**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

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

**Forthe year ended December 31, 2006**

**OR**

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

**Commissionfile number 0-22384**

**MICRO COMPONENT TECHNOLOGY, INC.**

(Exact name of registrantas specified in its charter)

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

 

| **2340 West County Road C, St. Paul, Minnesota 55113**                           |
|----------------------------------------------------------------------------------|
| (Address of  principal executive offices)                                        |
| Registrant’s  telephone number, including area code** (651) 697-4000** |
|                                                                             |
| Securities  registered pursuant to Section 12(b) of the Act: None                |
| Securities  registered pursuant to Section 12(g) of the Act:                     |
| ** **                                                                       | **COMMON  STOCK, $.01 PAR VALUE** | ** ** |
|                                                                             | (Title of Class) |   |

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes oNo x

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.  Yes oNo x

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.  Yes xNo o

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

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

| Large Accelerated  Filer o |   | Accelerated  Filer o |   | Non-Accelerated  Filer x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

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

The aggregate market value of the common stock held bynon-affiliates of the Registrant as of July 1, 2006 (the business day of theRegistrant’s most recently completed second fiscal quarter), was $14.1 millionbased upon the closing price of $0.51 on that date for the shares.

Number of sharesoutstanding of the Registrant’s Common stock, as of****March 30, 2007,****is36,665,322.

DOCUMENTSINCORPORATED BY REFERENCE

Portionsof the Registrant’s Definitive Proxy Statement for the annual meeting ofstockholders (the “Proxy Statement”) to be filed within 120 days after theRegistrant’s fiscal year ended December 31, 2006, are incorporated by referenceinto Part III.

 

----

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

**TABLE OFCONTENTS**
| **PART I**                                      |   |                                                                                                               |   |   |
|-------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|--------|
| ** **                                      |   |                                                                                                               |   |   |
| ITEM 1.                                         |   | Business                                                                                                           |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 1A.                                        |   | Risk  Factors                                                                                                      |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 2.                                         |   | Properties                                                                                                         |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 3.                                         |   | Legal  Proceedings                                                                                                 |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 4.                                         |   | Submission of  Matters to a Vote of Security Holders                                                               |   |   |
|                                            |   |                                                                                                               |   |   |
| **PART II**                                     |   |                                                                                                               |   |   |
| ** **                                      |   |                                                                                                               |   |   |
| ITEM 5.                                         |   | Market for  Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 6.                                         |   | Selected  Consolidated Financial Data                                                                              |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 7.                                         |   | Management’s  Discussion and Analysis of 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,  Executive Officers, and Corporate Governance                                                           |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 11.                                        |   | Executive  Compensation                                                                                            |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 12.                                        |   | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholders Matters                  |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 13.                                        |   | Certain  Relationships and Related Transactions and Director Independence                                          |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 14.                                        |   | Principal  Accountant Fees and Services                                                                            |   |   |
|                                            |   |                                                                                                               |   |   |
| ITEM 15.                                        |   | Exhibits and  Financial Statement Schedules                                                                        |   |   |
|                                            |   |                                                                                                               |   |   |
| **Index to  Consolidated Financial Statements** |   |                                                                                                               |
| ** **                                      |   |                                                                                                               |
| Signatures  and Certifications                  |   |                                                                                                               |

 

2

----

**PART I**

This Report onForm 10-K contains forward-looking statements that have been made pursuant tothe provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are not historicalfacts, but rather are based on our current expectations, estimates andprojections about the semiconductor capital equipment industry, and our beliefsand assumptions.   We intend words suchas “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 Item 1A and elsewhere in this report on Form 10-K.  We caution you not to place undue reliance onthese forward-looking statements, which reflect our management’s view only asof the date of this Report on Form 10-K. We are not obligated to update these statements or publicly release theresult of any revisions to them to reflect events or circumstances after thedate of this Report on Form 10-K or to reflect the occurrence of unanticipatedevents.

**ITEM 1.  Business**

**General**

Unless the contextotherwise requires, references in this Report on Form 10-K to “MCT”, “ We”, “Us”,“Registrant” and the “Company” refer to Micro ComponentTechnology, Inc. and its consolidated subsidiaries. MCT was incorporatedin Minnesota on June 20, 1972, was reorganized as a Delaware corporationon June 28, 1983 and reorganized as a Minnesota corporation on November 6,1996.  MCT has three wholly owned activeoperating subsidiaries, Micro Component Technology Asia Pte. Ltd., (“MCT Asia”),MCT Asia (Penang) Sdn. Bhd., (“Penang”), and MCT Philippines, Inc. (“Philippines”).  Our principal executive offices are locatedat 2340 West County Road C, St. Paul, Minnesota 55113 and our telephone numberat that location is (651) 697-4000.

Our trademarksused in this Form 10-K are: ***MCT***, ***Infinity Systems***, ***Aseco***, ***Tapestry®***, ***Smart Solutions***, ***SmartMark®***, ***SmartSort®***, ***SmartTrak®***, ***Isocut***,***MCT 5100***, ***MCT7632***, ***S-170*****and ***S-130***.All other trademarks or trade names referred to in this Form 10-K are theproperty of their respective owners.

**Background**

On December 24,2001, we issued $10.0 million of 10% Senior Subordinated Convertible Notes duein 2006 to a group of accredited investors. These Notes are convertible into MCT common stock. The conversion pricewas initially $2.60 per share.  The Notesare redeemable by MCT at any time after January 3, 2004 as long as the marketprice of our common stock 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, 2003and March 26, 2003, pursuant to a private equity placement with a group ofaccredited investors, we issued a total of 3,166,869 shares of common stock,which resulted in net proceeds to us of approximately $1.1 million.  Stock issuance costs associated with this offeringtotaled approximately $241,000.  As partof this offering, we also issued warrants to purchase 253,350 shares of commonstock that have a term of five years with an exercise price of $0.43 per share.

OnJune 30, 2003, we completed the restructuring of $9.29 million, or 92.9%, ofour 10% Senior Subordinated Convertible Notes, wherein the participatingnoteholders agreed to accept stock in lieu of cash for the next foursemi-annual interest payment dates beginning June 30, 2003 through December 31,2004, and we agreed to reduce the conversion price to $1.00 per share.  On February 25, 2005, we completed 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 

3

----

four interest paymentsthrough December 24, 2006.  Theconversion price was then reduced to $0.85 per share.

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

On January 28, 2005, wecompleted an amendment to the financing agreement with Laurus to defer paymentson the long-term convertible note.  As part of this amendment, theconversion prices for both notes were reduced. We also issued Laurus at that time a seven-year warrant to purchase150,000 shares of common stock at $.67 per share.

OnApril 29, 2005, we completed another financing transaction with Laurus in whichwe borrowed an additional $2.5 million, and which was convertible into sharesof common stock.  We also issued Laurus at that time an option to purchase2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing.  As a result of the new financing with Laurus,the conversion price for all of the Noteholders who accepted the priorrestructuring agreements was at that time reduced to $0.61 per share.

On February 17, 2006, we restructured the financing with Laurus,and increased the total maximum secured indebtedness with Laurus to $9.25million.  The Company also issued Laurus a 10-year option to purchase2,500,000 shares at an exercise price of $.01 per share.  The sharesissuable upon exercise of the option have standard registration rights. As aresult of the new financing with Laurus, the conversion price for all of theNoteholders who accepted the prior restructuring agreements was reduced to$0.56 per share.

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 million inprincipal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006, an additional$65,000 in principal amount of the Notes was satisfied by cash payments by theCompany at a discount.  There is currently $1.2 million in principalamount of the Notes outstanding, represented by one Note now held byLaurus.  The Note has a conversion price of $.56 per share, and is due andpayable in full on March 31, 2008.

On March 29, 2007, we again restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible.  Beginning March 1, 2008, we are required tomake monthly payments equal to 1/60th of the principal amount until February17, 2009, at which time the entire remaining principal and accrued interest isdue and payable in full.  In addition to the $5.25 million note, there isa $4.0 million working capital line of credit, which is payable in full onMarch 8, 2008.  Interest is payable monthly on the line at the prime rateplus 2.5%.  As of March 30, 2007, there was an $800,000 over-advance inexcess of the borrowing base on the working capital line of credit.  Principal on the over-advance is repayable in$100,000 monthly payments beginning on February 28, 2008.  Therestructured financing also includes an additional $1.0 million term note.  The proceeds from the $1 million term note,net of fees and expenses from the 2007 refinancing, are required to be held ina restricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment.  Interest is payable monthlyat the prime rate plus 2.0% and the principal is payable in full on March 31,2008.  As part of the 2007 restructuring,the Company also issued Laurus a 10-year option to purchase 5,000,000 shares atan exercise price of $0.01 per share. The shares issuable upon exercise of the option have standardregistration rights.

As part of the refinancing, Laurus required that the Companygrant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, asincentive for him to remain with the Company. On March 20, 2007, the 

4

----

Compensation Committee of the Company approved the grant toMr. Gower of a non-qualified stock option to purchase 1,000,000 shares ofcommon stock at a price of $0.26 per share, the closing sale price on the dayof grant.  The option becomes fullyvested on March 20, 2008 and has a term of 10 years.

**Introduction**

We are a leading supplier of integrated automation solutionsfor the global semiconductor test and assembly industry.  We offer complete and comprehensive equipmentautomation solutions for the test, laser mark and mark inspect processes forthe back-end of the semiconductor manufacturing process that significantlyimprove our customers’ productivity, yield and throughput.  Our solutions include our series ofintegrated Smart Solutions, automated test handlers, factory automationsoftware and equipment integration services. Our customers include many leading semiconductor companies such asMicrochip Technologies, Analog Devices, National Semiconductor, PhillipsSemiconductor, Cypress Semiconductor and ST Microelectronics and many of theleading back-end contract test and assembly companies including Amkor and NSElectronics Bangkok.  We believe we haveone of the world’s largest installed bases of handlers used to testsemiconductor devices.

Semiconductor devices are becoming more complex and arecharacterized by shrinking semiconductor device sizes, miniaturized packaging,increased circuitry and larger wafer sizes. These trends have led manufacturers to seek new tools and new solutionsto meet their demanding requirements.  Webelieve that our complete offering of equipment automation products andservices allows manufacturers to effectively address evolving processtechnologies and packaging formats, such as QFN (quad flat packages with noexternal leads) and miniaturized packaging.

Beginning in 1999,we broadened our strategy from that of a test handler manufacturer to alsobecome a provider of comprehensive equipment automation solutions for theback-end of the semiconductor manufacturing process.  Consistent with this new strategy, wecompleted two acquisitions.  Ouracquisition of Infinity Systems in June 1999, a company involved in thedevelopment of factory automation software, was integral to the development ofour integrated equipment Smart Solutions product suite.  In January 2000, we completed our acquisitionof Aseco Corp, which provided us with increased machine vision and roboticsengineering technology critical to the handling of strips and wafers.

**Industry Overview**

The semiconductor device industry had grown tremendously overthe ten-year period ending in the year 2000. This growth had been driven bytraditional semiconductor markets like personal computers and data processing,and more recently by the proliferation of semiconductor devices intelecommunications, wireless communications, and consumer electronics, as wellas Internet infrastructure equipment. However, the semiconductor capital equipment market, in which wecompete, has historically been subject to cyclical periods of high growth andcontraction.  In the fourth quarter of2000, the semiconductor industry went into a sharp downturn, which intensifiedand continued through the majority of 2003, resulting in a significant adverseimpact on our business.  In late 2003,worldwide semiconductor bookings began showing signs of stabilization and demandfor our products increased during this period and continued through the firsthalf of 2004.  However, in the thirdquarter of 2004 the markets again retracted, impacting our financial resultsthrough the end of 2004 and continuing through 2006. At this juncture, thereturn to sustained market growth cannot be predicted in the short term.

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

5

----

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

Automation andprocess improvement of back-end tools and facilities has severely lagged thefront-end.  Over the last several years,manufacturers began to seek automation and process solutions for the back-endproduction process.  This is because,historically, the cost of back-end assembly and test processes was only a smallportion of the total semiconductor device cost and traditional processes wereable to provide adequate throughput. Today the cost of back-end assembly and test per semiconductor deviceoften equals or exceeds the wafer fabrication cost per 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 ManufacturingProcess**

Semiconductordevices arrive for test in strip or wafer format, with each strip or wafercontaining multiple individual devices. Until recently, most semiconductor manufacturers believed it wasnecessary to test individual semiconductor devices after they were singulated,or cut from the strip or wafer.  However,as semiconductor device and package sizes have shrunk, they have becomeextremely difficult to handle individually. For example, manufacturers’ chip scale packages, or CSPs, are nearly thesame size as the die they package. Traditional handling tools do not have the precision to adequatelyaddress the various semiconductor device size and chip-scale packagingtechnologies demanded by manufacturers. As a result, handling tools designed for singulated processes havebecome a bottleneck to throughput.

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

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

**Our Solution**

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

·Tapestry series automated strip handler,

·Smart Solutions integrated equipment product series,

·Infinity Systems factory automation software and equipment integrationservices, and

·Line of traditional test handlers for singulated processes.

6

----

Our solution provides thefollowing benefits to our customers:

***Flexibilityto address new form factors, including wafers and strips.***  We believe that our Tapestry series ofhandlers are among the first handlers capable of processing semiconductordevices in strip or wafer formats. Tapestry provides increased flexibility, permitting the handling andtesting of a variety of packages, substrates and semiconductor device types.  Depending on the application, we believe thatour Tapestry handler’s throughput capability is three to ten times greater thanexisting singulated handling options available today.

***Abilityto collect critical process data. ***OurSmart Solutions equipment products utilize our factory automation software toprovide both the hardware and software necessary to accurately track importantyield events in the test and assembly portion of the back-end process.  We use state-of-the-art technology includingmachine vision to accurately track all semiconductor devices as they travelthrough the test and assembly processes. This machine vision technology is not only critical to the precisepositioning of strips, but also enables our software to generate critical processdata.  This information, together withyield information obtained in the assembly process and the front-end facility,can provide real-time data on the entire semiconductor manufacturing processfor each wafer, giving manufacturers the information they need to improve theirprocesses and increase their yields.

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

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

**Strategy**

Our objective isto be the leading supplier for the newly developing market of automatedsolutions for the semiconductor test and assembly market.  Key elements of our strategy include:

***Providingcomprehensive automated solutions.***  Today, we provide equipment automationsolutions for the test and assembly portion of the semiconductor manufacturingprocess, including test, laser mark, mark inspect, and other processes.  In addition, we are expanding our automationsolutions to include equipment integration solutions compatible with productsfrom a greater number of other equipment manufacturers such as trim, form andsingulation system providers.  We haveenhanced the software component of our automation solutions by adding dataanalysis and report generating capabilities to increase our customer’s abilityto improve their manufacturing process. In the future we plan to expand the Smart Solution suite of products tohandle other processes within the semiconductor test and assembly area.

***Capitalizingon emerging chip scale packaging, or CSP, process development.***  Our Smart Solutions and Tapestry productsalready meet initial chip scale package process requirements through striphandling.  However, the vast numbers ofnew chip scale packages, recently introduced, have imposed additionalrequirements on semiconductor test and assembly processes, including theability to perform multi-pass testing and stacked die testing.  As a leader in providing equipment automationsolutions that address chip scale packaging technologies, we are continuingdevelopment of next-generation handling and equipment automation solutions foradvanced semiconductor device packaging.

***Strengtheningkey customer relationships.***  Our customers include many of the world’s leadingproviders of semiconductor devices as well as major third-party test andassembly companies.  We expect that ourcustomers 

7

----

will look to us to helpresolve their process as well as automation problems throughout theback-end.   As we solve our customers’diverse needs, we will deepen our present customer relationships and also buildour knowledge base so that we can develop similar relationships with others inthe semiconductor manufacturing industry.

***Leveragingour strong sales and service capability.***  We predominantly sell our products throughour direct sales force and have established sales and service offices in theworld’s major centers of semiconductor manufacturing including Penang,Malaysia, Singapore and in the Philippines. In addition to our sales and service engineers, we have severalapplications engineers in key customer support locations.  We have placed software engineers in severalAsian locations to directly support Infinity Systems’ pursuit of factoryautomation software sales.

***Continuingto develop and support existing singulated test handling solutions andproducts.***  We believethat we have one of the largest installed bases of traditional test handlers inthe world.  We intend to support ourcustomers who use singulated test handling with new product introductions forspecialty applications.

**Products**

***AutomationProducts***

***Smart Solutions****.*  Our Smart Solutionsequipment suite of products, once integrated with a tester, are designed toautomate the entire test process from the point where the semiconductor deviceshave been packaged, through test, laser mark, inspection, singulation and sort,to the point of shipment to the customer. Our Smart Solutions product family offers semiconductor manufacturersgreater flexibility, yield and throughput. These products are designed to meet the back-end semiconductormanufacturer’s demand for greater production efficiency, lower cost of test andmanufacturing flexibility.  The followingtable sets forth our key automation product offerings by category, dateintroduced and application.
| **Automation  Product Category** | ** ** | **Product  Name**                   | ** ** | **Introduced**        | ** ** | **Applications**                                                                                                                                                                           |
|----------------------------------|------------|-------------------------------------|------------|-----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                       |       |                                |       |                  |       |                                                                                                                                                                                       |
| Smart Solutions                  |       | Tapestry SC Tri-Temp                |       | May 2006              |       | A next generation handling system for semiconductor devices that are  in strip or wafer package formats capable of thermally conditioning devices  (-60 to +150C) under test               |
|                             |       | Tapestry SC                         |       | July 2003             |       | A next generation handling system for semiconductor devices that are  in strip or wafer package formats.                                                                                   |
|                             |       | Tapestry PH1                        |       | February 1999         |       | A next generation handling system for semiconductor devices that are  in strip or wafer package formats.                                                                                   |
|                             |       | SmartMark SC                        |       | September 2004        |       | A next generation high-speed laser marker for integration with strip  handling or for marking strips with 2D codes.                                                                        |
|                             |       | SmartTrak                           |       | May 2000              |       | Software management system providing a map with information about  each semiconductor device in the strip.                                                                                 |
| Automation Software              |       | 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 SmartSolutions equipment product family was introduced to meet the anticipatedevolution of back-end manufacturing from singulated handling to stripprocessing through the final stages of assembly and electrical test.  Additionally, our Smart Solutions productsare designed with electronic strip mapping capability as a cornerstone.  As high-density semiconductor strips withtiny chip scale packages become the standard, electronic strip mappingaddresses the problem of manually tracking individual semiconductor deviceswithin the strip.  The new SmartSolutions systems provide customers enhanced performance in either stand-aloneor integrated assembly lines.  Thecurrent average selling price for Smart Solutions products vary from $300,000for a single module and can approach approximately $1.0 million for a fullyconfigured system that includes all of the components.

Tapestry SC, introducedin July 2003, is our next generation system for semiconductor devices that arein strip format.  The system is targetedto meet the growing need for lower cost of ownership, greater flexibility, easieruse, increased process control, faster set-up and changeover times.  The Tapestry SC has several optional features

8

----

and can be targeted atseveral different applications with the potential to add additional options and/ or capability at a later time.  TheTapestry SC is compatible and complementary to the Tapestry PH-1.

Tapestry, ourstrip handling system introduced in February 1999, is the flagship of the SmartSolution product family.  Tapestry is aversatile, high volume, parallel test handling and thermal conditioning systemfor semiconductor devices that are in strip format.  Thermal conditioning is required to ensurethat a semiconductor device can operate normally in a wide range oftemperatures.  Tapestry can conditiondevices at temperatures ranging from —40 degrees centigrade to +130 degreescentigrade.  The system is capable ofhandling fine pitch chip scale packages as well as traditional leadedsemiconductor devices in strip format. Using standard industry interfaces, the system is designed to functionas a stand-alone system, or can be integrated into an in-line process with ourother Smart Solution products or equipment of other manufacturers.

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

Our suite of SmartSolution equipment products includes additional modules to assist companies inautomating the back-end of the semiconductor manufacturing process using thenew strip format.  These include theinput/output devices for both slotted and stacked magazines used with strips.

***AutomationSoftware. **** *Infinity SystemsSoftware Solutions provide highly sophisticated systems integration services tothe semiconductor test and assembly industry. Infinity Systems’ solutions assist customers in creating either new manufacturingenvironments or implementing new methods and control systems in existingones.  These installations allowpreviously isolated stand-alone equipment to exchange information with otherequipment and provide for remote monitoring and control of these systems.  Our engineering experience, efficientsoftware development process, strong project management and our understandingof semiconductor 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 providemore traditional singulated handling products utilizing gravity-feedtechnology.  As a result of our shift inproduct strategy to strip-based solutions, we will build our singulatedproducts only when a sales order exists and if technology permits.  We continue to support these products for ourinstalled base of systems for consumable and spare parts.

***OtherProducts and Services***

We provide service and spare parts for all of our current andmany of our discontinued products. We have also done significant business insupport services for a semiconductor device tester that is still widely usedbut that was last manufactured by us in 1993.

**Research and Development**

Asan important element of our business strategy, we work closely with ourcustomers to develop new products and enhancements of existing products to meetthe evolving needs of the test and assembly market, particularly with respectto emerging semiconductor devices, while striving to provide the lowest cost oftest.  These efforts, historicallyfocused on test handler products, have resulted in the successful introductionof several new product platforms, including our Tapestry family of productsincluding the PH1, SC (ambient and elevated temperature versions) strip testingand associated handling modules, and our SmartMark and SmartMark SC products.

9

----

Although we relyprimarily on our internal engineering capabilities to develop new products andenhance existing products, we also utilize contract services to enhance ourtechnical capabilities or temporarily expand our resources.  In addition, we work closely with severalmanufacturers of products that are incorporated into our products or arecomplementary to our products when we believe a higher quality, lower costproduct would result.

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

Our research and development expenses were $2.0million, $2.0 million, and $2.8 million in the years ended December 31, 2006,2005 and 2004, respectively.  Ourcombined resources totaled 20 employees and contractors in research anddevelopment, or approximately 21% of our entire workforce, at December 31,2006. We expect research and development expenses to remain fairly flat in 2007relative to 2006 levels, subject to mandated increases due to customerrequirements for system related products.

**Customers**

Our customers include many of the leading manufacturers ofsemiconductor devices, as well as test and assembly companies, in the UnitedStates, Europe and Asia.  In recentyears, our significant customers have shifted from the major semiconductormanufacturers to test and assembly companies, corresponding to the increasedutilization of test and assembly companies by the major semiconductormanufacturers.  Analog Devices, CarsemSemi, and Microchip Technologies accounted for 48%, 10% and 9% of our netsales, respectively, in the year ended December 31, 2006.  Microchip Technologies, Maxim Tech, andKestronics accounted for 33%, 11% and 10% of our net sales, respectively, inthe year ended December 31, 2005.  AnalogDevices, Microchip Technologies and Amkor Technology, Inc. accounted for 28%,20% and 19% of our net sales, respectively, in the year ended December 31,2004.

Our customers tendto limit the number of qualified equipment vendors they purchase from in orderto gain the efficiencies of standardization across their productionprocess.  We therefore expend substantialefforts to maintain our relationships with our existing major customers toincrease the likelihood that they will continue to select our products fortheir future generations of semiconductor devices.

**Marketing, Sales and WorldwideSupport**

We market ourproducts primarily to semiconductor manufacturers and third party test andassembly companies through our own sales force and in selected markets throughindependent sales representatives and distributors.  Our automation solutions, however, aremarketed directly by our employees to the key personnel at customers and potentialcustomers who are in charge of capital equipment for the entire back-end.  These sales frequently involve majordecisions by the customer as to the configuration and operation of its entireback-end operation.  Consequently, thesales cycle for Smart Solutions products may be longer than for our traditionalhandler products as the average order amount is generally larger.

We augment oursales efforts with direct customer support/service engineers and applicationengineers based in the field.  These engineersare specialists in our product portfolio and partner with our customers to helpdetermine product requirements.  Ourservice engineers install our equipment and train the customers’ operators andmaintenance technicians on the proper use and care of our equipment.  Our application engineers help identifyemerging markets for new products.

We established apresence in Asia more than 20 years ago, where we operate through oursubsidiaries with offices in Singapore and Penang, Malaysia.  To supplement the region’s sales and servicecoverage, we use sales representative companies and distributors in Korea,Taiwan and China.  We also established anoffice in the Philippines to provide better sales and service support and the establishmentof a software development group.  We havestationed service engineers in Singapore, Malaysia, Thailand and thePhilippines for rapid response to customer needs in Asia.

10

----

**Manufacturing and Suppliers**

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

**Competition**

The semiconductordevice testing and assembly equipment industry is highly competitive, and themarket for our automation products and services is expected to become morecompetitive.  We face substantial competitionthroughout the world primarily from manufacturers in Asia, the United States,Europe and Japan.  The companies that weare aware of that currently offer a production grade strip handling solutioncomparable to our Tapestry products are Fico BV, ASM International,Electroglas, Tesec, Rasco, Multitest and Cohu, Inc., whose products wereintroduced between 1995 and 2006.

The principalelements of competition in our markets include throughput capability, quality,reliability, price, product performance, customer service and support,financial strength, versatility and the ability to deliver on schedule.  Although we believe that we compete favorablywith respect to each of these factors, new product introductions by ourcompetitors could cause a decline in sales or loss of market acceptance of ourexisting products.  If competitorsintroduce more technologically advanced products, the demand for our similarproducts would likely be reduced.

**Intellectual Property Rights**

Weattempt to protect the proprietary aspects of our products with patents,trademarks and copyrights, as well as contractual and other trade secretprotection strategies.

Wefrequently review our inventions and discoveries to attempt to determine whichinventions will provide substantial differentiation between our products andthose of our competitors.  We currently have four U.S. patents issued andactive.  In certain cases, we may also choose to keep an invention or processconfidential as trade secrets, in lieu of making public disclosure through thepatenting process.  Key employees are required to enter into nondisclosureand invention assignment agreements, and customers, vendors and other thirdparties also must agree to nondisclosure restrictions prior to disclosure ofour trade secrets or other confidential or proprietary information.

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

Theintellectual property position of any manufacturer, including us, is subject touncertainties and may involve complex legal and factual issues.  Allowedclaims for our existing or future patents issued may be challenged, invalidatedor circumvented, and any rights granted by those patents may not provide uswith adequate protection.  Additionally, it may be possible for competitorsor customers to copy aspects of our products or to obtain information that wemay regard as a trade secret.  Litigation may be necessary in the futureto enforce our patents and other intellectual property rights or to defend usagainst claims of infringement.

11

----

**Backlog**

At December 31, 2006, our backlog of unfilled orders for whicha purchase order number has been assigned by the customer and for which adelivery schedule has been specified was $2.8 million.  At December 31, 2005, our backlog was $1.9million.  A significant portion of the backlogat December 31, 2006, is expected to be shipped in the first two quarters of2007.  Since a large majority of theshipments made in a given quarter are usually made during the latter part ofthe 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.  Our backlogat a particular date is not necessarily indicative of actual sales for that orany succeeding period and does not reflect the effects of the SEC’s StaffAccounting Bulletin No. 101, amended by Staff Accounting Bulletin 104 (SAB 104)discussed in our revenue recognition policy in Note 1 of Notes to ConsolidatedFinancial Statements included elsewhere herein.

**Employees**

At December 31,2006, we had a total of 91 employees in the following areas: 35 inmanufacturing, 19 in engineering and research and development, 19 in sales,marketing, application engineering and service, and 18 in administration.  Our workforce remained relatively stableduring 2006.  Many of our employees arehighly skilled, and we believe our future success will depend in large part onour ability to attract and retain similar employees.  None of our employees are covered by acollective bargaining agreement, and we have experienced no workstoppages.  We consider our relationshipwith our employees to be good.

**Seasonalityin Quarterly Operating Results**

During eachquarter, we customarily sell a relatively small number of systems that carry ahigh average selling price.  Although webelieve our sales are not seasonal in nature, a small change in the number ofproducts ordered and/or shipped and accepted in a quarter can have asignificant impact on results of operations for that particular quarter.  Moreover, production difficulties could delayshipments.  Accordingly, our operatingresults may vary significantly from quarter to quarter and could be adverselyaffected for a particular quarter if shipments and customer acceptances forthat quarter were lower than anticipated. Our quarterly operating results may also be affected by, among otherfactors, the timing of new product introductions, fluctuations in thesemiconductor market and the actions of competitors.

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

We operate inthree geographic areas.  Summarized datafor our operations are included in Note 9 of Notes to Consolidated FinancialStatements, included elsewhere herein.

**ITEM 1A.Risk Factors**

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

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

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

As of December 31, 2006, we had cash and cash equivalents of$200,000, assets totaling $5.6 million, liabilities totaling $11.4 million, andincurred losses from continuing operations of $3.7 million for the year thenended.  We expect to continue to expendcash and incur operating losses at the current net sales levels, but to a 

12

----

lesser extent than the twelve months ended December 31, 2006as certain operating expenses are expected to decline from 2006 levels. Ourability to generate cash and operating income is dependent on increasing ourcustomer base to expand the penetration of our product technology and therealization of our lower operating expense targets.

A material portion of the principal and interest due from theCompany to Laurus on the existing financing agreements becomes due and payablein March of 2008.  In the event that weare unable to repay or refinance our debt in March of 2008, Laurus couldpotentially take a number of actions as secured creditor which would have amaterial negative impact on the Company and its shareholders, includingforeclosure, a forced sale of all or part of the Company, and/or liquidation.Further, if future financing requirements are satisfied through the issuance ofequity or debt instruments, shareholders may experience additional dilution interms of their percentage of ownership of our securities.

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

Several of our newproducts, including our Tapestry strip handler and other Smart Solutionsproducts, are used to test and process semiconductor devices in stripform.  Assembly of semiconductor devicesin strip form is the standard industry practice.  However, we cannot assure you that testing ofsemiconductor devices in strip form will become widely accepted by theindustry.  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, couldresult in damage or contamination to the semiconductor devices and, as aconsequence, make the prior test results unreliable.

We introduced ourTapestry handling system in February 1999. In May 2000, we introduced other Smart Solutions products, which provideadditional process capability for handling and testing semiconductor devices instrip form.  In July of 2003, weintroduced our Tapestry SC, a second-generation system.  In July of 2004, we introduced our TapestrySC SmartMark, a second-generation system. Our new products are attractive tocustomers only if the customers can see the value of automating the test andassembly portions of their semiconductor manufacturing operations.  Although semiconductor manufacturers haveautomated the wafer fabrication portion of their operation, or the front-end ofthe semiconductor manufacturing process, very few semiconductor manufacturershave invested a significant amount of capital to automate the test and assemblyportions of their operations.  We areintroducing new products for technologies, which may not be accepted on awide-scale basis by the industry.  Ifeither the testing of semiconductor devices in strip form or wide-scaleautomation of the back-end is not accepted by the industry, our net sales likelywill suffer.

**Downturns in semiconductorindustry business cycles could have a negative impact on our operating results.**

Ourbusiness depends heavily upon capital expenditures by semiconductormanufacturers.  The semiconductorindustry is highly cyclical, with periods of capacity shortage and periods ofexcess capacity.  In periods of excesscapacity, the industry sharply cuts purchases of capital equipment, such as ourproducts.  Thus, a semiconductor industrydownturn or slowdown substantially reduces our revenues and operating resultsand could hurt our financial condition. In the fourth quarter of 2000, the semiconductor capital equipmentindustry went into a severe downturn and continued through 2005.  In 2006, there was a slight upturn in themarket, but the depressed market over the prior six years has negativelyaffected our operations and financial condition.

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

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

13

----

We acquired anautomation software business in June 1999 and introduced our first suite ofproducts to provide an automation solution for the testing portion ofsemiconductor manufacturing in May 2000. The sales from these operations make up less than 1%, 1% and 3% of netsales for the years ended December 31, 2006, 2005 and 2004, 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 anddevelopment efforts and our financial results depend upon the success of theseefforts.**

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

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

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

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

·  the cyclical nature of the semiconductorindustry;

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

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

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

·  new product introductions by competitors andcompetitive pricing pressures; 

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

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

·  component shortages resulting in manufacturingdelays; and

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

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

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

Stock prices ofcompanies in the semiconductor equipment industry, including ours, can swingdramatically with little relationship to operating performance.  Factors, which could cause our stock price tochange, include:

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

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

14

----

·  changes inour reported financial results based on accounting pronouncements;

·  changes inresearch 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 investors confidence;

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

 

Additional factors, whichmay 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;

·  the lossof 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;

·  our inability to obtain financing to fundcontinuing or expanding operations;

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

# **ITEM 2.  Properties**

We occupy approximately 24,029 square feet of leased space inSt. Paul, Minnesota, for our principal executive offices and research andproduct development activities.  Thislease expires on April 30, 2012 with a one-time option to terminate the leaseon April 30, 2010 with a termination fee of two months gross rent.  We occupy approximately 54,000 square feet ofleased space in Penang, Malaysia, which is utilized as a manufacturing center.This lease expires in 2007.  As ofDecember 31, 2006 we notified our landlord of our intent to lease on a month tomonth basis.  We occupy approximately1,300 square feet of leased space in the Philippines in support of ourapplications engineering and software development activities.  This lease expires in 2008.  We believe that our current and committedfacilities are adequate to support our activities for at least the next twelvemonths.

**ITEM 3. Legal Proceedings**

This item is not applicable.

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

There were no matters submitted to a vote of the securityholders during the quarter ended December 31, 2006.

**PART II**

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

Our common stockis traded on the OTC Bulletin Board under the symbol MCTI.  The following table sets forth, for theperiods indicated, the high and low closing sale prices per share of our commonstock, as reported

15

----

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, 2006: |       |     |       |    |       |
| First Quarter                  |       | $        | 0.51       |    | $          | 0.14 |   |
| Second Quarter                 |       | 0.55     |       | 0.35    |       |
| Third Quarter                  |       | 0.55     |       | 0.21    |       |
| Fourth Quarter                 |       | 0.26     |       | 0.13    |       |
|                           |       |     |       |    |       |
| Year ended  December 31, 2005: |       |     |       |    |       |
| First Quarter                  |       | $        | 0.75       |    | $          | 0.33 |   |
| Second Quarter                 |       | 0.39     |       | 0.17    |       |
| Third Quarter                  |       | 0.24     |       | 0.15    |       |
| Fourth Quarter                 |       | 0.19     |       | 0.09    |       |

 

Theapproximate number of holders of record of our common stock as of December 31,2006 was 313.

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

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

**STOCKPERFORMANCE GRAPH**

The following graph compares the cumulative totalstockholder return on the Company’s Common Stock for the five fiscal yearsbeginning December 31, 2001 and ending December 31, 2006, with thecumulative total return on the NASDAQ Stock Market-U.S. Index and thePhiladelphia Exchange Semiconductor Sector Index (“SOXX”) over the same period(assuming the investment of $100 in the Company’s Stock, the NASDAQ StockMarket-U.S. Index and the SOXX Index on December 31, 2001 and thereinvestment of all dividends).

16

----

 
| **Period Ended**                  | ** ** | **Dec 31,  2001** | ** ** | **Dec 31,  2002** | ** ** | **Dec. 31,  2003** | ** ** | **Dec. 31,  2004** | ** ** | **Dec. 31,  2005** | ** ** | **Dec. 31,  2006** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| Micro Component  Technology, Inc. |       | 100                    |       | 23.73                  |       | 48.81                   |       | 18.98                   |       | 5.76                    |       | 6.78                    |       |
| NASDAQ Stock  Market — U.S. Index |       | 100                    |       | 68.47                  |       | 102.72                  |       | 111.54                  |       | 113.07                  |       | 123.84                  |       |
| PHLX Semiconductor  Sector Index       |       | 100                    |       | 55.39                  |       | 97.31                   |       | 82.98                   |       | 91.83                   |       | 89.44                   |       |

 

17

----

**ITEM 6.  SelectedConsolidated Financial Data**
| ** **                                      | ** ** | **SELECTED CONSOLIDATED FINANCIAL DATA**            | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Years Ended**                                               | ** ** |
| ** **                                      | ** ** | **Dec. 31,**                                                  | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                      | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                      | ** ** | **(in thousands, except per share data)** | ** ** |
| **Consolidated  Statement of Operations Data:** |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net sales                                       |       | $                                                                  | 12,214     |   | $ | 7,069 |   | $ | 14,602 |   | $ | 11,123 |   | $ | 12,211 |   |
| Cost of sales:                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Product                                         |       | 6,163                                                              |       | 4,012 |   | 7,286 |   | 6,295 |   | 7,604 |   |
| Inventory revaluation                           |       | 170                                                                |       | 525 |   | — |   | — |   | 913 |   |
| Total cost of sales                             |       | 6,333                                                              |       | 4,537 |   | 7,286 |   | 6,295 |   | 8,517 |   |
| Gross Profit                                    |       | 5,881                                                              |       | 2,532 |   | 7,316 |   | 4,828 |   | 3,694 |   |
| Operating expenses:                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative             |       | 4,095                                                              |       | 4,213 |   | 5,596 |   | 4,872 |   | 8,556 |   |
| Research and development                        |       | 2,041                                                              |       | 1,980 |   | 2,841 |   | 2,351 |   | 4,214 |   |
| Restructuring charges                           |       | —                                                             |       | 107 |   | 35 |   | 266 |   | 207 |   |
| Loss from operations                            |       | (255                                                               | )          | (3,768 | ) | (1,156 | ) | (2,661 | ) | (9,283 | ) |
| Other income                                    |       | (3,398                                                             | )          | (1,335 | ) | (892 | ) | (1,007 | ) | (1,047 | ) |
| Loss before income taxes                        |       | (3,653                                                             | )          | (5,103 | ) | (2,048 | ) | (3,668 | ) | (10,330 | ) |
| Income tax provision                            |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Net income (loss)                               |       | $                                                                  | (3,653     | ) | $ | (5,103 | ) | $ | (2,048 | ) | $ | (3,668 | ) | $ | (10,330 | ) |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic earnings  (loss) per share                |       | $                                                                  | (0.12      | ) | $ | (0.20 | ) | $ | (0.08 | ) | $ | (0.21 | ) | $ | (0.73 | ) |
| Diluted earnings  (loss) per share              |       | $                                                                  | (0.12      | ) | $ | (0.20 | ) | $ | (0.08 | ) | $ | (0.21 | ) | $ | (0.73 | ) |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Weighted average  shares outstanding:           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                           |       | 30,642                                                             |       | 25,894 |   | 25,013 |   | 17,606 |   | 14,125 |   |
| Diluted                                         |       | 30,642                                                             |       | 25,894 |   | 25,013 |   | 17,606 |   | 14,125 |   |
|                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Selected  Balance Sheet Data:**               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                       |       | $                                                                  | 200        |   | $ | 77 |   | $ | 166 |   | $ | 1,078 |   | $ | 1,560 |   |
| Working capital                                 |       | (664                                                               | )          | (188 | ) | 1,737 |   | 1,618 |   | 2,861 |   |
| Total assets                                    |       | 5,556                                                              |       | 4,546 |   | 6,122 |   | 7,194 |   | 7,753 |   |
| Long-term debt                                  |       | 5,506                                                              |       | 3,683 |   | 1,458 |   | 195 |   | — |   |
| Convertible notes                               |       | —                                                             |       | 3,630 |   | 3,630 |   | 7,340 |   | 10,000 |   |
| Total  stockholders equity (deficit)            |       | $                                                                  | (5,815     | ) | $ | (7,056 | ) | $ | (2,676 | ) | $ | (5,026 | ) | $ | (5,794 | ) |

 

18

----

**ITEM 7.  Management’s Discussion and Analysis ofResults of Operations and Financial Condition**

**Overview**

We supply equipment automation solutions for the globalsemiconductor test and assembly manufacturing market.  Our solutions include automated test handlers,factory automation software and our new integrated Smart Solutions equipmentproduct line.  We believe that ourproducts can significantly improve the productivity, yield and throughput ofthe back-end, or to the post-wafer manufacturing process, including assembling,packaging, testing and singulating semiconductor devices.

Beginning in 1999 and continuing into 2000, we broadened our strategyfrom that of a test handler manufacturer to becoming a provider ofcomprehensive equipment automation solutions for the back-end of the semiconductormanufacturing process.  First, wedeveloped and introduced in February 1999 our Tapestry strip handler.  Tapestry combines strip handling capabilitywith robotics, machine vision technology and critical software, enabling thetesting and tracking of semiconductor devices in strip form and the generationof critical process data throughout the test process.  Second, in June 1999 we acquired the InfinitySystems division of Fico.  InfinitySystems has been involved in the development of factory automation software forthe semiconductor manufacturing industry. Infinity Systems’ software expertise was integral to the development ofour integrated Smart Solutions equipment product line, introduced in May2000.  Together with a third partytester, our Smart Solutions equipment products including our Tapestry handlerenable complete automation of the test, laser mark, mark inspect and other processesof the back end.

The demand for our products and services is dependent upongrowth in the semiconductor industry and the increasing automation needs ofsemiconductor manufacturers and independent test and assembly facilities.  In the fourth quarter of 2000, thesemiconductor industry went into a sharp downturn, which continued through 2005but with a slight upturn in 2006.  Atthis juncture, the return to sustained market growth cannot be predicted in theshort term.  As we have disclosed in ourForm 10-K for the year ended December 31, 2005 and 2004 and each of our Forms10-Q for the first three quarters of 2006 and 2005, a continued or renewedmarket downturn might result in significant losses, charges for inventoryrevaluation, or asset impairment or restructuring charges.  In response to these negative marketconditions a number of restructuring steps were taken in 2003, 2004 and 2005,as described below.  No restructuring actionswere taken in 2006.

*Workforceand Facility Cost Reductions*

During the second quarter of 2005, in response to thecontinuing downturn in the semiconductor capital equipment market, we reducedour workforce across all functional areas by approximately 7% resulting in arestructuring charge of $66,000.  Thischarge reflected severance and other benefit costs associated with thisreduction.  This workforce reductionaffected a total of seven employees across all functional areas.

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

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

During the firstquarter of 2003, in response to the continued and prolonged downturn in thesemiconductor capital equipment industry, we reduced our workforce across allfunctional areas by approximately 24% at the time, resulting in a restructuringcharge of $19,000.  This charge reflectedseverance and other benefit costs associated with this reduction.  This workforce reduction affected a total of26 employees across all functional areas.

19

----

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

*Financing transactions*

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

OnJanuary 28, 2005, we completed an amendment to the financing agreement withLaurus to defer payments on the long-term convertible note.  As part ofthis amendment, the conversion prices on both notes were reduced.  We alsoissued Laurus at that time a seven-year warrant to purchase 150,000 shares ofcommon stock at $.67 per share.

OnApril 29, 2005, we completed another financing transaction with Laurus in whichwe borrowed an additional $2.5 million, and which was convertible into sharesof common stock.  We also issued Laurus at that time an option to purchase2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing.

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

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 million inprincipal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006, anadditional $65,000 in principal amount of the Notes was satisfied by cashpayments by the Company at a discount.  There is currently $1.2 million inprincipal amount of the Notes outstanding, represented by one Note now held byLaurus.  The Note has a conversion price of $.56 per share, and is due andpayable in full on March 31, 2008.

On March 29, 2007, we again restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible.  Beginning March 1, 2008, we are required tomake monthly payments equal to 1/60th of the principal amount until February17, 2009, at which time the entire remaining principal and accrued interest isdue and payable in full.  In addition to the $5.25 million note, there isa $4.0 million working capital line of credit, which is payable in full onMarch 8, 2008.  Interest is payable monthly on the line at the prime rateplus 2.5%.  As of March 30, 2007, there was an $800,000 over-advance inexcess of the borrowing base on the working capital line of credit.  Principal on the over-advance is repayable in$100,000 monthly payments beginning on February 28, 2008.  Therestructured financing also includes an additional $1.0 million term note.  The proceeds from the $1 million term note,net of fees and expenses from the 2007 refinancing, are required to be held ina restricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment.  Interest is payable monthlyat the prime rate plus 2.0% and the principal is payable in full on March 31,2008.  As part of the 2007 restructuring,the Company also issued Laurus 

20

----

a 10-year option to purchase 5,000,000 shares at an exerciseprice of $0.01 per share.  The sharesissuable upon exercise of the option have standard registration rights.

As part of the refinancing, Laurus required that the Companygrant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, asincentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approvedthe grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000shares of common stock at a price of $0.26 per share, the closing sale price onthe day of grant.  The option becomesfully vested on March 20, 2008 and has a term of 10 years.

Most industry forecasts are presently predicting thatcapacity-driven purchases of capital equipment are expected to improve in2007.  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 capital expenditures,monitoring inventory purchases and additional strategic restructuringinitiatives.  Certain of these types ofactions have the potential for further charges in future periods.  The impact of a continuing 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 revenueupon shipment, as our terms are FOB shipping point, for established equipmentproducts that have previously satisfied existing customer performancespecifications and that provide for full payment tied to shipment.  Revenue for products that have not previouslysatisfied customer performance specifications or from sales where all or aportion of customer payment is based upon acceptance are only recognized uponcustomer acceptance.  As such, in periodsof increasing shipments, revenues will be deferred if the shipments are for newcustomers, new products or the payment terms are tied to acceptancecriteria.  Consequently, if theseconditions exist, we may report revenue levels that are not reflective of actualshipment growth rates.  Conversely, inperiods of decreasing shipments, we potentially could recognize revenuesrelated to shipments made in prior periods. Consequently, if these conditions exist, we may report revenue levelsthat are greater than actual shipments. During the year ended December 31, 2006, revenue recorded approximatedshipments.

*Allowance for Doubtful Accounts*

We record a provision for doubtful accounts based on specificidentification of our accounts receivable. This involves a degree of judgmentbased on discussion with our internal sales and marketing groups, our customerbase and the examination of the financial stability of our customers.  There can be no assurance that our estimateswill match actual amounts ultimately written off.  During periods of downturn in the market forsemiconductor capital equipment or economic recession, a greater degree of riskexists concerning the ultimate collectibility of our accounts receivable due tothe impact that these conditions might have on our customer base.  For the year ended December 31, 2006, noprovisions were recorded and we charged approximately $22,000 against theallowance for accounts receivable that we deemed to be uncollectible.

*Valuationof Inventories*

Our inventoriesare stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”)method.  We maintain a standard costingsystem for our inventories.  Assumptionswith respect to direct labor utilization, standard direct and indirect costrates, vendor pricing and utilization of factory capacities are formulated inthe development of our standard costing system. Sudden or continuing changes in the semiconductor capital equipmentmarket affecting our shipments can result in significant production variancesfrom our standard rates. These variances directly impact our gross profitperformance and may cause variability in gross profits results from reportingperiod-to-reporting period.  Our laborand overhead rates are set for production rates that 

21

----

match typical marketconditions.  Production variances arecharged to cost of sales each quarter as incurred. Material standards are basedupon normal purchase volumes.  Purchaseprice variances are charged to costs of sales each quarter as incurred.

Provisions to reduce inventories to the lower of cost ormarket are made based on a review of excess and obsolete inventories through anexamination of historical component consumption, current market demands andshifting product technology.  Significantassumptions with respect to market trends and customer product acceptance areutilized to formulate our provision methods. Sudden or continuing downward changes in the semiconductor capitalequipment market may cause us to record additional inventory revaluation chargesin future periods.  For the years endedDecember 31, 2006 and 2005, we recorded additional inventory reserve of$170,000 and $525,000.  No writedown ofour inventories occurred for the year ended December 31, 2004.

*AccruedWarranty*

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

**Resultsof Operations**

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

|                                    | ** ** | **Years Ended** | ** ** |
|------------------------------------|------------|----------------------|------------|
| ** **                         | ** ** | **Dec. 31,**    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                         | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                          |       | 100.0                | %          | 100.0 | % | 100.0 | % |
| Cost of sales                      |       | 51.9                 |       | 64.2 |   | 49.9 |   |
| Gross profit                       |       | 48.1                 |       | 35.8 |   | 50.1 |   |
| Operating  expenses:               |       |                 |       |   |   |   |   |
| Selling, general and adminstrative |       | 33.5                 |       | 59.6 |   | 38.3 |   |
| Research and development           |       | 16.7                 |       | 28.0 |   | 19.5 |   |
| Restructuring charge               |       | —               |       | 1.5 |   | 0.2 |   |
| Total operating expenses           |       | 50.2                 |       | 89.1 |   | 58.0 |   |
| Loss from operations               |       | (2.1                 | )          | (53.3 | ) | (7.9 | ) |
| Other expense                      |       | (27.8                | )          | (18.9 | ) | (6.1 | ) |
| Net loss                           |       | (29.9                | )%         | (72.2 | )% | (14.0 | )% |

 

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

*NetSales.*  Net sales forthe year ended December 31, 2006 increased $5.1 million or 72.8% to $12.2 million,compared to net sales of $7.1 million for the prior year.  Thisincrease is a result of an upturn in the capital equipment market.  Sales increases were experienced across allof our product lines.  Sales ofour Tapestry and Smart Solutions strip-based products increased $5.2 million or161% over the prior year period, while sales of singulated device handlerproducts also increased $0.1 million or 6% from the prior year period.  Sales of our Tapestry and Smart Solutionsstrip-based product made up 70.0% of our net sales for the year ended December31, 2006 compared to 46.0% in the prior year period.

Net sales to Asia comprised approximately 84.1% of our netsales for the year ended December 31, 2006. Net sales to customers in the United States represented approximately13.0% and net sales to customers in Europe represented approximately 2.9% foryear ended December 31, 2006. Comparatively, net sales to customers in Asia comprised approximately78.5% of our net sales for the year ended December 31, 2005.  Net sales to 

22

----

customers in the United States represented approximately 17.1%and net sales to customers in Europe represented approximately 4.4% for yearended December 31, 2005.

*GrossProfit.*  Gross profitincreased $3.3 million to $5.9 million or 48.1% of net sales from $2.5 millionor 35.8% of net sales, for the comparable period in the prior year.  The increase in gross margin is directly relatedto the increase in sales volume resulting in fixed costs being spread overhigher sales volumes, partially offset by recording of $171,000 of additionalinventory reserve and $250,000 of scrap inventory.  For the year ended December 31, 2005, werecorded an additional inventory reserve of $525,000.

*Selling,General and Administrative Expense.*  Selling, general and administrative expensein 2006 was $4.1 million, or 33.5% of net sales compared to $4.2 million, or59.6% of net sales in the prior year. The expenses for 2006 remained flat compared to the prior year due tothe results of restructuring efforts that have been completed during 2003,2004, and 2005.  Although the expensesremain the same, the percentage to net sales is lower  than the prior year due to expenses beingspread over higher net sales.  Selling,general and administrative expense is expected to remain fairly flat in 2007.

*Researchand Development Expense*. Research and development expense was $2.0 million in 2006 and 2005.  As a percentage of sales, research anddevelopment expense in 2006 was 16.7% of net sales compared to 28.0% of netsales in 2005.  The decrease in percentof sales over the prior year is directly related to the spread of expenses overa higher net sales amount.  We expectresearch and development expenses to increase slightly in 2007 due to theanticipation of new product development projects, subject to impacts resultingfrom market requirements.

*RestructuringCharge. *There were norestructuring charges in 2006.  However,in 2005, due to the continuing retraction of the semiconductor capitalequipment market, we reduced our workforce across all functional areas byapproximately 7% in the second quarter and 2% in the third quarter.  The restructuring charge totaled $107,000 or1.5% of net sales in 2005.  This chargereflected severance and other benefit costs associated with the reduction.  This workforce reduction affected a total of9 employees.

*OtherIncome (Expense).* Interest income for the year ended December 31, 2006 was $11,000compared to $13,000 for the comparable period in the prior year.  This decrease resulted from lower balances ininvestment in interest-bearing cash and cash equivalents.  Interest expense and other totaled $3.4 millionor 27.8% of net sales in the current year, compared to $1.3 million or 18.9% ofnet sales for the comparable period in the prior year.  Included in interest expense and other are non-cash expenses of $1.8 million, of which$0.4 million relates to the Laurus refinancing of prior debt issuance expense,that occurred in February and $1.4 million of conversion expense relating toconversion from debt to equity of $2.1 million in subordinated notes payable.

*IncomeTax Provision.*  Duringboth 2006 and 2005, we incurred minimal tax liabilities.  We have recorded valuation allowances againstall benefits associated with net operating loss carry forwards due to uncertaintyregarding their ultimate utilization.

*Net Loss.*  Net loss for the year ended December 31, 2006was $3.7 million, or $0.12 per basic and diluted share, as compared to net lossof $5.1 million, or $ 0.20 per basic and diluted share for the comparable prioryear period.

***Year Ended December 31,2005 versus Year Ended December 31, 2004***

*NetSales.*  Net sales forthe year ended December 31, 2005 decreased $7.5 million or 51.6% to $7.1 million,compared to net sales of $14.6 million for the prior year.  Current year product sales continued to beseverely impacted by the continued downturn in the semiconductor capitalequipment market.  Sales of our Tapestryand Smart Solutions strip-based products decreased $4.9 million or 60.0% overthe prior year period, while sales of singulated device handler products alsodecreased $2.4 million or 53.5% from the prior year period.  Sales of our Tapestry and Smart Solutionsstrip-based product made up 46.0% of our net sales for the year ended December31, 2005 

23

----

compared to 54.6% in theprior year period.  If the market continuesto be in this downturn, net sales would be adversely impacted in futureperiods.

Net sales to Asia comprised approximately 78.5% of our netsales for the year ended December 31, 2005. Net sales to customers in the United States represented approximately17.1% and net sales to customers in Europe represented approximately 4.4% foryear ended December 31, 2005. Comparatively, net sales to customers in Asia comprised approximately72.8% of our 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 Europe representedapproximately 8.2% for year ended December 31, 2004.

*GrossProfit.*  Gross profitdecreased $4.8 million to $2.5 million or 35.8% of net sales from $7.3 millionor 50.1% of net sales, for the comparable period in the prior year.  The decrease in gross margin is directlyrelated to the $525,000 additional inventory reserve recorded at the end of theyear along with the decline in sales, resulting in fixed costs being spreadover smaller sales volumes. Additionally, for the year ended December 31, 2004, we benefited fromapproximately $1.5 million in gross margin dollars resulting from sales ofproducts that had been previously written down to lower of cost or market.  However, a continued contraction of themarket for semiconductor capital equipment as well as changes in sales mix wouldnegatively impact our gross margin contribution in future periods.

*Selling,General and Administrative Expense.*  Selling, general and administrative expensein 2005 was $4.2 million, or 59.6% of net sales compared to $5.6 million, or38.2% of net sales in the prior year. The decrease in expense for the current year is a result ofrestructuring efforts that have been completed during 2003, 2004, and2005.  Although the expenses have beenreduced, the percentage to net sales is higher than the prior year due toexpenses being spread over lower net sales. Selling, general and administrative expense is expected to remain fairlyflat in 2006 from 2005 due to expense cutting measures and the continuingretraction in the semiconductor capital equipment market.

*Researchand Development Expense*. Research and development expense in 2005 was $2.0 million, or 28.0% ofnet sales compared to $2.4 million, or 19.5% of net sales in 2004.  The decrease in expense for the current yearis a direct result of certain development activities that have been completedduring the year.  The increase in percentof sales over prior year is directly related to the spread of expenses over alower net sales amount.  We expectresearch and development expenses to be slightly higher in 2006 due to theanticipation of new product development projects, subject to impacts resultingfrom market requirements.

*RestructuringCharge. *Due to thecontinuing retraction of the semiconductor capital equipment market in 2005, wereduced our workforce across all functional areas by approximately 7% in thesecond quarter and 2% in the third quarter. The restructuring charge totaled $107,000 or 1.5% of net sales for thecurrent year period.  This chargereflected severance and other benefit costs associated with the reduction.  This workforce reduction affected a total of9 employees.

*OtherIncome (Expense).* Interest income for the year ended December 31, 2005 was $13,000compared to $6,000 for the comparable period in the prior year.  This increase resulted from a slight rateincrease in investment in interest-bearing cash and cash equivalents.  Interest expense and other totaled $1.3million or 18.9% of net sales in the current year, compared to $0.9 million or5.9% of net sales for the comparable period in the prior year.  The increase in interest expense and otherrelates to the write-off of cumulative translation adjustment of $69,000 andhigher average debt levels due to additional financing with an institutionallender.

*IncomeTax Provision.*  Duringboth 2005 and 2004, we incurred minimal tax liabilities.  We have recorded valuation allowances againstall benefits associated with net operating loss carry forwards due to uncertaintyregarding their ultimate utilization.

*Net Loss.*  Net loss for the year ended December 31, 2005was $5.1 million, or $0.20 per basic and diluted share, as compared to net lossof $2.0 million, or $ 0.08 per basic and diluted share for the comparable prioryear period.

24

----

***QuarterlyResults***

Thefollowing tables present selected unaudited quarterly operating results for theeight fiscal quarters ended December 31, 2006, as well as the data expressed asa percentage of net sales.  We believethat all necessary adjustments have been included to present fairly thequarterly information when read in conjunction with our consolidated financialstatements.  The operating results forany quarter are not necessarily indicative of the results for any subsequentperiod.
| ** **                                                         | ** ** | **(in thousands, except per share data)** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | ** **                                                         | ** ** |
| ** **                                                         | ** ** | **Quarter Ended**                                             | ** ** |
| ** **                                                         | ** ** | **Dec. 31**                                                   | ** ** | **Sept 30** | ** ** | **July 1** | ** ** | **April 1** | ** ** | **Dec. 31** | ** ** | **Sept. 24** | ** ** | **June 25** | ** ** | **Mar. 26** | ** ** |
| ** **                                                         | ** ** | **2006**                                                           | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales                                                          |       | $                                                                  | 2,884      |   | 3,279 |   | $ | 3,676 |   | $ | 2,375 |   | $ | 2,029 |   | $ | 1,758 |   | $ | 1,322 |   | $ | 1,960 |   |
| Cost of sales                                                      |       | 1,763                                                              |       | 1,770 |   | 1,619 |   | 1,181 |   | 1,627 |   | 984 |   | 869 |   | 1,057 |   |
| Gross profit loss                                                  |       | 1,121                                                              |       | 1,509 |   | 2,057 |   | 1,194 |   | 402 |   | 774 |   | 453 |   | 903 |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                                                |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative                               |       | 1,038                                                              |       | 1,074 |   | 1,038 |   | 945 |   | 992 |   | 945 |   | 1,145 |   | 1,131 |   |
| Research and  development                                          |       | 511                                                                |       | 487 |   | 525 |   | 518 |   | 466 |   | 435 |   | 491 |   | 588 |   |
| Restructuring  charge                                              |       | —                                                             |       | — |   | — |   | — |   | 1 |   | 40 |   | 66 |   | — |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from  operations                                     |       | (428                                                               | )          | (52 | ) | 494 |   | (269 | ) | (1,057 | ) | (646 | ) | (1,249 | ) | (816 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other expense                                                      |       | (270                                                               | )          | (1,827 | ) | (487 | ) | (814 | ) | (445 | ) | (346 | ) | (307 | ) | (237 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                  |       | $                                                                  | (698       | ) | $ | (1,879 | ) | $ | 7 |   | $ | (1,083 | ) | $ | (1,502 | ) | $ | (992 | ) | $ | (1,556 | ) | $ | (1,053 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per  share: (1)                                  |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |       | $                                                                  | (0.02      | ) | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.04 | ) |
| Diluted                                                            |       | $                                                                  | (0.02      | ) | $ | (0.06 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.04 | ) | $ | (0.06 | ) | $ | (0.04 | ) |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted  average common and common equivalent shares outstanding: |       |                                                               |       |   |   |   |   |   |   |
|                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                              |       | 36,644                                                             |       | 31,141 |   | 27,490 |   | 27,225 |   | 26,215 |   | 26,187 |   | 25,567 |   | 25,567 |   |
| Diluted                                                            |       | 36,644                                                             |       | 31,141 |   | 27,490 |   | 27,225 |   | 26,215 |   | 26,187 |   | 25,567 |   | 25,567 |   |

 
| ** **                           | ** ** | **Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Dec. 31**       | ** ** | **Sept. 30** | ** ** | **July 1** | ** ** | **April 1** | ** ** | **Dec. 31** | ** ** | **Sept. 24** | ** ** | **June 25** | ** ** | **Mar. 26** | ** ** |
| ** **                           | ** ** | **2006**               | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
| **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                        |       | 61.1                   |       | 54.0 |   | 44.0 |   | 49.7 |   | 80.2 |   | 56.0 |   | 65.7 |   | 53.9 |   |
| Gross profit                         |       | 38.9                   |       | 46.0 |   | 56.0 |   | 50.3 |   | 19.8 |   | 44.0 |   | 34.3 |   | 46.1 |   |
| Operating expenses:                  |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative |       | 36.0                   |       | 32.8 |   | 28.2 |   | 39.8 |   | 48.9 |   | 53.8 |   | 86.6 |   | 57.7 |   |
| Research and  development            |       | 17.7                   |       | 14.9 |   | 14.3 |   | 21.8 |   | 22.9 |   | 24.7 |   | 37.1 |   | 30.0 |   |
| Restructuring  charge                |       | —                 |       | — |   | — |   | — |   | 0.1 |   | 2.3 |   | 5.0 |   | — |   |
| Income (loss) from  operations       |       | (14.8                  | )          | (1.7 | ) | 13.5 |   | (11.3 | ) | (52.1 | ) | (36.8 | ) | (94.4 | ) | (41.6 | ) |
| Other expense                        |       | (9.4                   | )          | (55.7 | ) | (13.3 | ) | (34.3 | ) | (22.0 | ) | (19.7 | ) | (23.2 | ) | (12.1 | ) |
| Net income (loss)                    |       | (24.2                  | )%         | (57.4 | )% | 0.2 | % | (45.6 | )% | (74.1 | )% | (56.5 | )% | (117.6 | )% | (53.7 | )% |

 

25

----

----

(1)          The sum of income (loss)per share for the fiscal quarters may differ from annual loss per share due tothe required method of computing weighted average number of shares in the respectiveperiods.

***Liquidity and Capital Resources***

The net loss and increases in accounts receivable, partiallyoffset by other accrued liabilities, were the primary uses of cash in2006.  The net loss and decreases inaccounts payable were the primary uses of cash in 2005.  The net loss and decreases in accountspayable and other accrued liabilities were the primary uses of cash in2004.  Cash used in operations was $3.2million, $3.2 million and $3.4 million in 2006, 2005 and 2004, respectively.

We recordprovisions for doubtful accounts based on specific identification of ouraccounts receivable.  As a result of thisexamination, no provisions were recorded for the year ended December 31, 2006;however, we wrote off approximately $22,000 for the year ended December 31,2006 and $113,000 for the year ended December 31, 2005, which we deemeduncollectible.  We recorded no provisionsfor doubtful accounts for the years ended December 31, 2005 and December 31,2004, respectively.

Capitalexpenditures totaled $36,000, $35,000 and $149,000 for the years ended December31, 2006, 2005 and 2004, respectively. Capital purchases for all periods have been primarily for production andcomputer equipment and for leasehold improvements.   As of December 31, 2006, we hadapproximately $0.74 million in committed purchase orders outstanding with ourvendors and budgeted capital expenditures for 2007 is approximately $0.1million.

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

OnJanuary 28, 2005, we completed an amendment to the financing agreement withLaurus to defer payments on the long-term convertible note.  As part ofthis amendment, the conversion prices on both notes were reduced.  We alsoissued Laurus at that time a seven-year warrant to purchase 150,000 shares ofcommon stock at $.67 per share.

OnApril 29, 2005, we completed another financing transaction with Laurus in whichwe borrowed an additional $2.5 million, and which was convertible into sharesof common stock.  We also issued Laurus at that time an option to purchase2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing.

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

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 million inprincipal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006, anadditional $65,000 in principal amount of the Notes was satisfied by cash paymentsby the Company at a discount.  There is currently $1.2 million inprincipal amount of the Notes outstanding, represented 

26

----

by one Note now held by Laurus.  The Note has aconversion price of $.56 per share, and is due and payable in full on March 31,2008.

On March 29, 2007, we again restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible.  Beginning March 1, 2008, we are required tomake monthly payments equal to 1/60th of the principal amount until February17, 2009, at which time the entire remaining principal and accrued interest isdue and payable in full.  In addition to the $5.25 million note, there isa $4.0 million working capital line of credit, which is payable in full onMarch 8, 2008.  Interest is payable monthly on the line at the prime rateplus 2.5%.  As of March 30, 2007, there was an $800,000 over-advance inexcess of the borrowing base on the working capital line of credit.  Principal on the over-advance is repayable in$100,000 monthly payments beginning on February 28, 2008.  Therestructured financing also includes an additional $1.0 million term note.  The proceeds from the $1 million term note,net of fees and expenses from the 2007 refinancing, are required to be held ina restricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment.  Interest is payable monthlyat the prime rate plus 2.0% and the principal is payable in full on March 31,2008.  As part of the 2007 restructuring,the Company also issued Laurus a 10-year option to purchase 5,000,000 shares atan exercise price of $0.01 per share. The shares issuable upon exercise of the option have standardregistration rights.

As part of the refinancing, Laurus required that the Companygrant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, asincentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approvedthe grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000shares of common stock at a price of $0.26 per share, the closing sale price onthe day of grant.  The option becomesfully vested on March 20, 2008 and has a term of 10 years.

Our contractual obligations are as follows (in thousands):
| ** **                                        | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Future rental payments under noncancelable leases |       | $        | 377.0      |     | $          | 191.0    |       | $        | 178.0      |     | $          | 180.0          |       | $ | 182.0 |   | $ | 61.0 |   |
|                                              |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Payments due under long  term debt agreements     |       | $        | 228.0      |     | $          | 2,105.0  |       | $        | 4,375.0    |     | —     |           | —     |   | — |   |
|                                                   |            |          |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |

 

For the yearsended December 31, 2006, we issued 150,000 shares of common stock through theexercise of employee stock options and our stock purchase plan.  For the year ended December 31, 2005, no commonshares were exercised through employee stock options, warrants and our stockpurchase plan.  For the year endedDecember 31, 2004, we issued approximately 0.1 million shares of common stockthrough the exercise of employee stock options and our stock purchase plan,which provided approximately $21,000 in cash to us.

We believe that these transactions in combination with ourexisting line of credit will provide the cash necessary to meet our operating,working capital and capital resource obligations through all of 2007.

A material portion of the principal and interest due from theCompany to Laurus on the existing financing agreements becomes due and payablein March of 2008.  In the event that weare unable to repay or refinance our debt in March of 2008, Laurus couldpotentially take a number of actions as secured creditor which would have amaterial negative impact on the Company and its shareholders, includingforeclosure, a forced sale of all or part of the Company, and/or liquidation.Further, if future financing requirements are satisfied through the issuance ofequity or debt instruments, shareholders may experience additional dilution interms of their percentage of ownership of our securities.

27

----

**FederalTax Matters**

We paid onlynominal federal and state income taxes in the years ended December 31, 2006,2005 and 2004.  At December 31, 2006, wehad federal net operating loss carryforwards for tax reporting purposes of approximately$99.7 million.

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

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

**Impact of New AccountingStandards**

In June 2006, the Financial Accounting Standards Board issuedFASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109,*or FIN48.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, *Accounting for IncomeTaxes*.  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  This pronouncement alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal yearsbeginning after December 15, 2006; therefore, the Company will adopt the newrequirements for fiscal 2007.  We do notexpect the adoption of this pronouncement to have a material impact on ourfinancial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “*Fair Value Measurements*” (“SFAS No. 157”), which effectivefor interim and annual reporting periods beginning after November 15,2007.  This statement provides adefinition of fair value, establishes a framework for measuring fair value, andexpands disclosures about fair value measurements for future transactions.  The Company has not yet assessed the impactof this Statement on the Company’s financial statements.

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

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

See Consolidated Financial Statements included elsewhere in this AnnualReport on Form 10-K for the year ended December 31, 2006.  The financial information by quarter is includedin Item 7 of this Annual Report on Form 10-K.

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

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

28

----

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

The audit report of Virchow Krause on the financial statementsof the Company for the year ended December 31, 2005 contains an explanatoryparagraph that raises substantial doubt about the Registrant’s ability tocontinue as a going concern.  The auditreports of Virchow Krause on the financial statements of the Registrant for thelast two fiscal years ended December 31, 2005, did not contain any otheradverse opinion or disclaimer of opinion, nor were those opinions otherwisequalified or modified as to audit scope or accounting principles.  During the Registrant’s two most recentfiscal years ended December 31, 2005, and during the subsequent interim periodpreceding the resignation of Virchow Krause, there was no disagreement betweenthe Registrant and Virchow Krause on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedurewhich, if not resolved to Virchow Krause’s satisfaction, would have causedVirchow Krause to make reference to the subject matter of the disagreement inconnection with its reports.  During theRegistrant’s two most recent fiscal years and the subsequent interim period throughDecember 8, 2005, there were no reportable events, as that term is defined byItem 304 of Regulation S-K.

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

**ITEM 9A.  Controls andProcedures**

(a)                Evaluation of disclosure controls andprocedures.

Under the supervision and with the participation of our management,including the Company’s Chief Executive Officer and Chief Financial Officer, weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) under the Exchange Act)as of the end of the 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 were effective toensure that the information required to be disclosed by us in our periodic SECfilings is recorded, processed, summarized, and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

(b)         Changes in internal controls over financial reporting.

No changes in the Company’s internal control over financial reportingoccurred during the fourth quarter of 2006 that have materially affected, orare reasonably likely to affect, our internal control over financial reporting.

**ITEM 9B.  Other Information**

This item is not applicable.

**PART III**

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

Theinformation required by this item is incorporated by reference from the ProxyStatement to be filed no later than 120 days following our December 31, 2006year-end.

29

----

**ITEM 11. Executive Compensation**

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

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

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

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

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

**ITEM 14.  PrincipalAccountant Fee and Services**

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

**ITEM 15.  Exhibits,Financial Statement Schedules and Reports on Form 8-K**
| **(a)1.  Consolidated  Financial Statements**                                                                                                 | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Index to  Consolidated Financial Statements                                                                                                        |       |       |
| Reports of  Independent Registered Public Accounting Firm                                                                                          |       |       |
| Consolidated Balance  Sheets as of December 31, 2006, and December 31, 2005                                                                        |       |       |
| Consolidated Statements of  Operations for the Years Ended December 31, 2006, December 31, 2005, and  December 31, 2004                            |       |       |
| Consolidated  Statements of Changes in Stockholders’ Deficit for the Years Ended December  31, 2006, December 31, 2005, and December 31, 2004 |       |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, December 31,  2005, and December 31, 2004                            |       |       |
| Notes to  Consolidated Financial Statements                                                                                                        |       |       |
| Signatures  and Certificates                                                                                                                       |       |       |

 

**(a)3. Exhibits**

3A.                             Bylawsof MCT. (7)

3B.                               Articlesof Incorporation of MCT. (7)

3C.                               Articlesof Amendment dated March 14, 2002 (11).

4.                                       SpecimenCertificate of Common stock. (1)

10A.                       Form ofNon-Competition Agreement between MCT and certain senior executive officers.(1)

10B.                         StockPurchase Agreement and Commission Agreement between MCT and Cardine & Levy,dated September 25, 1995. (3)

10C.                         EmploymentAgreement with Roger E. Gower dated March 28, 1995. (2)

10D.                        EmploymentAgreement with Dennis L. Nelson dated May 30, 1996. (5)

10E.                          StockOption Plan for Outside Directors as amended through April 10, 2001. (10)

10F.                          IncentiveStock Option Plan as amended through April 10, 2001. (10)

10G.                         2004Incentive Stock Plan. (16)

10H.                        FormerAseco Corp. 1986 Incentive Stock Option Plan. (9)

10I.                             FormerAseco Corp. 1993 Omnibus Stock Plan. (9)

10J.                            FormerAseco Corp. 1993 Non-Employee Director Stock Option Plan. (9)

10K.                        Lease forMCT’s corporate headquarters dated October 16, 1996. (6)

10L.                          Leasefor space in Marlborough, Massachusetts dated April 13, 1993. (8)

10M.                     EmployeeStock Purchase Plan. (4)

10U.                        WarrantPurchase Agreement dated July 11, 1992. (1)

10V.                         SecondCommon Stock Warrant Purchase Agreement dated August 10, 1993. (1)

30

----

10W.                    Form of 10%Senior Subordinated Convertible Note. (11)

10X.                        Agreementfor Payment of Interest with Stock, effective June 30, 2003. (12)

10Y                            AccountsReceivable Financing Agreement with Silicon Valley Bank (13)

10Z                            SecurityAgreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)

10AA                SecuritiesPurchase Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)

10BB                    SecuredConvertible Minimum Borrowing Note with Laurus Master Fund, Ltd. dated March 9,2004. (15)

10CC                    SecuredRevolving Note with Laurus Master Fund, Ltd dated March 9, 2004. (15)

10DD                  SecuredConvertible Term Note with Laurus Master Fund, Ltd dated March 9, 2004. (15)

10EE                      MinimumBorrowing Note Registration Rights Agreement with Laurus Master Fund, Ltd.dated March 9, 2004. (15)

10FF                      RegistrationRights Agreement with Laurus Master Fund, Ltd. dated March 9, 2004. (15)

10GG                    Common StockPurchase Warrant with Laurus Master Fund, Ltd. dated March 9, 2004. (15)

10HH                  Amendment No. 1by and between Micro Component Technology, Inc. and Laurus Master Fund, Ltd.dated January 28, 2005 to Secured Convertible Term Note, Secured RevolvingNote, Registration Rights Agreement and Minimum Borrowing Note RegistrationRights Agreement. (Schedules omitted) (17)

10II                            CommonStock Purchase Warrant with Laurus Master Fund, Ltd. dated January 28, 2005.(17)

10JJ                          SecondAgreement for Payment of Interest with Stock, effective January 31, 2005 (18).

10KK                  Security andPurchase Agreement with Laurus Master Fund, Ltd. effective February 17, 2006(19).

10LL                      SecuredNon-Convertible Revolving Note with Laurus Master Fund, Ltd. effective February17, 2006 (19).

10MM            SecuredNon-Convertible Term Note with Laurus Master Fund, Ltd. effective February 17,2006 (19).

10NN                  Offer to ReduceNote Conversion Price to 10% Senior Subordinate Convertible Notes dated August28, 2006 (20).

10OO                  Consultingagreement made between Micro Component Technology, Inc. and a member of theBoard of Directors, Pat Verderico dated October 18, 2006 (21).

10PP                      EmployeeStock Option Agreement dated March 20, 2007(22).

10QQ                  SecuritiesPurchase Agreement with Laurus Master Fund, Ltd. effective March 29, 2007 (23).

10RR                    Amendment tothe Secured Non-Convertible Revolving Note with Laurus Master Fund, Ltd.effective March 29, 2007 (23).

10SS                      Secured TermNote with Laurus Master Fund, Ltd. effective March 29, 2007 (23).

10TT                    Common StockPurchase Warrant with Laurus Master Fund, Ltd. effective March 29, 2007 (23).

10UU                  RestrictedAccount Agreement with Laurus Master Fund, Ltd. dated March 29, 2007 (23).

10VV                    RestrictedAccount Side Letter with Laurus Master Fund, Ltd. dated March 29, 2007 (23).

21.                                 RevisedListing of Subsidiaries of Micro Component Technology, Inc. (11).

23.1                           Consentof Olsen Thielen & Co. Ltd. (filed herewith).

23.2                           Consentof Virchow, Krause & Company, LLP (filed herewith).

31.1                           Certificationof Chief Executive Officer (filed herewith).

31.2                           Certificationof Chief Financial Officer (filed herewith).

32.0         Section1350 Certification (filed herewith).

----

(1)                                  Incorporated by reference to the exhibitsto the 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 reporton Form 10-Q filed by MCT for the quarter ended March 25, 1995, SEC File No.0-22384.

(3)                                  Incorporated by reference to the reporton Form 10-Q filed by MCT for the quarter ended September 30, 1995, SEC FileNo. 0-22384.

(4)                                  Incorporated by reference to the exhibitsto the Post-Effective Amendment to Registration Statement on Form S-8 filed byMCT on July 15, 1996, as amended, SEC File No. 33-85766.

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

31

----

(6)                                  Incorporated by reference to the reporton Form 10-Q filed by MCT for the quarter ended September 28, 1996, SEC FileNo. 0-22384.

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

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

(9)                                  Incorporated by reference to the exhibitsto the Registration Statement on Form S-8 filed by MCT on January 31, 2000, SECFile No. 333-95765.

(10)                            Incorporated by reference to thedefinitive proxy materials for the 2001 Annual Stockholders Meeting, filedApril 30, 2001.

(11)                            Incorporated by reference to the reporton Form 10-K filed by MCT for the period ended December 31, 2001, SEC File No.0-22384.

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

(13)                            Incorporated by reference to the reporton Form 10-Q filed by MCT for the quarterly period ended September 27, 2003,SEC File No. 0-22384.

(14)                            Incorporated by reference to the reporton Form 10-K filed by MCT for the period ended December 31, 2002, SEC File No.0-22384.

(15)                            Incorporated by reference to the reporton Form 10-K filed by MCT for the period ended December 31, 2003, SEC File No.0-22384.

(16)                            Incorporated by reference to the exhibitsto the Registration Statement on Form S-8 filed by MCT on July 16, 2004, SECFile No. 333-117407.

(17)                            Incorporated by reference to the reporton Form 8-K filed by MCT on February 3, 2005.

(18)                            Incorporated by reference to the reporton Form 8-K filed by MCT on February 24, 2005.

(19)                            Incorporated by reference to the reporton Form 8-K filed by MCT on February 25, 2006.

(20)         Incorporated by reference to the reporton Form 8-K filed by MCT on September 7, 2006.

(21)         Incorporated by reference to the reporton Form 8-K filed by MCT on October 18, 2006.

(22)         Incorporated by reference to the reporton Form 8-K filed by MCT on March 23, 2007.

(23)         Incorporated by reference to the reporton Form 8-K filed by MCT on April 2, 2007.

32

----

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

**Index to Consolidated FinancialStatements**
|                                                                                                                                                    | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 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, 2006, and December 31, 2005                                                                        |       |       |
| Consolidated Statements of  Operations for the Years Ended December 31, 2006, December 31, 2005, and  December 31, 2004                            |       |       |
| Consolidated  Statements of Changes in Stockholders’ Deficit for the Years Ended December  31, 2006, December 31, 2005, and December 31, 2004 |       |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, December 31,  2005, and December 31, 2004                            |       |       |
| Notes to  Consolidated Financial Statements                                                                                                        |       |       |
| Signatures  and Certifications                                                                                                                     |       |       |

 

F-1

----

##### **REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

To the Audit Committee,Stockholders and Board of Directors of

Micro ComponentTechnology, Inc. and Subsidiaries

St. Paul, MN

We have audited theaccompanying consolidated balance sheet of Micro Component Technology, Inc. andSubsidiaries as of December 31, 2006 and the related consolidated statements ofoperations, stockholders’ deficit and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financialstatements based on our audit.

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

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Micro Component Technology, Inc.and Subsidiaries as of December 31, 2006 and the results of their operationsand their cash flows for the year ended December 31, 2006 in conformity withU.S. generally accepted accounting principles.

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

 

/s/ Olsen, Thielen & Co. Ltd.

St. Paul, Minnesota

March 30, 2007

F-2

----

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Shareholders,Audit Committee and Board of Directors

Micro ComponentTechnology, Inc. and Subsidiaries

St. Paul, MN

We have audited theaccompanying consolidated balance sheet of Micro Component Technology, Inc. andSubsidiaries as of December 31, 2005, and the related consolidated statementsof operations, shareholders’ deficit and cash flows for the years endedDecember 31, 2005 and 2004.  Theseconsolidated financial statements are the responsibility of the company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe 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.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Micro Component Technology, Inc.and Subsidiaries as of December 31, 2005 and the results of their operationsand their cash flows for the years ended December 31, 2005 and 2004 inconformity with U.S. generally accepted accounting principles.

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

/s/ Virchow,Krause & Company, LLP

Minneapolis, Minnesota

February 3, 2006

(except for Note12, as to which the date is February 17, 2006)

F-3

----

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

**CONSOLIDATEDBALANCE SHEETS**

(in thousands,except share and per share amounts)
| ** **                                                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **Assets**                                                                                          |       |                  |       |                  |       |
| Current assets:                                                                                     |       |                  |       |                  |       |
| Cash and cash equivalents                                                                           |       | $                     | 200        |                  | $          | 77 |   |
| Accounts receivable, less allowance for doubtful accounts  of $126 and $148, respectively           |       | 2,816                 |       | 1,661                 |       |
| Inventories                                                                                         |       | 2,016                 |       | 2,194                 |       |
| Other                                                                                               |       | 169                   |       | 169                   |       |
| Total current assets                                                                                |       | 5,201                 |       | 4,101                 |       |
|                                                                                                |       |                  |       |                  |       |
| Property, plant  and equipment, net                                                                 |       | 91                    |       | 148                   |       |
| Debt issuance  costs, net of accumulated amortization of $1,383 and $1,005, respectively            |       | 246                   |       | 276                   |       |
| Other assets                                                                                        |       | 18                    |       | 21                    |       |
| Total assets                                                                                        |       | $                     | 5,556      |                  | $          | 4,546 |   |
|                                                                                                |       |                  |       |                  |       |
| **Liabilities  and Stockholders’ Deficit**                                                     |       |                  |       |                  |       |
| Current  liabilities:                                                                               |       |                  |       |                  |       |
| Current portion of long-term debt                                                                   |       | $                     | 228        |                  | $          | 133 |   |
| Bank line of credit, net of discounts of $0 and $42,  respectively                                  |       | 3,906                 |       | 2,630                 |       |
| Accounts payable                                                                                    |       | 440                   |       | 425                   |       |
| Accrued compensation                                                                                |       | 413                   |       | 382                   |       |
| Accrued interest                                                                                    |       | 144                   |       | 234                   |       |
| Accrued warranty                                                                                    |       | 101                   |       | 153                   |       |
| Customer prepayments and unearned service revenue                                                   |       | 382                   |       | 152                   |       |
| Other accrued liabilities                                                                           |       | 251                   |       | 180                   |       |
| Total current liabilities                                                                           |       | 5,865                 |       | 4,289                 |       |
|                                                                                                |       |                  |       |                  |       |
| Long-term debt,  net of discounts of $836 and $545, respectively                                    |       | 5,506                 |       | 3,683                 |       |
| 10% senior  subordinated convertible debt                                                           |       | —                |       | 3,630                 |       |
| Total  liabilities                                                                                  |       | 11,371                |       | 11,602                |       |
|                                                                                                |       |                  |       |                  |       |
| Commitments and  contingencies (Note 7)                                                             |       |                  |       |                  |       |
|                                                                                                |       |                  |       |                  |       |
| Stockholders’  deficit:                                                                        |       |                  |       |                  |       |
| Preferred stock, $.01 par value, 1,000,000  authorized, none issued and outstanding                 |       |                  |       |                  |       |
| Common stock, $.01 par value, 55,000,000 authorized  36,665,322 and 26,215,388 issued, respectively |       | 367                   |       | 262                   |       |
| Additional paid-in capital                                                                          |       | 102,459               |       | 97,670                |       |
| Accumulated deficit                                                                                 |       | (108,641              | )          | (104,988              | )          |
| Total stockholders’ deficit                                                                    |       | (5,815                | )          | (7,056                | )          |
| Total liabilities and  stockholders’ deficit                                                   |       | $                     | 5,556      |                  | $          | 4,546 |   |

 

See Notes to Consolidated Financial Statements.

F-4

----

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(in thousands,except per share data)
| ** **                                                         | ** ** | **Years Ended**  | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                         | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                          |       | $                     | 12,214     |   | $ | 7,069 |   | $ | 14,602 |   |
| Cost of sales:                                                     |       |                  |       |   |   |   |   |
| Product                                                            |       | 6,162                 |       | 4,012 |   | 8,830 |   |
| Inventory reserve adjustments                                      |       | 171                   |       | 525 |   | (1,544 | ) |
| Total cost of sales                                                |       | 6,333                 |       | 4,537 |   | 7,286 |   |
| Gross profit                                                       |       | 5,881                 |       | 2,532 |   | 7,316 |   |
| Operating  expenses:                                               |       |                  |       |   |   |   |   |
| Selling, general, and administrative                               |       | 4,095                 |       | 4,213 |   | 5,596 |   |
| Research and development                                           |       | 2,041                 |       | 1,980 |   | 2,841 |   |
| Restructuring charge                                               |       | —                |       | 107 |   | 35 |   |
| Total operating expenses                                           |       | 6,136                 |       | 6,300 |   | 8,472 |   |
|                                                               |       |                  |       |   |   |   |   |
| Loss from  operations                                              |       | (255                  | )          | (3,768 | ) | (1,156 | ) |
|                                                               |       |                  |       |   |   |   |   |
| Other income  (expense):                                           |       |                  |       |   |   |   |   |
| Interest income                                                    |       | 11                    |       | 13 |   | 6 |   |
| Interest expense                                                   |       | (3,371                | )          | (1,247 | ) | (868 | ) |
| Gain on sale of property and equipment                             |       | —                |       | — |   | 14 |   |
| Other expense                                                      |       | (38                   | )          | (101 | ) | (44 | ) |
|                                                               |       |                  |       |   |   |   |   |
| Loss before  income taxes                                          |       | (3,653                | )          | (5,103 | ) | (2,048 | ) |
| Income tax  provision                                              |       | —                |       | — |   | — |   |
|                                                               |       |                  |       |   |   |   |   |
| Net loss                                                           |       | $                     | (3,653     | ) | $ | (5,103 | ) | $ | (2,048 | ) |
|                                                               |       |                  |       |   |   |   |   |
| Net loss per common  share:                                        |       |                  |       |   |   |   |   |
| Basic and diluted                                                  |       | $                     | (0.12      | ) | $ | (0.20 | ) | $ | (0.08 | ) |
|                                                               |       |                  |       |   |   |   |   |
| Weighted average  common and common equivalent shares outstanding: |       |                  |       |   |   |   |   |
| Basic                                                              |       | 30,642                |       | 25,894 |   | 25,013 |   |
| Diluted                                                            |       | 30,642                |       | 25,894 |   | 25,013 |   |

 

See Notes toConsolidated Financial Statements.

F-5

----

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

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT**

(in thousands,except share data)
| ** **                                                                    | ** ** | **Common Stock** | ** ** | ** ** | ** ** | ** **     | ** ** | **Cumulative** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|------------|------------|----------------|------------|----------------|------------|
| ** **                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | **Other** | ** ** |
| ** **                                                                    | ** ** | ** **            | ** ** | ** ** | ** ** | **Additional** | ** ** | **Compre-**    | ** ** | ** ** | ** ** | **Compre-** | ** ** |
| ** **                                                                    | ** ** | ** **            | ** ** | **Par**    | ** ** | **Paid-in**    | ** ** | **hensive**    | ** ** | **Accumulated** | ** ** | **hensive** | ** ** |
| ** **                                                                    | ** ** | **Shares**            | ** ** | **Value**  | ** ** | **Capital**    | ** ** | **Loss**       | ** ** | **Deficit** | ** ** | **Loss** | ** ** |
| Balance at December 31,  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, net                                    |       | 56,951                |       | —     |       | 22             |       |           |       |   |   |   |   |
| Comprehensive  loss                                                           |       |                  |       |       |       |           |       | $              | (2,048     | ) |   |   |   |   |
|                                                                          |       |                  |       |       |       |           |       |           |       |   |   |   |   |
| Balance at December 31,  2004                                                 |       | 25,566,511            |       | $          | 256        |           | $          | 97,022         |       |   |   | $ | (99,885 | ) | $ | (69 | ) |
| Net loss                                                                      |       |                  |       |       |       |           |       | $              | (5,103     | ) | (5,103 | ) |   |   |
| Cumulative  translation adjustments                                           |       |                  |       |       |       |           |       | 69             |       |   |   | 69 |   |
| Shares issued in  lieu of interest                                            |       | 648,874               |       | 6          |       | 124            |       |           |       |   |   |   |   |
| Discounts on  long-term debt                                                  |       | —                |       | —     |       | 524            |       |           |       |   |   |   |   |
| Shares issued on  exercise of options / warrants, net                         |       | —                |       | —     |       | —         |       |           |       |   |   |   |   |
| Comprehensive  loss                                                           |       |                  |       |       |       |           |       | $              | (5,034     | ) |   |   |   |   |
|                                                                          |       |                  |       |       |       |           |       |           |       |   |   |   |   |
| Balance at December 31,  2005                                                 |       | 26,215,385            |       | $          | 262        |           | $          | 97,670         |       |   |   | $ | (104,988 | ) |   |   |
| Net loss                                                                      |       |                  |       |       |       |           |       | $              | (3,653     | ) | (3,653 | ) |   |   |
| Shares issued in  lieu of interest                                            |       | 1,304,711             |       | 13         |       | 303            |       |           |       |   |   |   |   |
| Discounts on  long-term debt                                                  |       | —                |       | —     |       | 821            |       |           |       |   |   |   |   |
| Shares issued on  conversion of 10% senior subordinated convertible debt, net |       | 7,795,223             |       | 78         |       | 3,613          |       |           |       |   |   |   |   |
| Shares issued on  exercise of options / warrants, net                         |       | 1,350,000             |       | 14         |       | 52             |       |           |       |   |   |   |   |
| Comprehensive  loss                                                           |       |                  |       |       |       |           |       | $              | (3,653     | ) |   |   |   |   |
|                                                                          |       |                  |       |       |       |           |       |           |       |   |   |   |   |
| Balance at December 31, 2006                                                  |       | 36,665,322            |       | $          | 367        |           | $          | 102,459        |       |   |   | $ | (108,641 | ) | $ | — |   |

 

See Notes toConsolidated Financial Statements.

F-6

----

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

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

(in thousands)
| ** **                                                                   | ** ** | **Years Ended**  | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                   | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                       |       |                  |       |   |   |   |   |
| Net loss                                                                     |       | $                     | (3,653     | ) | $ | (5,103 | ) | $ | (2,048 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                  |       |   |   |   |   |
| Depreciation                                                                 |       | 91                    |       | 191 |   | 450 |   |
| Amortization                                                                 |       | 813                   |       | 420 |   | 267 |   |
| Inventory  reserve adjustments                                               |       | 171                   |       | 525 |   | (1,544 | ) |
| (Gain) loss on  disposal of property and equipment                           |       | 1                     |       | — |   | 14 |   |
| Changes in  operating assets and liabilities:                                |       |                  |       |   |   |   |   |
| Accounts  receivable                                                         |       | (1,155                | )          | 374 |   | (496 | ) |
| Inventories                                                                  |       | 7                     |       | 275 |   | 1,651 |   |
| Other assets                                                                 |       | 3                     |       | 33 |   | 106 |   |
| Accounts payable                                                             |       | 15                    |       | (99 | ) | (746 | ) |
| Other accrued  liabilities                                                   |       | 507                   |       | 138 |   | (1,084 | ) |
| Net cash used in  operating activities                                       |       | (3,200                | )          | (3,246 | ) | (3,430 | ) |
|                                                                         |       |                  |       |   |   |   |   |
| Cash flows from  investing activities:                                       |       |                  |       |   |   |   |   |
| Additions to  property, plant and equipment                                  |       | (36                   | )          | (33 | ) | (149 | ) |
| Proceeds from  disposition of property                                       |       | —                |       | 28 |   | — |   |
| Net cash used in  investing activities                                       |       | (36                   | )          | (5 | ) | (149 | ) |
|                                                                         |       |                  |       |   |   |   |   |
| Cash flows from  financing activities:                                       |       |                  |       |   |   |   |   |
| Proceeds  (Payments) on long-term debt, net of discounts                     |       | 843                   |       | (315 | ) | (267 | ) |
| Proceeds  (Payments) on bank line of credit                                  |       | 1,096                 |       | 1,011 |   | (348 | ) |
| Proceeds from  institutional line of credit, net of discount                 |       | —                |       | — |   | 1,661 |   |
| Issuance of  long-term convertible note, net of debt issue costs             |       | —                |       | 2,397 |   | 1,657 |   |
| Proceeds from  issuance of stock, net of stock issuance costs                |       | 66                    |       | — |   | (36 | ) |
| Stock issuance  costs                                                        |       | 1,354                 |       | — |   | — |   |
| Net cash  provided by financing activities                                   |       | 3,359                 |       | 3,093 |   | 2,667 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Effects of exchange  rate changes                                            |       | —                |       | 69 |   | — |   |
|                                                                         |       |                  |       |   |   |   |   |
| Net increase (decrease)  in cash and cash equivalents                        |       | 123                   |       | (89 | ) | (912 | ) |
|                                                                         |       |                  |       |   |   |   |   |
| Cash and cash equivalents  at beginning of period                            |       | 77                    |       | 166 |   | 1,078 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                     | 200        |   | $ | 77 |   | $ | 166 |   |
|                                                                         |       |                  |       |   |   |   |   |
| Supplemental  disclosure:                                                    |       |                  |       |   |   |   |   |
| Non-cash  investing and financing activities:                                |       |                  |       |   |   |   |   |
| Stock issued in  lieu of interest                                            |       | $                     | 316        |   | $ | 130 |   | $ | 642 |   |
| Discount on  issuance of long-term debt                                      |       | 821                   |       | 524 |   | — |   |
| Stock issued in  conversion of 10% senior subordinated debt                  |       | 2,335                 |       | — |   | 3,710 |   |
| Conversion of  accounts payable into long term debt                          |       | —                |       | 450 |   | — |   |
|                                                                         |       |                  |       |   |   |   |   |
| Cash paid for interest                                                       |       | $                     | 968        |   | $ | 503 |   | $ | 228 |   |

 

See Notes to Consolidated Financial Statements.

F-7

----

**MICROCOMPONENT TECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

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

*Business*

We design, manufacture, market and service automated testhandling equipment for the semiconductor industry.  Our handlers are designed to handle mostsemiconductor or integrated circuit device packages currently inproduction.  We operate in one businesssegment in three geographic locations.

A network ofoffices and representatives supports our customers across North America, Europeand Asia.  Our company was formed in 1972and is headquartered in St. Paul, Minnesota.

*Basis ofPresentation*

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

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

As of December 31, 2006, we had cash and cash equivalents of$200,000, working capital of negative $0.7 million, assets totaling $5.6million, liabilities totaling $11.4 million and an accumulated deficit of$108.6 million.  We expect to continue toexpend cash and incur operating losses at the current net sales levels, but toa lesser extent than the twelve months ended December 31, 2006 as certainoperating expenses are expected to decline from 2006 levels. Our ability to generatecash and operating income is dependent on increasing our customer base toexpand the penetration of our product technology and the realization of ourlower operating expense targets.

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

On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31, 2006, holders of $2.1 million inprincipal amount of the Notes (62%) accepted the offer and agreed to converttheir Notes, and the Company issued 7,795,223 shares of common stock to thoseholders.  As of December 24, 2006, anadditional $65,000 in principal amount of the Notes was satisfied by cashpayments by the Company at a discount.  There is currently $1.2 million inprincipal amount of the Notes outstanding, represented by one Note now held byLaurus.  The Note has a conversion price of $.56 per share, and is due andpayable in full on March 31, 2008.

On March 29, 2007, we again restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable 

F-8

----

monthly on the term note at the prime rate plus 2.5%. The note is non-convertible.  BeginningMarch 1, 2008, we are required to make monthly payments equal to 1/60th of theprincipal amount until February 17, 2009, at which time the entire remainingprincipal and accrued interest is due and payable in full.  In addition tothe $5.25 million note, there is a $4.0 million working capital line of credit,which is payable in full on March 8, 2008.  Interest is payable monthly onthe line at the prime rate plus 2.5%.  As of March 30, 2007, there was an$800,000 over-advance in excess of the borrowing base on the working capitalline of credit.  Principal on theover-advance is repayable in $100,000 monthly payments beginning on February28, 2008.  The restructured financing also includes an additional $1.0million term note.  The proceeds from the$1 million term note, net of fees and expenses from the 2007 refinancing, arerequired to be held in a restricted account at a bank, and will only bereleased by the bank to the Company, upon approval of Laurus in its discretion,for the manufacture of demo equipment. Interest is payable monthly at the prime rate plus 2.0% and theprincipal is payable in full on March 31, 2008. As part of the 2007 restructuring, the Company also issued Laurus a10-year option to purchase 5,000,000 shares at an exercise price of $0.01 pershare.  The shares issuable upon exerciseof the option have standard registration rights.

As part of the refinancing, Laurus required that the Companygrant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, asincentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approvedthe grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000shares of common stock at a price of $0.26 per share, the closing sale price onthe day of grant.  The option becomesfully vested on March 20, 2008 and has a term of 10 years.

The Companybelieves that the combination of reduced spending, increasing our customer baseto further enable the penetration of our product technology, and the amendmentof our existing credit facility contained elsewhere herein, will provide thecash necessary to meet our operating, working capital and capital resource obligationsthrough all of 2007.

A material portion of the principal and interest due from theCompany to Laurus on the existing financing agreements becomes due and payablein March of 2008.  In the event that weare unable to repay or refinance our debt in March of 2008, Laurus couldpotentially take a number of actions as secured creditor which would have amaterial negative impact on the Company and its shareholders, includingforeclosure, a forced sale of all or part of the Company, and/or liquidation.Further, if future financing requirements are satisfied through the issuance ofequity or debt instruments, shareholders may experience additional dilution interms of their percentage of ownership of our securities.

*Use ofEstimates*

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

*RevenueRecognition*

Under SAB 104, our revenue is recognized upon shipment, as our terms areFOB shipping point, for established products that have previously satisfiedexisting customer performance specifications and that provide for full paymenttied to shipment.  Revenue for productsthat have not previously satisfied customer performance specifications or fromsales where all or a portion of customer payment is based upon acceptance areonly recognized upon customer acceptance. The related inventory costs are offset against the deferred revenue andreported as “deferred revenue in excess of costs incurred” in the consolidatedbalance sheet.  Product warranty and installationcosts are accrued in the period sales are recognized.  Installation services are considered to beperfunctory as defined under SAB 104 and average less than 5% of the contractprice.  Revenue related to spare parts isrecognized upon shipment.  Revenuerelated to maintenance and service contracts are deferred and amortized to earningson a straight-line basis over the life of the service contract.  Custom integration software revenue is recognizedon a project basis with milestone acceptance provisions.  Shipping and handling costs are billed to thecustomer and included in the net revenue with the cost of shipment and handlingcharged to cost of goods sold.

F-9

----

*Researchand Development Expenses*

Researchand development expenses for new product development are charged to expense asincurred.

*FinancialInstruments*

Thecarrying amounts for all financial instruments approximates fair value.  The carrying amounts for cash and cashequivalents, accounts receivable, accounts payable and accrued liabilitiesapproximates fair value because of the short maturity of theseinstruments.  The fair value of capitallease obligations, note payable and long-term debt approximates the carryingamounts based upon the Company’s expected borrowing rate for debt with similarremaining maturities and comparable risk.

*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.

*AccountsReceivable*

We review customers’ credit history beforeextending unsecured credit and establish an allowance for doubtful accountsbased upon factors 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 $126,000 and$148,000 at December 31, 2006 and 2005, respectively.

*Inventories*

Inventoriesare stated at the lower of cost or market. Cost is determined by the first-in, first-out (“FIFO”)method.  Provisions to reduce inventoriesto the lower of cost or market are made based on a review of excess andobsolete 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 at cost.  Depreciationis provided by the straight-line method over the estimated useful livesof the assets for financial reporting and accelerated methods for taxpurposes.  Leasehold improvements areamortized over the shorter of the estimated useful life or the lease term forfinancial reporting purposes.  Estimatedlives used in computing book depreciation are as follows:

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

 

*Impairment of Long-Lived Assets*

We periodicallyevaluate the carrying value of long-lived assets for potential impairment.  We consider projected future operatingresults, cash flows, trends, and other circumstances in making such estimatesand 

F-10

----

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.

*ProductWarranty*

Atthe time the product is sold, estimated costs of warranty obligations tocustomers are charged to expense and a related accrual is established.

*IncomeTaxes*

Weaccount for income taxes in accordance with the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 109*, Accountingfor Income Taxes*.  Deferredincome taxes are recorded based on differences in the bases of assets andliabilities between the financial statements and the tax returns as well asfrom loss carryforwards.  The valuationallowance for deferred income tax benefits is determined by us based upon the expectationof whether the benefits are more likely than not to be realized.

*Stock-BasedCompensation*

The Company adopted Statement of Financial AccountingStandards (SFAS) No. 123R “Share-Based Payment”, on January 1, 2006.  This statement requires us to recognize thecost of employee and director services received in exchange for the stockoptions it has awarded.  Under SFAS 123R,we are required to recognize compensation expense over an award’s vestingperiod based on the award’s fair value at the date of grant.  We have elected to adopt SFAS 123R on amodified prospective basis; accordingly the financial statements for periodsprior to January 1, 2006 do not include stock-based compensation costscalculated under the fair value method. As a result of the adoption of SFAS 123R, we incurred a compensationexpense of $4,000 for year ended December 31, 2006.

If compensation cost forour stock option and employee stock purchase plans had been accounted for inaccordance with SFAS 123R, our net loss and net loss per share would have beenas follows:

|                                     | ** ** | **Years Ended** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **Dec 31**      | ** ** | **Dec. 31** | ** ** |
| ** **                          | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Net loss, in  thousands:            |       |                 |       |   |   |
| As reported                         |       | $                    | (5,103     | ) | $ | (2,048 | ) |
| Fair value compensation expense     |       | (184                 | )          | (1,581 | ) |
| Pro forma                           |       | $                    | (5,287     | ) | $ | (3,629 | ) |
|                                |       |                 |       |   |   |
| Net loss per  share — basic:   |       |                 |       |   |   |
| As reported                         |       | $                    | (0.20      | ) | $ | (0.08 | ) |
| Fair value compensation expense     |       | (0.01                | )          | (0.06 | ) |
| Pro forma                           |       | $                    | (0.21      | ) | $ | (0.14 | ) |
|                                |       |                 |       |   |   |
| Net loss per  share — diluted: |       |                 |       |   |   |
| As reported                         |       | $                    | (0.20      | ) | $ | (0.08 | ) |
| Fair value compensation expense     |       | (0.01                | )          | (0.06 | ) |
| Pro forma                           |       | $                    | (0.21      | ) | $ | (0.14 | ) |
|                                |       |                 |       |   |   |
| Stock Based  Compensation:          |       |                 |       |   |   |
| As reported                         |       | $                    | —     |   | $ | — |   |
| Fair value compensation expense     |       | (184                 | )          | (1,581 | ) |
| Pro forma                           |       | $                    | (184       | ) | $ | (1,581 | ) |

 

F-11

----

In December of 2004, the Compensation Committee of the Boardof Directors approved the acceleration of the vesting of all of the thenoutstanding options under all plans.  Atthe time of this approval all option exercise prices exceeded the public marketprice of the underlying common shares. This action resulted in 1,029,500 shares being accelerated with respectto their original vesting dates.  Thisacceleration resulted in an additional $737,000 of net compensation expensebeing included in the above tables for the year ended December 31, 2004.

The fair value of optionsgranted under the stock option and employee stock purchase plans for the yearsended December 31, 2006, 2005, and 2004 was estimated on the date of grantusing the Black-Scholes option pricing model with the following weightedaverage assumptions and results:

|                                          | ** ** | **Years Ended** | ** ** |
|------------------------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **Dec. 31,**    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **                               | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                     |       |                 |       |   |   |   |   |
| Dividend yield                           |       | 0.00                 | %          | 0.00 | % | 0.00 | % |
| Expected  volatility                     |       | 91.89                | %          | 94.31 | % | 93.53 | % |
| Risk-free  interest rate                 |       | 4.99                 | %          | 3.89 | % | 3.41 | % |
| Expected life of  options                |       | 3.5 years            |       | 3.5 years |   | 3.5 years |   |
| Fair value per share of  options granted |       | $                    | 0.32       |   | $ | 0.21 |   | $ | 0.87 |   |
|                                          |            |                      |            |  |  |  |  |  |  |  |

 

*ForeignCurrency Translation*

Assets and liabilities ofthe foreign subsidiary are translated to U.S. dollars at year-end rates,and the statements of operations are translated at average exchange ratesduring the year.  Translation adjustmentsarising from the translation of the foreign affiliates’ net assets into U.S.dollars were recorded in cumulative other comprehensive income until 1999.  During 1999, the foreign subsidiary’sfunctional currency changed to the U.S. dollar due principally to a significantshift in the amount of activity denominated in U.S. dollars versus the local currency.  All translation adjustments are now recordedin the consolidated statements of operations. For the year ended December 31, 2006, there are no cumulativetranslation adjustments.  For the yearended December 31, 2005, we wrote-off cumulative translation adjustments of$69,000.

*New Accounting Standards*

InJune 2006, the Financial Accounting Standards Board issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109,*or FIN 48.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, *Accounting for IncomeTaxes*.  FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  This pronouncement alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal years beginningafter December 15, 2006; therefore, the Company will adopt the new requirementsfor fiscal 2007.  We do not expect theadoption of this pronouncement to have a material impact on our financialposition or results of operations.

InSeptember 2006, the FASB issued SFAS No. 157, “*Fair ValueMeasurements*” (“SFAS No. 157”), which effective for interim andannual reporting periods beginning after November 15, 2007.  This statement provides a definition of fairvalue, establishes a framework for measuring fair value, and expandsdisclosures about 

F-12

----

fair value measurements forfuture transactions.  The Company has notyet assessed the impact of this Statement on the Company’s financialstatements.

InFebruary 2007, the FASB issued Statement of Financial Accounting Standards No.159, “*The Fair Value Option for Financial Assets andFinancial Liabilities*” (“SFAS 159”). The Statement permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. The objective is to improve financial reporting by providing entitieswith the opportunity to mitigate volatility in reported earnings caused bymeasuring related assets and liabilities differently without having to applycomplex hedge accounting provisions. SFAS 159 will be effective for the first fiscal year that begins afterNovember 15, 2007.  The company has notyet assessed the impact of this Statement on the Company’s financialstatements.

**NOTE 2 -LOSS PER COMMON SHARE**

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

|                                                | ** ** | **Years Ended**  | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                     | ** ** | **2006(1)**           | ** ** | **2005(1)** | ** ** | **2004(1)** | ** ** |
| Weighted average  common shares outstanding    |       | 30,642                |       | 25,894 |   | 25,013 |   |
| Effect of  dilutive stock options and warrants |       | —                |       | — |   | — |   |
| Effect of  convertible debt                    |       | —                |       | — |   | — |   |
|                                           |       | 30,642                |       | 25,894 |   | 25,013 |   |

----

(1)          We reported a loss for the period.  No adjustment was made for the effect ofstock options, warrants or convertible debt as the effect wasanti-dilutive.  Stock options andwarrants outstanding totaled 5,915,398 shares at December 31, 2006, 5,013,398shares at December 31, 2005 and 3,358,058 shares at December 31, 2004.

**NOTE 3 -RESTRUCTURING CHARGES**

Therestructuring charges described below were incurred and paid within the yearsas set forth below.

**2005 Restructuring Charges**

 During the secondquarter of 2005, in response to the continuing downturn in the semiconductorcapital equipment market, we reduced our workforce across all functional areasby approximately 7% resulting in a restructuring charge of $66,000.  This charge reflected severance and otherbenefit costs associated with this reduction. This workforce reduction affected a total of seven employees across allfunctional areas.

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

F-13

----

**2004 Restructuring Charges**

During the fourth quarter, in response to a second half 2004market contraction, we reduced our workforce by approximately 11% at the time,resulting in a restructuring charge of $35,000. This charge reflected severance and benefit costs associated with thisreduction.  This work force reductionaffected a total of 12 employees principally with the manufacturing function.

**NOTE 4 - BALANCE SHEETINFORMATION**

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

|                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Beginning  balance |       | $                     | 148        |                  | $          | 215 |   |
| Provisions         |       | —                |       | 46                    |       |
| Write offs         |       | (22                   | )          | (113                  | )          |
| Ending balance     |       | $                     | 126        |                  | $          | 148 |   |

 

Provisions are charged to selling, general and administrativeexpense.

Major components of inventories were as follows (inthousands):

|                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Raw materials   |       | $                     | 1,314      |                  | $          | 1,783 |   |
| Work-in-process |       | 377                   |       | 394                   |       |
| Finished goods  |       | 325                   |       | 17                    |       |
|            |       | $                     | 2,016      |                  | $          | 2,194 |   |

 

In accordance withaccounting principles generally accepted in the United States of America, wevalue our inventories at the lower of cost or market.

Thefollowing table provides the inventory reserves for the years ended December31, 2006 and 2005.

|                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Inventory  reserve balance — beginning     |       | $        | 7,401      |     | $          | 7,149 |   |
| Release of  inventory reserve on sale of goods  |       | —   |       | (61      | )          |
| Release of  inventory reserve on scrap of goods |       | (1,959   | )          | (212     | )          |
| Additional  inventory reserve                   |       | 171      |       | 525      |       |
| Inventory reserve  balance — ending        |       | $        | 5,613      |     | $          | 7,401 |   |

 

We provide a standard thirteen month warranty program for ourequipment products. We record provisions for warranty claims for these productsbased upon historical claim performance. The following table provides the expense recorded and charges againstour reserves for the years ended December 31, 2006 and 2005.

F-14

----

 

|                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Accrued warranty  balance — beginning |       | $        | 153        |     | $          | 162 |   |
| Provision                                  |       | 32       |       | 62       |       |
| Warranty claims                            |       | (84      | )          | (71      | )          |
| Accrued warranty  balance — ending    |       | $        | 101        |     | $          | 153 |   |

 

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

|                                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Leasehold  improvements        |       | $                     | 193        |                  | $          | 188 |   |
| Machinery and  equipment       |       | 2,049                 |       | 2,070                 |       |
| Furniture and  fixtures        |       | 208                   |       | 208                   |       |
|                           |       | 2,450                 |       | 2,466                 |       |
| Less accumulated  depreciation |       | (2,359                | )          | (2,318                | )          |
|                           |       | $                     | 91         |                  | $          | 148 |   |

 

#### **NOTE5 - LONG-TERM DEBT**

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

|                                                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Long-term Laurus  notes, net of discounts of $836 and $545, respectively |       | $                | 5,506      |                  | $     | 3,455 |   |
| Long-term  California lease                                              |       | 228                   |       | 361                   |       |
| Less: current  portion                                                   |       | (228                  | )          | (133                  | )          |
| Total long-term debt                                                     |       | $                     | 5,506      |                  | $          | 3,683 |   |
|                                                                     |       |                  |       |                  |       |
| 10% senior subordinated  convertible notes                               |       | $                     | —     |                  | $          | 3,630 |   |

 

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

OnJanuary 28, 2005, we completed an amendment to the financing agreement withLaurus to defer payments on the long-term convertible note.  As part ofthis amendment, the conversion prices on both notes were reduced.  We alsoissued Laurus at that time a seven-year warrant to purchase 150,000 shares ofcommon stock at $.67 per share.

OnApril 29, 2005, we completed another financing transaction with Laurus in whichwe borrowed an additional $2.5 million, and which was convertible into sharesof common stock.  We also issued Laurus at that time an option to purchase2,556,651 shares of common stock at an exercise price of $.01 per share. We received net proceeds of approximately $2.4 million at the closing.

F-15

----

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

On March 29, 2007, we again restructured the financing withLaurus, and increased the total secured indebtedness to $10.25 million.  The restructured financing includes a $5.25million term note.  Interest is payable monthly on the term note at theprime rate plus 2.5%.  The note is non-convertible.  Beginning March 1, 2008, we are required tomake monthly payments equal to 1/60th of the principal amount until February17, 2009, at which time the entire remaining principal and accrued interest isdue and payable in full.  In addition to the $5.25 million note, there isa $4.0 million working capital line of credit, which is payable in full onMarch 8, 2008.  Interest is payable monthly on the line at the prime rateplus 2.5%.  As of March 30, 2007, there was an $800,000 over-advance inexcess of the borrowing base on the working capital line of credit.  Principal on the over-advance is repayable in$100,000 monthly payments beginning on February 28, 2008.  Therestructured financing also includes an additional $1.0 million term note.  The proceeds from the $1 million term note,net of fees and expenses from the 2007 refinancing, are required to be held ina restricted account at a bank, and will only be released by the bank to theCompany, upon approval of Laurus in its discretion, for the manufacture of demoequipment.  Interest is payable monthlyat the prime rate plus 2.0% and the principal is payable in full on March 31,2008.  As part of the 2007 restructuring,the Company also issued Laurus a 10-year option to purchase 5,000,000 shares atan exercise price of $0.01 per share. The shares issuable upon exercise of the option have standardregistration rights.

As part of the refinancing, Laurus required that the Companygrant Roger Gower, the Company’s CEO, an option for 1,000,000 shares, asincentive for him to remain with the Company. On March 20, 2007, the Compensation Committee of the Company approvedthe grant to Mr. Gower of a non-qualified stock option to purchase 1,000,000shares of common stock at a price of $0.26 per share, the closing sale price onthe day of grant.  The option becomesfully vested on March 20, 2008 and has a term of 10 years.

In December 2001, we issued$10.0 million of 10% Senior Subordinated Convertible Notes due in 2006 to agroup of accredited investors.  TheseNotes were initially convertible into our common stock at a conversion priceequal to $2.60 per share.  The Notes areredeemable by us at any time after January 3, 2004 as long as the market priceof our common stock equals or exceeds 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 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 beginningJune 30, 2003 through December 31, 2004, and the conversion price for the Noteswas reduced to $1.00 per share.  OnFebruary 25, 2005, we completed a second amendment to the agreement with the holdersof our 10% Senior Subordinated Convertible Notes, wherein holders of 80% of theremaining Notes, representing $2.9 million, agreed to continue to accept stockin payment of interest for the remaining four interest payments throughDecember 24, 2006.  As part of thisamendment, we agreed to reduce the Note conversion price to $0.85 per share,and use our best efforts to register the shares with the SEC.  On April 29, 2005, we completed anotherfinancing transaction with Laurus.  As aresult of the new financing with Laurus, the conversion price for all of theNoteholders who accepted the prior restructuring agreements was at that timereduced to $0.61 per share.  On August 28, 2006, the Company sent the holders of theCompany’s 10% Senior Subordinated Convertible Notes an Offer to Reduce NoteConversion Price, in which the Company offered to reduce the conversion priceof the Notes to $0.29 per share if the holders agreed to convert their Notes byAugust 31, 2006. Effective August 31,

F-16

----

2006, holders of $2.1 million in principal amount of the Notes(62%) accepted the offer and agreed to convert their Notes, and the Companyissued 7,795,223 shares of common stock to those holders.

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 endedDecember 31, 2003, principal in the amount of $2.66 million and interest in theamount 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.”

As of December 24, 2006, an additional $65,000 in principalamount of the Notes was satisfied by cash payments by the Company at adiscount.  There is currently $1.2 million in principal amount of theNotes outstanding, represented by one Note now held by Laurus.  The Notehas a conversion price of $.56 per share, and is due and payable in full onMarch 31, 2008.

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

Payments due underdebt obligations, including additional amounts borrowed subsequent to year-endare as follows: 2007 - $228,000, 2008 - $2,105,000; 2009 - $4,375,000; and 2010- $0.

**NOTE 6 -INCOME TAXES**

The Company incurred losses for the years ended December 31,2006, 2005, and 2004, respectively, and recorded no provision for income taxes.

The reconciliationof income tax computed at the U.S. federal statutory rate to income tax expenserecorded in the consolidated financial statements was as follows:

|                                     | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Tax (benefit) at  statutory rate    |       | (35.0                                       | )%         | (35.0 | )% | (35.0 | )% |
| Effect of  graduated tax rates      |       | 1.0                                         |       | 1.0 |   | 1.0 |   |
| State taxes                         |       | (3.0                                        | )          | (3.0 | ) | (3.0 | ) |
| Adjustment for  valuation allowance |       | 37.0                                        |       | 37.0 |   | 37.0 |   |
|                                |       | 0.0                                         | %          | 0.0 | % | 0.0 | % |

 

As of December 31, 2006, we had federal net operating loss(NOL) carryforwards totaling approximately $99.7 million and tax creditcarryforwards of approximately $117,000 which can be used to reduce future taxableincome.  Such tax loss and tax creditcarryforwards begin to expire in 2012. Changes in the ownership of the Company have placed limitations on theannual usage of these NOLs.  Futurechanges in ownership may place additional limitations on these losses.

The components of thedeferred tax asset is as follows:

F-17

----

 

|                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Net operating  loss carryforwards |       | $                     | 34,289     |                  | $          | 13,431 |   |
| Inventories                       |       | 2,318                 |       | 3,068                 |       |
| Accrued expenses                  |       | 208                   |       | 235                   |       |
| Other                             |       | 233                   |       | 269                   |       |
| Valuation  allowance              |       | (37,048               | )          | (17,003               | )          |
|                              |       | $                     | —     |                  | $          | — |   |

 

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

**NOTE 7 - COMMITMENTSAND CONTINGENCIES**

We lease certainfacilities and equipment under various operating leases.  We occupy approximately 24,029 square feet ofleased space in St. Paul, Minnesota, for our principal executive offices andresearch and product development activities. This lease expires on April 30, 2012 with a one-time option to terminatethe lease on April 30, 2010 with a termination fee of two months grossrent.  We occupy approximately 54,000square feet of leased space in Penang, Malaysia, which is utilized as a manufacturingcenter for our mature products.  Thislease expires in June 2007.  As ofDecember 31, 2006 we notified our landlord of our intent to lease on a month tomonth basis.

Totalrent expense charged to operations, primarily for facilities and equipment, was$582,000, $615,000 and $814,000 for the years ended December 31, 2006, 2005 and2004, respectively.

The future minimum rental payments at December 31, 2006, dueunder noncancelable operating leases, are as follows: 2007 - $377,000; 2008 -$191,000; 2009 - $178,000; 2010 - $180,000; 2011 - $182,000 and $61,000 thereafter.

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

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

TheBoard of Directors previously reserved a total of 2,600,000 shares of commonstock under the 1993 Incentive Stock Options Plan for key employees.  This plan expired in April 2003 except foroutstanding options. In June of 2004, the Board of Directors and shareholdersapproved the 2004 Incentive Stock Plan and the reservation of 880,000shares.  Options under the two plansexpire 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 vestedoptions.  Options granted in excess of the$100,000 annual IRS limitations become non-qualified. The Compensation Committeeof the Board of Directors at their discretion can grant non-qualified optionsand restricted 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 our shareholdersapproved the Stock Option Plan for Outside Directors.  A total of 570,000 shares have been reservedfor issuance under the plan.  Each personwho becomes an outside director will automatically be granted an option topurchase 10,000 shares.  In addition,each outside director will also automatically be granted an option to purchase10,000 shares immediately upon each reelection as a director, or on theanniversary of the prior year’s grant in any year in which there is no meetingof the stockholders 

F-18

----

at which directors are elected.  The period within which an option must beexercised will be the earlier of (1) ten years from the date of the grant, or(2) the date which is one year after the director ceases to be a director forany reason, provided that if a director voluntarily declines to stand forre-election after the age of 60, he shall not be required to exercise hisoptions within one year after he ceases to be a director and shall continue tovest in his options after he ceases to be a director.  The exercise price for each option will bethe fair market value of the stock on the date of grant, and each option willgenerally vest over a two-year period at 50 percent per year.

Wehave also reserved 150,000 shares of common stock for the grant ofnon-qualified stock options for outside directors, consultants, advisors andemployees.

Shares subject to optionsunder these plans were as follows:
| ** **                        | ** ** | ** ** | ** ** | ** **           | ** **     | **Weighted**       | ** ** |
|-----------------------------------|------------|------------|------------|----------------------|----------------|--------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | ** **           | ** **     | **Average**        | ** ** |
| ** **                        | ** ** | ** ** | ** ** | ** **           | ** **     | **Exercise**       | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Exercise**         | ** **     | **Price Per** | ** ** |
| **Options**                       | ** ** | **Shares** | ** ** | **Price Range** | ** **     | **Share**          | ** ** |
| 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 |   |
|                              |       |       |       |                 |           |               |       |
| Granted                           |       | 890,000    |       | $                    | 0.16 to $0.36  |               | $          | 1.23 |   |
| Exercised                         |       | —     |       | —               |           | —             |       |
| Expired                           |       | (1,941,311 | )          | $                    | 0.36 to $9.25  |               | $          | 1.98 |   |
|                              |       |       |       |                 |           |               |       |
| Outstanding at  December 31, 2005 |       | 1,672,235  |       | $                    | 0.16 to 11.25  |               | $          | 1.33 |   |
|                              |       |       |       |                 |           |               |       |
| Granted                           |       | 40,000     |       | $                    | 0.50           |               | $          | 0.50 |   |
| Exercised                         |       | (150,000   | )          | $                    | 0.36           |               | $          | 0.36 |   |
| Expired                           |       | (288,000   | )          | $                    | 0.69 to $4.0   |               | $          | 1.82 |   |
|                              |       |       |       |                 |           |               |       |
| Outstanding at  December 31, 2006 |       | 1,274,235  |       | $                    | 0.16 to 11.25  |               | $          | 1.33 |   |
|                              |       |       |       |                 |           |               |       |
| Exercisable at December  31, 2006 |       | 1,214,235  |       | $                    | 0.16 to 11.25  |               | $          | 1.38 |   |

 

Optionsoutstanding at December 31, 2006 had exercise prices ranging from $0.16 to$11.25 per share as summarized in the following table:

F-19

----

 

|                   | ** ** | **Number**                | ** ** | **Weighted**  | ** ** | **Weighted**                  | ** ** | **Number**                | ** ** |
|-------------------|------------|---------------------------|------------|---------------|------------|-------------------------------|------------|---------------------------|------------|
| **Range of** | ** ** | **Outstanding**           | ** ** | **Average**   | ** ** | **Average**                   | ** ** | **Exercisable**           | ** ** |
| **Exercise**      | ** ** | **at Dec. 31,** | ** ** | **Remaining** | ** ** | **Exercise**                  | ** ** | **at Dec. 31,** | ** ** |
| **Prices**        | ** ** | **2006**                  | ** ** | **Life**      | ** ** | **Price Per Share** | ** ** | **2006**                  | ** ** |
| ** **        | ** ** | ** **                | ** ** | ** **    | ** ** | ** **                    | ** ** | ** **                | ** ** |
| $0.16 to $1.56    |       | 986,235                   |       | 1.5 years     |       | $                             | 0.57       |                      | 926,235    |   |
| $1.84 to $2.95    |       | 168,000                   |       | 5.3 years     |       | $                             | 2.57       |                      | 168,000    |   |
| $3.19 to $4.00    |       | 50,000                    |       | 1.6 years     |       | $                             | 3.31       |                      | 50,000     |   |
| $5.44 to $7.75    |       | 60,000                    |       | 3.2 years     |       | $                             | 7.13       |                      | 60,000     |   |
| $9.25 to $11.25   |       | 10,000                    |       | 3.2 years     |       | $                             | 11.25      |                      | 10,000     |   |
| $0.16 to $11.25   |       | 1,274,235                 |       | 2.1 years     |       | $                             | 1.33       |                      | 1,214,235  |   |

 

At December 31, 2006 and 2005, 725,000 and 765,000 shares,respectively, were available for future grants under the terms of theseplans.  In December of 2004, theCompensation Committee of the Board of Directors approved the acceleration ofthe vesting of all of the then outstanding options under all plans.  At the time of this approval all optionexercise prices exceeded the public market price of the underlying commonshares.  This action resulted in1,029,500 shares being accelerated with respect to their original vestingdates.

InFebruary 1996, the Board of Directors adopted the Employee Stock Purchase Planand reserved 300,000 shares of common stock for issuance under the Plan.  Eligible employees can elect under the Planto contribute between two percent and ten percent of their base pay each planyear (June 1 - May 31) to purchase shares of common stock at a price per shareequal to 85 percent of market value on the first day of the plan year or thelast day of the plan year, whichever is lower. Employee contributions are deducted from their regular salary orwages.  The maximum number of shares thatcan be purchased by an employee in any plan year is 1,000 shares.  For the years ended December 31, 2006, 2005,and 2004, no shares were issued under the plan. For the year ended December 31, 2003, 8,000 shares were issued under theplan at a price of $0.37.  For the yearended December 31, 2002, 28,551 shares were issued under the plan at pricesranging from $2.59 to $2.68 at a weighted average price of $2.68.  Approximately 122,900 shares remain reservedfor future issuances.

Under the Note Purchase Agreement  associated with the issuance of the 10%Senior Subordinated Convertible Notes and the Security Agreement associatedwith our Revolving Line of Credit and Term Note (each discussed in Note 5 inNotes to Consolidated Financial Statements contained elsewhere herein) we areprohibited from paying dividends.

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

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

|               | ** ** | **Years Ended** | ** ** |
|---------------|------------|----------------------|------------|
| ** **    | ** ** | **Dec. 31,**    | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** |
| ** **    | ** ** | **2006**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| United States |       | $                    | 1,594      |   | $ | 1,205 |   | $ | 2,769 |   |
| Asia          |       | 10,264               |       | 5,550 |   | 10,640 |   |
| Europe        |       | 356                  |       | 314 |   | 1,193 |   |
|          |       | $                    | 12,214     |   | $ | 7,069 |   | $ | 14,602 |   |

 

Although our primary manufacturing facility is located in Penang,Malaysia, we do not hold a material amount of long-lived assets outside of theUnited States.  Of our inventory reflectedon the Company balance sheet as of December 31, 2006, $1.8 million was locatedin our facility in Penang, Malaysia.

F-20

----

During the yearended December 31, 2006 our top ten customers accounted for approximately 95%of net sales with three customers accounting for approximately 67.2% and onecustomer accounting for approximately 47.8% of net sales.  During the year ended December 31, 2005 ourtop ten customers accounted for approximately 92% of net sales with threecustomers accounting for approximately 53.3% of net sales and one customeraccounting for approximately 33% of net sales. During the year ended December 31, 2004 our top ten customers accountedfor approximately 93% of net sales with three customers accounting forapproximately 65% of net sales and one customer accounting for approximately26% of net sales.  As of December 31,2006, one customer accounted for 66.2% of our total net accounts receivable.

F-21

----

**SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned;thereunto duly authorized, in the City of St. Paul, State of Minnesota, on April2, 2007.
|    |    | MICRO COMPONENT TECHNOLOGY, INC.    |
|--------------|--------------|-------------------------------------|
|         |         |                                |
|    |    | By:                                 | /s/ Roger E. Gower |   |
|    |    |                           |  Roger E.  Gower |
|    |    | President, Chief Executive Officer, |
|    |    | Chairman of the Board and Director  |

 

Pursuant to the requirements of the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe registrant in the capacities indicated on April 2, 2007.
| Signature               | ** ** | **Capacity**                        |
|-------------------------|------------|-------------------------------------|
|                    |       |                                |
|                    |       |                                |
| /s/Roger E. Gower       |       | President, Chief Executive Officer, |
| Roger E. Gower          |       | Chairman of the Board and Director  |
|                    |       |                                |
|                    |       |                                |
| /s/BachThuy T. Vo       |       | Interim Chief Financial Officer     |
| BachThuy T. Vo          |       |                                |
|                    |       |                                |
| /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      |       |                                |

 

F-22

----