompleted an amendment to the financing agreement with the lender whereby ourpayments under the long-term convertible notes have been deferred for one year,resulting in $800,000 of principal payments being rescheduled

 

F-8

----

 

tobegin on February 1, 2006.  Thesepayments were previously scheduled to be paid in 2005.  The maturity date of the long-tem convertiblenote has also been extended for one year from March 2007 to March 2008.  As a part of this amendment the fixedconversion prices related to both the $3.0 million secured working capital lineof credit and the $2.0 long-term convertible note were reduced to $0.60 and$0.56, respectively.  On February 25,2005, we completed a new restructuring agreement with our 10% SeniorConvertible Noteholders. Under the agreement, the Noteholders representing $2.9million in debt, or 80% of the debt existing as of December 31, 2004, haveagreed to continue to accept stock in lieu of cash for their interest paymentsfor the remaining term of the notes through December 2006.  As part of this agreement, the conversionprice of the underlying notes has been reduced from $1.00 per share to $0.85per share for the remaining term of the notes through December 2006.  This results in approximately $145,000 ofinterest expense scheduled to be paid in 2005 in cash to be satisfied throughthe issuance of shares of our common stock.

 

The Company believes that the combination of reducedspending, increasing our customer base to further enable the penetration of ourproduct technology, the amendment of our existing credit facility and theamendment of our agreement with the holders of our 10% Senior ConvertibleNotes, each discussed in Note 13, contained elsewhere herein, will provide thecash necessary to meet our operating, working capital and capital resourceobligations through all of 2005.

 

*Use of Estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires that we make estimates and assumptions that affect amountsreported therein.  Due to the inherentuncertainty involved in making estimates, actual results reported in futureperiods might differ from those estimates.

 

*Revenue Recognition*

 

Under SAB 104, our revenue is recognized uponshipment, as our terms are FOB shipping point, for established products thathave previously satisfied existing customer performance specifications and thatprovide for full payment tied to shipment. Revenue for products that have not previously satisfied customerperformance specifications or from sales where all or a portion of customerpayment is based upon acceptance are only recognized upon customeracceptance.  The related inventory costsare offset against the deferred revenue and reported as “deferred revenue inexcess of costs incurred” in the consolidated balance sheet.  Product warranty and installation costs areaccrued in the period sales are recognized. Installation services are considered to be perfunctory as defined underSAB 104 and average less than 5% of the contract price.  Revenue related to spare parts is recognizedupon shipment.  Revenue related tomaintenance and service contracts are deferred and amortized to earnings on astraight-line basis over the life of the service contract.  Custom integration software revenue isrecognized on 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.

 

*Research and Development Expenses*

 

Research and development expenses for new productdevelopment are charged to expense as incurred.

 

*Financial Instruments*

 

The carrying amounts for all financial instrumentsapproximates fair value.  The carryingamounts for cash and cash equivalents, accounts receivable, account payable andaccrued liabilities approximates fair value because of the short maturity ofthese instruments.  The fair value ofcapital lease obligations, note payable and long-term debt approximates thecarrying amounts based upon the Company’s expected borrowing rate for debt withsimilar remaining maturities and comparable risk.

 

F-9

----

 

*Cash and Cash Equivalents*

 

We consider all highly liquid investments purchasedwith original maturities of 90 days or less to be cash equivalents.  We place our temporary cash investments withhigh credit quality financial institutions. At times such investments may be in excess of the Federal DepositInsurance Corporation (FDIC) insurance limit.

 

*Accounts Receivable*

 

We review customers’ credit history before extendingunsecured credit and establish an allowance for doubtful accounts based uponfactors surrounding the credit risk of specific customers and otherinformation. Invoice terms can vary from net 30 days, to percentage amounts ofthe total customer purchase order tied to acceptance criteria.  The Company does not accrue interest on pastdue accounts receivable.  The Companywrites off receivables when they are deemed uncollectible after all collectionattempts have failed.  Accountsreceivable are shown net of an allowance for doubtful accounts of $215,000 and$303,000 at December 31, 2004 and 2003, respectively.

 

*Inventories*

 

Inventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out(“FIFO”) method.  Provisions to reduceinventories to the lower of cost or market is made based on a review of excessand obsolete inventories, estimates of future sales, examination of historicalconsumption rates and the related value of component parts.

 

*Property, Plant and Equipment*

 

Property, plant and equipment are stated atcost.  Depreciation is provided by thestraight-line method over the estimated useful lives of the assets forfinancial reporting and accelerated methods for tax purposes.  Leasehold improvements are amortized over theshorter of the estimated useful life or the lease term for financial reportingpurposes.  Estimated lives used incomputing book depreciation are as follows:

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

 

*Impairment of Long-Lived Assets*

 

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

 

*Product Warranty*

 

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

 

F-10

----

 

*Income Taxes*

 

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

 

*Stock-Based Compensation*

 

We account for stock-based transactions under SFASNo. 123*, Accounting for Stock-BasedCompensation*.  As permitted bySFAS No. 123, we have elected to continue following the guidance of APB OpinionNo. 25 (as interpreted by FIN 44) for measurement and recognition ofstock-based transactions with employees and non-employee directors.  Because stock options have been granted atexercise prices at least equal to the fair market value of the stock at thegrant date, no compensation cost has been recognized for stock options issuedto employees and non-employee directors under the stock option plans.  Stock-based transactions with non-employeesare accounted for in accordance with SFAS No. 123 and related interpretations.

 

If compensation cost for our stock option andemployee stock purchase plans had been determined based on the fair value atthe grant dates, consistent with the method provided in SFAS No. 148 and SFASNo. 123, our net loss and net loss per share would have been as follows:

 
| ** **                          | ** ** | **Years Ended**   | ** ** |
|-------------------------------------|------------|-------------------|------------|
| ** **                          | ** ** | **Dec. 31  2004** | ** ** | **Dec 31  2003** | ** ** | **Dec. 31  2002** | ** ** |
| Net loss, in  thousands:            |       |              |       |   |   |   |   |
| As reported                         |       | $                 | (2,048     | ) | $ | (3,668 | ) | $ | (10,330 | ) |
| Fair value  compensation expense    |       | (1,581            | )          | (985 | ) | (1,147 | ) |
| Pro forma                           |       | $                 | (3,629     | ) | $ | (4,653 | ) | $ | (11,477 | ) |
|                                |       |              |       |   |   |   |   |
| Net loss per  share – basic:   |       |              |       |   |   |   |   |
| As reported                         |       | $                 | (0.08      | ) | $ | (0.21 | ) | $ | (0.73 | ) |
| Fair value  compensation expense    |       | (0.06             | )          | (0.06 | ) | (0.08 | ) |
| Pro forma                           |       | $                 | (0.14      | ) | $ | (0.27 | ) | $ | (0.81 | ) |
|                                |       |              |       |   |   |   |   |
| Net loss per  share – diluted: |       |              |       |   |   |   |   |
| As reported                         |       | $                 | (0.08      | ) | $ | (0.21 | ) | $ | (0.73 | ) |
| Fair value  compensation expense    |       | (0.06             | )          | (0.06 | ) | (0.08 | ) |
| Pro forma                           |       | $                 | (0.14      | ) | $ | (0.27 | ) | $ | (0.81 | ) |
|                                |       |              |       |   |   |   |   |
| Stock Based  Compensation:          |       |              |       |   |   |   |   |
| As reported                         |       | $                 | —     |   | $ | — |   | $ | — |   |
| Fair value  compensation expense    |       | (1,581            | )          | (985 | ) | (1,147 | ) |
| Pro forma                           |       | $                 | (1,581     | ) | $ | (985 | ) | $ | (1,147 | ) |

 

In December of 2004, the Compenation Committeeof the Board of Directors approved the acceleration of the vesting of all ofthe then outstanding options under all plans. At the time of this approval all option exercise prices exceeded thepublic market price of the underlying common shares.  This action resulted in 1,029,500 sharesbeing accelerated with respect to their original vesting dates.  This acceleration resulted in an additional$737,000 of net compensation expense being included in the above tables for theyear ended December 31, 2004.

 

F-11

----

 

The fair value of options granted under the stockoption and employee stock purchase plans for the years ended December 31,2004, 2003, and 2002 was estimated on the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions andresults:

 
| ** **                               | ** ** | **Years Ended**    |
|------------------------------------------|------------|--------------------|
| ** **                               | ** ** | **Dec. 31,  2004** | ** ** | **Dec. 31,  2003** | ** ** | **Dec. 31,  2002** | ** ** |
|                                     |       |               |   |   |   |   |   |
| Dividend  yield                          |       | 0.00               | % | 0.00 | % | 0.00 | % |
| Expected  volatility                     |       | 93.53              | % | 139.76 | % | 88.17 | % |
| Risk-free  interest rate                 |       | 3.41               | % | 2.52 | % | 3.87 | % |
| Expected  life of options                |       | 3.5 years          |   | 3.5 years |   | 3.5 years |   |
| Fair value  per share of options granted |       | $                  | 0.87 |   | $ | 0.70 |   | $ | 1.28 |   |
|                                          |            |                    |  |  |  |  |  |  |  |  |

 

*Foreign Currency Translation*

 

Assets and liabilities of the foreign subsidiary aretranslated to U.S. dollars at year-end rates, and the statements of operationsare translated at average exchange rates during the year.  Translation adjustments arising from thetranslation of the foreign affiliates’ net assets into U.S. dollars wererecorded 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 localcurrency.  All translation adjustmentsare now recorded in the consolidated statements of operations.

 

*Reclassifications*

 

Certain amounts previously reported in the 2002consolidated financial statements have been reclassified to conform to the 2004and 2003 presentations.  Thesereclassifications had no effect in previously reported net loss or stockholders’deficit.

 

*New Accounting Standards*

 

In December of 2003 the Financial AccountingStandards Board (FASB) issued*****Interpretation No. 46 –(Revised December 2003),Consolidation of Variable Interest Entities, an****Interpretation of ARB No. 51 (FIN46R)*.  This standard replaces FIN 46, *“Consolidation of Variable Interest Entities”*that was issued on January 2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN 46Raddresses the consolidation of business enterprises of variable interestentities. (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities from its requirements and provides forspecial effective dates for entities that have fully or partially applied FIN46 prior to issuance of FIN 46R. Otherwise, application of FIN 46R is required in financial statements ofpublic entities that have interest in structures commonly referred to asspecial purpose entities for periods ending after December 15, 2003.  FIN 46R had no effect on our financialstatements for the year ended December 31, 2004, as we had no interests inspecial purpose entities.  Application byus for all other types of VIEs is required in financial statements for periodsending no later than the quarter ended in March of 2005.  We do not expect the adoption of FIN 46R tohave a material effect on our financial statements.

 

In November 2004, FASB issued SFAS No. 151 *Inventory Costs* amends the guidance in ARBNo. 43, Chapter 4 *Inventory Pricing*,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). Paragraph 5 pf ARB 43,Chapter 4, previously stated that under some circumstances, items such as idlefacility expense, excessive spoilage, double freight, and rehandling costs maybe so abnormal as to require treatment as current period charges.” SFAS No. 151requires that those items be recognized as current-period charges regardless ofwhether they meet the criterion of “so abnormal.” In addition, SFAS

 

F-12

----

 

No,151 requires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFAS No. 151 shall be effective for inventory costs incurred during fiscalyears beginning after June 15, 2005. Earlier application is permitted forinventory costs incurred during fiscal years beginning after the date SFAS No.151 was issued. SFAS No. 151 shall be applied prospectively.  We do notexpect the adoption of SFAS No. 151 to have a material effect on our financialstatements.

 

In December 2004, FASB issued SFAS No. 153 *Exchanges of Nonmonetary Assets* amends APBOpinion No. 29, *Accounting for NonmonetaryTransactions*. APB No. 29 is based on the principle that exchanges ofnonmonetary assets should be measured based on the fair value of the assetsexchanged. The guidance in that Opinion, however, included certain exceptionsto that principle. SFAS No. 153 amends APB No. 29 to eliminate the exceptionfor nonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that do not havecommercial substance. A nonmonetary exchange has commercial substance if thefuture cash flows of the entity are expected to change significantly as aresult of the exchange.  SFAS No. 153 shall be effective for nonmonetaryasset exchanges occurring in fiscal periods beginning after June 15, 2005.Earlier application is permitted for nonmonetary asset exchanges occurring infiscal periods beginning after the date SFAS No. 153 was issued. SFAS No. 153 shallbe applied prospectively.  We do not expect the adoption of SFAS No. 153to have a material effect on our financial statements.

 

In December 2004, FASB issued SFAS No. 123(revised 2004), *Share-Based Payment*,that focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions.  Thisstatement replaces SFAS No. 123, *Accountingfor Stock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*. Beginning with our quarterly period that begins June 26, 2006, wewill be required to expense the fair value of employee stock options andsimilar awards.  As a public company, we are allowed to select from twoalternative transition methods, each having different reportingimplications.  The impact of SFAS No. 123R has not been determined at thistime.

 

**NOTE 2 - LOSS PER COMMON SHARE**

 

Loss per common share is computed in accordance withSFAS No. 128, *Earnings Per Share*.  Basic loss per share is computed using theweighted average number of common shares outstanding during each period.  Diluted earnings per share include thedilutive effect of common shares potentially issuable upon the exercise ofstock options, warrants outstanding and the conversion of convertibledebt.  The following table reconciles thedenominators used in computing basic and diluted loss per share for the periodsreported (in thousands):

 
| ** **                                     | ** ** | **Years Ended**                | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **December 31,  2004(1)** | ** ** | **December 31,  2003(1)** | ** ** | **December 31,  2002(1)** | ** ** |
|                                           |       |                           |       |   |   |   |   |
| Weighted  average common shares outstanding    |       | 25,013                         |       | 17,606 |   | 14,125 |   |
| Effect of  dilutive stock options and warrants |       | —                         |       | — |   | — |   |
| Effect of  convertible debt                    |       | —                         |       | — |   | — |   |
|                                           |       | 25,013                         |       | 17,606 |   | 14,125 |   |

 

----

(1)          We reported a loss for the period. No adjustment was made for the effect of stock options, warrants orconvertible debt as the effect was anti-dilutive.  Stock options and warrants outstandingtotaled 3,358,058 shares at December 31, 2004,  2,882,468 shares at December 31, 2003and 2,688,751 shares at December 31, 2002 We also have potentially issuable common shares of 3,629,919 related toour 10% Senior Subordinated Convertible Notes described in Note 7 containedelsewhere herein.

 

F-13

----

 

**NOTE 3 - RESTRUCTURING CHARGES**

 

The restructuring charges described below wereincurred and paid within the years as set forth below.

 

**2004 Restructuring Charges**

 

During the fourth quarter, in response to a secondhalf 2004 market contraction, we reduced our workforce by approximately 11% atthe time, resulting in a restructuring charge of $35,000.  This charge reflected severance and benefitcosts associated with this reduction. This work force reduction affected a total of 12 employees principallywith the manufacturing function.

 

**2003 Restructuring Charges**

 

During the first quarter, in response to thecontinued and prolonged downturn in the semiconductor capital equipmentindustry, we reduced our workforce across all functional areas by approximately24% at the time, resulting in a restructuring charge of $19,000.  This charge reflected severance and otherbenefit costs associated with this reduction. This workforce reduction affected a total of 26 employees across allfunctional areas.

 

During the second quarter, 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 4 employees across allfunctional areas.

 

**NOTE 4 – FINANCING TRANSACTIONS**

 

On March 7, 2003 and March 26, 2003,pursuant to a private equity placement with a group of accredited investors, weissued a total of 3,166,869 shares of common stock, which resulted in netproceeds to us of approximately $1.1 million. Stock issuance costs associated with this offering totaled approximately$241,000.  As part of this offering, wealso issued warrants to purchase 253,350 shares of common stock that have aterm of five years with an exercise price of $0.43 per share.

 

On June 9, 2003, theCompany completed a one-year, $2.5 million secured working capital line ofcredit agreement with a bank.  Under theterms of the agreement, the Company may borrow up to eighty percent (80%) ofqualified receivables.  Additionally,under this agreement the Company granted a first security interest in allassets of the company.  The advances bearinterest at prime plus 2.0% (6% at December 31, 2003). As of December 31,2003, $348,000 was outstanding under this agreement.

 

On March 9, 2004 we completed a $5.0 millionsecured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 long-term convertible note.  Inconnection with the execution of this credit facility, we issued to the lendera seven-year warrant to purchase 400,000 shares of our common stock at exerciseprices ranging from $2.30 to $2.88.  Thefair value of the warrants was determined using the Black-Scholes optionpricing model.  This resulted in a valueof $391,000, which was recorded as an increase to additional paid-in- capitaland a discount to the working capital line of credit and long-term convertiblenote.  This discount is amortized tointerest expense over the three-year agreement. Our existing secured lending relationship was terminated as a result ofthis transaction.  This credit facilityis secured by all the assets of the Company. See Note 13 to consolidated financial statements contained elsewhereherein for changes to this agreement subsequent to December 31, 2004.

 

F-14

----

 

During the period covered by this report, we issued 654,260shares of our common stock to the holders of our 10% Senior SubordinatedConvertible Notes (“the Notes”) in payment of interest due on December 31,2003, June 30, 2004 and December 31, 2004, respectively, and interestdue upon conversion of the notes.  Theissuance was exempt from registration under Rule 506 under the Securities Actof 1933, because all of the noteholders were accredited, there was no generalsolicitation, and the shares were subject to restrictions on transfer.

 

During the period covered by this report, we issueda total of 3,710,000 shares of our common stock to holders of the Notespursuant to conversion of their Notes at $1.00 per share including accruedinterest due at the time of conversion. The issuance was exempt from registration under Rule 506 under theSecurities Act of 1933, because all of the noteholders were accredited, therewas no general solicitation, and the shares were subject to restrictions ontransfer.

 

**NOTE 5 – CAPITAL STRUCTURE – CONTINGENTLY CONVERTIBLESECURITIES**

 

In connection with our $5.0 million securedfinancing completed March 9, 2004, certain features of the agreement allowfor the conversion of debt to shares of our common stock under certain marketconditions.

 

Under the $3.0 million revolving line of credit, thedebt outstanding can be converted by the lender (“the fixed conversion price”)to shares of our common stock.  Theconversion price in the original agreement was $1.92 per share, and was changedby amendment dated January 28, 2005 to $0.60 per share.  However, the lender is limited in the dollaramount of shares that they may purchase to twenty-five percent (25%) of theaggregate dollar trading volume of the Common Stock for the ten (10) daytrading period immediately preceding delivery of a Notice of Conversion.

 

Under the $2.0 million convertible note, the currentpayments due plus accrued interest can be converted by the lender in payment ofprincipal and interest (“fixed conversion price”) to shares of our common stock.The conversion price in the original agreement was $1.79 per share, and waschanged by amendment dated January 28, 2005 to $0.56 per share.  However, the stock price must first trade atone hundred and fifteen percent (115%) of the fixed conversion price for threeconsecutive days immediately preceding a payment date in order for theconversion to be available.  The dollaramount of shares that the lender may purchase is limited to twenty-five percent(25%) of the aggregate dollar trading volume of the Common Stock for the ten(10) day trading period immediately preceding delivery of a Notice ofConversion.

 

For the year ended December 31, 2004, therewere no conversions of these notes nor any dilutive effect as the convertiblecontingencies were not met.

 

**NOTE 6 – BALANCE SHEET INFORMATION**

 

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

 
| ** **         | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------|------------|-----------------------------|------------|-----------------------------|------------|
|               |       |                        |       |                        |       |
| Beginning  balance |       | $                           | 303        |                        | $          | 319 |   |
| Provisions         |       | —                      |       | —                      |       |
| Write offs         |       | (88                         | )          | (16                         | )          |
| Ending  balance    |       | $                           | 215        |                        | $          | 303 |   |

 

Provisions are charged to selling, general andadministrative expense.

 

F-15

----

 

Majorcomponents of inventories were as follows (in thousands):

 
| ** **      | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------|------------|-----------------------------|------------|-----------------------------|------------|
|            |       |                        |       |                        |       |
| Raw materials   |       | $                           | 2,078      |                        | $          | 1,775 |   |
| Work-in-process |       | 765                         |       | 1,254                       |       |
| Finished  goods |       | 213                         |       | 384                         |       |
|            |       | $                           | 3,057      |                        | $          | 3,413 |   |

 

In accordance with accounting principles generallyaccepted in the United States of America, we value our inventories at the lowerof cost or market.  In the fourth quarterof 2002, we recorded a charge of $913,000 for excess inventory related to ourolder singulated technologies resulting from the continued downturn in thesemiconductor capital equipment market. This charge is included in costs of sales in the fourth quarter of 2002and the year ended December 31, 2002. This provision for excess inventory resulted from the significantdecrease in forecasted demand and consumption rates associated with the marketdownturn and were calculated in accordance with our policy, which considers,among other factors, technological obsolescence, historical consumptions andexpected demand levels.  All inventorythat has been designated as functionally obsolete is physically disposed of.  Pursuant to SAB Topic 5-BB, inventoryprovisions establish a new cost basis for inventory.  During the years ended December 31, 2004and 2003, previously written down items totaling $1.5 million and $1.0 million,respectively, were sold resulting in higher than normal gross profits.

 

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

 
| ** **                     | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                           |       |                        |       |                        |       |
| Leasehold  improvements        |       | $                           | 284        |                        | $          | 379 |   |
| Machinery  and equipment       |       | 2,264                       |       | 2,241                       |       |
| Furniture  and fixtures        |       | 297                         |       | 547                         |       |
|                           |       | 2,845                       |       | 3,167                       |       |
| Less  accumulated depreciation |       | (2,575                      | )          | (2,831                      | )          |
|                           |       | $                           | 270        |                        | $          | 336 |   |

 

For the year ended December 31, 2002, we wroteoff approximatly $1.7 million in fully depreciated assets that are no longerutilized in the business.

 

We provide a standard thirteen month warrantyprogram for our equipment products. We record provisions for warranty claimsfor these products based upon historical claim performance.  The following table provides the expense recordedand charges against our reserves for the years ended December 31, 2004 and2003.

 
| ** **                           | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued warranty balance - beginning |       | $          | 181        |       | $          | 200 |   |
|                                 |       |       |       |       |       |
| Provision                            |       | 107        |       | 60         |       |
|                                 |       |       |       |       |       |
| Warranty  claims                     |       | (126       | )          | (79        | )          |
|                                 |       |       |       |       |       |
| Accrued  warranty balance- ending    |       | $          | 162        |       | $          | 181 |   |

 

F-16

----

 

#### **NOTE 7 - LONG-TERM DEBT**

####  

Long-term debt and financing obligations were asfollows (in thousands):

 
| ** **                                 | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                       |       |                        |       |                        |       |
| Long-term  convertible note                |       | $                           | 1,525      |                        |       |   |
| Less:  Current Portion                     |       | (67                         | )          | —                      |       |
|                                       |       |                        |       |                        |       |
| Total  long-term debt                      |       | $                           | 1,458      |                        | $          | — |   |
|                                       |       |                        |       |                        |       |
| 10% senior  subordinated convertible notes |       | $                           | 3,630      |                        | $          | 7,340 |   |

 

On March 9, 2004 we completed a $5.0 millionsecured financing transaction with an institutional lender.  Under the terms of the three-year agreement,we put in place a $3.0 million secured working capital line of credit and a$2.0 long-term convertible note both bearing interest at a rate of prime plus1.75%.  In connection with the executionof this credit facility, we issued to the lender a seven-year warrant topurchase 400,000 shares of our common stock at exercise prices ranging from$2.30 to $2.88.  The fair value of thewarrants was determined using the Black-Scholes option pricing model.  This resulted in a value of $391,000, whichwas recorded as an increase to additional paid-in- capital and a discount tothe working capital line of credit and long-term convertible note.  This discount is amortized to interestexpense over the three-year agreement. Our existing secured lending relationship was terminated as a result ofthis transaction.  This credit facilityis secured by all the assets of the Company. See Note 13 to consolidated financial statements contained elsewhereherein for changes to this agreement subsequent to December 31, 2004.

 

In December 2001, we issued $10.0 million of10% Senior Subordinated Convertible Notes due in 2006 to a group of accreditedinvestors.  These Notes were initiallyconvertible into our common stock at a conversion price equal to $2.60 pershare.  The Notes are redeemable by us atany time after January 3, 2004 as long as the market price of our commonstock equals or exceeds 150% of the conversion price.  Proceeds from the Notes, net of debt issuancecosts, totaled $9.2 million.  Holders ofthe Notes have standard registration rights if they convert the Notes to commonstock.  The Note Purchase Agreementbetween us and the holders of the Notes contains certain affirmative andnegative covenants.  Among other things,these covenants prohibit us from paying dividends to our shareholders orincurring more than $5.0 million of indebtedness that is senior to, or ranksthe same as the Notes.  The covenantsalso require us to comply with applicable laws and regulations, maintain amarket for our common stock, and provide the Note holders with copies of ourSEC reports and certain other information. There are no financial covenantsrelated to these Notes.  On June 30,2003, we completed the restructuring of $9.29 million, or 92.9%, of our 10%Senior Subordinated Convertible Notes, wherein the participating noteholdersagreed to accept stock in lieu of cash for the next four semi-annual interestpayment dates beginning June 30, 2003 through December 31, 2004, andthe conversion price for the Notes was reduced to $1.00 per share.  During the year ended December 31, 2004,principal in the amount of $3.71 million and interest in the amount of $642,000were converted into 4,364,260 shares of common stock. During the year ended December 31,2003, principal in the amount of $2.66 million and interest in the amount of$553,000 were converted into 3,667,911 shares of common stock.  There was no beneficial conversion of theNotes payable into common stock as defined in EITF 00-27 of “Application ofIssue No. 98-5” to Certain Convertible Instruments. See Note 13 to consolidatedfinancial statements contained elsewhere herein for changes to this agreementsubsequent to December 31, 2004.

 

F-17

----

 

We have manufacturing, phone and software equipmentoperating lease agreements utilized in several of our facilities.

 

Payments due under debt obligations at December 31,2004 are as follows: 2005 - $67,000; 2006 - $4,430,000; 2007 - $800,000; 2008 -$67,000 and thereafter $0**.**

 

**NOTE 8 -INCOME TAXES**

 

The Company incurred losses for the years ended December 31,2004, 2003, and 2002, respectively, and recorded no provision for income taxes.

 

The reconciliation of income tax computed at theU.S. federal statutory rate to income tax expense recorded in the consolidatedfinancial statements was as follows:

 

 
| ** **                          | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| ** **                          | ** ** | **2004**                          | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                |       |                              |       |   |   |   |   |
| 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 | ) | — |   |
| Adjustment  for valuation allowance |       | 37.0                              |       | 37.0 |   | 34.0 |   |
|                                |       | 0.0                               | %          | 0.0 | % | 0.0 | % |

 

As of December 31, 2004, we had federal netoperating loss (NOL) carryforwards totaling approximately $30.0 million and taxcredit carryforwards of approximately $122,000 which can be used to reducefuture taxable income.  Such tax loss andtax credit carryforwards begin to expire in 2005 as follows: 2005 – 2009 - $1.5million per year and $22.5 million thereafter. Changes in the ownership of the Company have placed limitations on theannual usage of these NOLs.  Theselimitations are the cause for the reduction of the net operating losscarryforwards.  Future changes inownership may place additional limitations on these losses.

 

We have recorded a total valuation allowance ondeferred tax assets due to uncertainity of their ultimate realization asfollows:

 
| ** **                       | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |                        |       |
| Net  operating loss carryfowards |       | $                           | 11,100     |                        | $          | 32,971 |   |
| Inventories                      |       | 3,108                       |       | 3,891                       |       |
| Accrued  expenses                |       | 162                         |       | 194                         |       |
| Other                            |       | 352                         |       | 362                         |       |
| Valuation  allowance             |       | (14,722                     | )          | (37,418                     | )          |
|                             |       | $                           | —     |                        | $          | — |   |

 

**NOTE 9 - ACCOUNTS PAYABLE – LONG TERM**

 

In July of 2003, we completed negotiations withthe majority of our vendors to extend the payment terms of the total amountsowed to them at the time.  This resultedin $1.2 million of our payables, or 67% of our total accounts payable at thetime,  being restructured with a total of281 vendors.  Under the terms of theextended payment plan, we agreed to make four to eight equal payments beginningon July 30, 2003 until the balances are satisfied.  The number of vendors agreeing to this planrepresented approximately 61% of our active vendors. As of December 31,2004, all scheduled contractual payments have been made under this plan.  The following sets forth the amounts dueunder this plan:

 

F-18

----

 
| ** **                                           | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                                 |       |                        |       |                        |       |
| Total  accounts payable due under the plan           |       | $                           | 183,000    |                        | $          | 782,000 |   |
| Less: Current  Portion due under the plan            |       | (183,000                    | )          | (587,000                    | )          |
|                                                 |       |                        |       |                        |       |
| Total  long-term accounts payable due under the plan |       | $                           | —     |                        | $          | 195,000 |   |

 

**NOTE 10 - COMMITMENTS AND CONTINGENCIES**

 

We lease certain facilities and equipment undervarious operating leases.  Effective April 1997,we entered into an operating lease agreement and relocated our headquarters toa new facility in St. Paul, Minnesota, coinciding with the expiration of theoperating lease at our previous headquarters facility.  Under the terms of the new agreement, whichextends through April 2007, we are responsible for base rent and alloperating expenses associated with the portion of the facility that weoccupy.  The agreement provides us with aone-time option to cancel the lease after seven years, at which time we wouldonly be responsible for certain unamortized build-out costs incurred by thelandlord.  In May 2000, we notified ourlandlord of our intent to exercise our one-time option to lease the remainingadditional 11,000 square feet within the same building at a date to be mutuallydetermined.  We occupy approximately54,000 square feet of leased space in Penang, Malaysia, which is utilized as amanufacturing center for our mature products. This lease expires in June 2007.

 

Total rent expense charged to operations, primarilyfor facilities and equipment, was $814,000 $847,000 and $864,000 for the yearsended December 31, 2004, 2003 and 2002, respectively.

 

The future minimum rental payments at December 31,2004, due under noncancelable operating leases, are as follows: 2005 -$592,000; 2006 - $559,000; 2007 - $229,000 and zero thereafter.

 

We have an employment agreement with our ChiefExecutive Officer 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 an agreementwith another executive officer that provides for severance pay and otherremuneration if his employment is terminated or duties significantly diminishedas a result of a change of control.

 

**NOTE 11 - STOCK OPTION AND BONUS PLANS ANDWARRANTS TO PURCHASE COMMON STOCK**

 

The Board of Directors previously reserved a totalof 2,600,000 shares of common stock under the 1993 Incentive Stock Options Planfor key employees.  This plan expired in April 2003except for outstanding options. In June of 2004, the Board of Directorsand shareholders approved the 2004 Incentive Stock Plan and the reservation of880,000 shares.  Options under the twoplans expire five to ten years from the date of grant and generally vest over atwo-year or four-year period.  If anindividual ceases employment, he/she has 90 days to exercise vested options.  Options granted in excess of the $100,000annual IRS limitations become non-qualified. The Compensation Committee of theBoard of Directors at their discretion can grant non-qualified options andrestricted stock to eligible employees. In 2004 and 2003, the Board of Directors granted 155,000 and 1,000,000,respectively, non-qualified options, which are included in the stock optiontable below.

 

In fiscal 1996, our Board of Directors and ourshareholders approved the Stock Option Plan for Outside Directors.  A total of 570,000 shares have been reservedfor issuance under the plan.  Each personwho becomes

 

F-19

----

 

anoutside director will automatically be granted an option to purchase 10,000shares.  In addition, each outsidedirector will also automatically be granted an option to purchase 10,000 sharesimmediately upon each reelection as a director, or on the anniversary of theprior year’s grant in any year in which there is no meeting of the stockholdersat which directors are elected.  Theperiod within which an option must be exercised will be the earlier of (1) tenyears from the date of the grant, or (2) the date which is one year after thedirector ceases to be a director for any reason, provided that if a directorvoluntarily declines to stand for re-election after the age of 60, he shall notbe required to exercise his options within one year after he ceases to be adirector and shall continue to vest in his options after he ceases to be adirector.  The exercise price for eachoption will be the fair market value of the stock on the date of grant, andeach option will generally vest over a two-year period at 50 percent per year.

 

As of December 31, 2004, we have also reserveda total of 9,563,077 shares of common stock for issuance upon conversion of theNotes described in Note 7.  As of December 31,2004, 6,370,081 shares of stock have been issued from this reserve pursuant tothe conversion features of the Notes described in Note 7.

 

As of December 31, 2004, we have also reserveda total of 2,092,350 shares of common stock for issuance upon conversions inconnection with the $5.0 million secured financing described in Note 7.  As of December 31, 2004, no shares ofstock have been issued from this reserve pursuant to the conversion features ofthe convertible debt described in Note 5.

 

We have also reserved 150,000 shares of common stockfor the grant of non-qualified stock options for outside directors,consultants, advisors and employees.

 

F-20

----

 

Shares subject to options under these were asfollows:

 
| **Options**                            | ** ** | **Shares** | ** ** | **Exercise  Price Range** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------|------------|---------------------------------------------------|------------|
|                                   |       |       |       |                      |       |                                              |       |
| Outstanding  at December 31, 2001 |       | 2,337,915  |       | $1.00 to  $11.25          |       | $                                                 | 3.44       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Granted                                |       | 633,109    |       | $0.69 to  $3.55           |       | $                                                 | 2.07       |   |
| Exercised                              |       | (49,176    | )          | $1.00 to  $2.62           |       | $                                                 | 1.66       |   |
| Expired                                |       | (245,097   | )          | $1.94 to  $11.25          |       | $                                                 | 4.98       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Outstanding  at December 31, 2002 |       | 2,676,751  |       | $0.69 to  $11.25          |       | $                                                 | 3.01       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Granted                                |       | 1,060,000  |       | $0.90 to  $1.27           |       | $                                                 | 0.97       |   |
| Exercised                              |       | (150,000   | )          | $1.22                     |       | $                                                 | 1.22       |   |
| Expired                                |       | (999,633   | )          | $0.69 to  $11.25          |       | $                                                 | 3.01       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Outstanding  at December 31, 2003 |       | 2,587,118  |       | $0.69 to  11.25           |       | $                                                 | 2.27       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Granted                                |       | 390,000    |       | $0.88 to  $2.04           |       | $                                                 | 1.23       |   |
| Exercised                              |       | (26,750    | )          | $0.69 to $0.90            |       | $                                                 | 0.79       |   |
| Expired                                |       | (226,822   | )          | $0.69 to  $7.75           |       | $                                                 | 2.52       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Outstanding  at December 31, 2004 |       | 2,723,546  |       | $0.69 to  11.25           |       | $                                                 | 2.13       |   |
|                                   |       |       |       |                      |       |                                              |       |
| Exercisable  at December 31, 2004 |       | 2,723,546  |       | $0.69 to  11.25           |       | $                                                 | 2.13       |   |

 

Options outstanding at December 31, 2004 hadexercise prices ranging from $0.69 to $11.25 per share as summarized in thefollowing table:

 
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding  at Dec. 31,  2004** | ** ** | **Weighted  Average  Remaining  Life** | ** ** | **Weighted  Average  Exercise  Price Per Share** | ** ** | **Number  Exercisable  at Dec. 31,  2004** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------|------------|
|                           |       |                                       |       |                                   |       |                                             |       |                                       |       |
| $0.69 to  $1.56                |       | 1,486,235                                  |       | 6.4 years                              |       | $                                                | 1.01       |                                       | 1,486,235  |   |
| $1.84 to  $2.95                |       | 679,811                                    |       | 4.1 years                              |       | $                                                | 2.21       |                                       | 679,811    |   |
| $3.19 to  $4.30                |       | 290,500                                    |       | 5.9 years                              |       | $                                                | 3.28       |                                       | 290,500    |   |
| $5.44 to  $7.75                |       | 237,000                                    |       | 5.4 years                              |       | $                                                | 6.57       |                                       | 237,000    |   |
| $9.25 to  $11.25               |       | 30,000                                     |       | 5.7 years                              |       | $                                                | 9.92       |                                       | 30,000     |   |
| $0.69 to  $11.25               |       | 2,723,546                                  |       | 5.7 years                              |       | $                                                | 2.13       |                                       | 2,723,546  |   |

 

At December 31, 2004 and 2003, 765,000 and117,000 shares, respectively, were available for future grants under the termsof these plans.  In December of2004, the Compensation Committee of the Board of Directors approved theacceleration of the vesting of all of the then outstanding options under allplans.  At the time of this approval alloption exercise prices exceeded the public market price of the underlyingcommon shares.  This action resulted in1,029,500 shares being accelerated with respect to their original vestingdates.

 

F-21

----

 

In February 1996, the Board of Directorsadopted the Employee Stock Purchase Plan and reserved 300,000 shares of commonstock for issuance under the Plan. Eligible employees can elect under the Plan to contribute between twopercent and ten percent of their base pay each plan year (June 1 - May 31)to purchase shares of common stock at a price per share equal to 85 percent ofmarket value on the first day of the plan year or the last day of the planyear, whichever is lower.  Employeecontributions are deducted from their regular salary or wages.  The maximum number of shares that can bepurchased by an employee in any plan year is 1,000 shares.  For the year ended December 31, 2004, noshares were issued under the plan.  Forthe year ended December 31, 2003, 8,000 shares were issued under the planat a price of $0.37.  For the year ended December 31,2002, 28,551 shares were issued under the plan at prices ranging from $2.59 to$2.68 at a weighted average price of $2.68. Approximately 122,900 shares remain reserved for future issuances.

 

**NOTE 12 -SEGMENT, GEOGRAPHIC, CUSTOMER INFORMATION AND CONCENTRATION OF CREDIT RISK**

 

We operate in one industry segment supplyingautomated equipment test handlers to the semiconductor industry.  Net sales to customers located in the threegeographic regions in which we operate are summarized as follows (inthousands):

 
| ** **     | ** ** | **Years Ended**    | ** ** |
|----------------|------------|--------------------|------------|
| ** **     | ** ** | **Dec. 31,  2004** | ** ** | **Dec. 31,  2003** | ** ** | **Dec. 31,  2002** | ** ** |
|           |       |               |       |   |   |   |   |
| United  States |       | $                  | 2,769      |   | $ | 3,725 |   | $ | 3,538 |   |
| Asia           |       | 10,640             |       | 6,989 |   | 7,527 |   |
| Europe         |       | 1,193              |       | 409 |   | 1,146 |   |
|           |       | $                  | 14,602     |   | $ | 11,123 |   | $ | 12,211 |   |

 

Although our primary manufacturing facility islocated in Penang, Malaysia, we do not hold a material amount of long-livedassets outside of the United States.  Ofour inventory reflected on the Company balance sheet as of December 31,2004, $2.7 million was located in our facility in Penang, Malaysia.

 

During the year ended December 31, 2004 our topten customers accounted for approximately 93% of net sales with three customersaccounting for approximately 65% and one customer accounting for approximately26% of net sales.  During the year ended December 31,2003 our top ten customers accounted for approximately 86% of net sales withthree customers accounting for approximately 50% of net sales and one customeraccounting for approximately 32% of net sales. During the year ended December 31, 2002, our top ten customersaccounted for approximately 77% of net sales with three customers accountingfor approximately 40% of net sales and one customer accounting forapproximately 16% of net sales and another customer accounted for approximately15% of our net sales.  As of December 31,2004, one customer accounted for 26% of our total net accounts receivable.

 

F-22

----

 

**NOTE 13 – SUBSEQUENT EVENT**

 

On January 28, 2005, we completed an amendmentto the financing agreement with the lender whereby our payments under thelong-term convertible note have been deferred for one year, resulting in$800,000 of principal payments being rescheduled to begin on February 1,2006.  These payments were previouslyscheduled to be paid in 2005.  Thematurity date of the long-term convertible note has also been extended for oneyear from March 2007 to March 2008. As a part of this amendment the fixed conversion prices related to boththe $3.0 million secured working capital line of credit and the $2.0 long-termconvertible note were reduced to $0.60 and $0.56, respectively.  Additionally, we issued the lender aseven-year warrant to purchase 150,000 shares of common stock at a price of$0.67.

 

On February 25, 2005, we completed a secondamendment to the agreement with the holders of our 10% Senior SubordinatedConvertible Notes, wherein holders of 80% of the remaining Notes, representing$2.9 million, agreed to continue to accept stock in payment of interest for theremaining four interest payments through December 24, 2006.  As part of this amendment, we agreed toreduce the Note conversion price to $0.85 per share, and use our best effortsto register the shares with the SEC.

 

F-23

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned; thereunto dulyauthorized, in the City of St. Paul, State of Minnesota, on March 15,2005.

 
|   | 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 SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant in the capacities indicated on March 15,2005.

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

 

----