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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)

FOR THE TRANSITION PERIOD FROM JANUARY 30, 2000 TO DECEMBER 29, 2000

COMMISSION FILE NUMBER: 0-45

SHELDAHL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MINNESOTA 41-0758073
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

1150 SHELDAHL ROAD
NORTHFIELD, MN 55057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (507) 663-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE OF $0.25 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(TITLE OF CLASS)
------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of shares held by non-affiliates was approximately
$23,919,097 on April 2, 2001, when the last sales price of the Registrant's
Common Stock, as reported in the Nasdaq National Market System, was $2.06. As of
April 2, 2001, the Company had outstanding 30,762,279 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

1. Portions of the Registrant's Proxy Statement to be filed with the Commission
within 120 days after the end of the Registrant's fiscal year are incorporated
by reference into Part III of the Form 10-K.
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PART I

ITEM 1. BUSINESS

GENERAL

On December 28, 2000, Sheldahl, Inc. ("Sheldahl") acquired all of the
outstanding securities of International Flex Holdings, Inc., a Delaware
corporation ("Holdings"), the sole shareholder of International Flex
Technologies, Inc., a Delaware corporation ("IFT"), pursuant to a merger of a
newly formed subsidiary of Sheldahl with and into Holdings (the "Merger").
Although Sheldahl is the legal survivor in the merger and remains the registrant
with the Securities and Exchange Commission ("SEC") and a listed company under
Nasdaq, under United States generally accepted accounting principles, as a
result of the number of shares issued and sold in the transactions, Holdings is
considered the "acquiror" of Sheldahl for financial reporting purposes. Among
other matters, this will require Sheldahl, in this report and all of its future
financial and informational filings with the SEC, to present the prior
historical, financial and other information of Holdings and IFT. Accordingly,
unless otherwise indicated to the contrary herein, the results of Holdings and
IFT will be presented herein as the "Company" for all periods prior to December
28, 2000 without inclusion of Sheldahl's results for the same period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" in Item 7 of this Form 10-K and the Company's
consolidated financial statements and notes thereto included elsewhere herein.
For purposes of this report, unless otherwise stated to the contrary, Company
shall refer to Sheldahl, Holdings and IFT on a combined basis for all periods on
or after December 28, 2000.

On January 5, 2001, the Board of Directors of the Company changed its
fiscal year to the Friday closest to December 31 of each year, beginning with
December 29, 2000. Therefore, for purposes of this report, fiscal 2000 consists
of a transition period from January 30, 2000, the beginning of Holdings' fiscal
year.

The Company creates and distributes high-density substrates, quality
fine-line flexible printed circuitry, and thin, flexible laminates and their
derivatives to worldwide markets. The Company's laminates are of two types:
adhesive-based tapes and materials, and its patented adhesiveless material,
Novaclad(R) and I-Flex. From these materials, the Company fabricates high-value
derivative products: single- and double-sided flexible interconnects and
assemblies under the trade names Flexbase(R), Novaflex(R) HD, Novaflex(R) VHD,
FlexStrate, DendriPlate(R) and substrates for silicon chip carriers under the
trade names ViaArray(R) and ViaThin(R). The Company also manufactures a variety
of electronic and specialty materials including high frequency laminates for RF
and microwave application, ITO used in EL lighting, touch and flat panel
applications, thermal materials for aerospace application and flat cable tape
for computer and automotive applications. Sheldahl's leading technology products
serve as the electronic interface between the function of electronic-based
products and their integrated circuits. The Company targets specific OEMs and
contract assemblers in the telecommunications, computer, medical, automotive and
aerospace markets in the drive to create electronic-based products that require
increased functionality.

The Company operates in two business divisions identified as the Materials
and Flex Interconnect Division (MFI), and the International Flex Technologies
Division (IFT). The MFI business division, which consists of Materials and
Flexible Interconnect Business Units, specializes in high quality, roll-to-roll
flexible circuits and specialty materials for the automotive, communications,
computer and aerospace markets. The IFT business division consists of fine-line,
roll-to-roll flexible circuits including substrates for silicon chip carriers
manufactured in Endicott, New York and Longmont, Colorado. These products target
the telecommunications, computer and medical markets.

The Company's high performance products -- FlexStrate, ViaArray, ViaThin,
Novaflex HD and Novaflex VHD provide substantial benefits compared to
traditional flexible circuits, including the capability for very fine circuit
traces and very small holes, or vias, thus utilizing both sides of the laminate
for circuit routing reducing size and cost per function. The Company has
developed its ViaThin to enable IC manufacturers to package future generations
of ICs economically by attaching the silicon die to a ViaThin substrate
manufactured by the Company or other circuitry manufacturers using the Company's
Novaclad or ViaArray products. As ICs are becoming increasingly powerful, they
produce more heat and require a greater
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number of connections to attach the silicon die, placing substantially greater
demands on IC packaging materials. The Company's substrates for silicon chip
carriers offer high-end thermal, electrical and quality attributes.

Sheldahl, Inc. was incorporated under the laws of the State of Minnesota in
1955. Its principal executive offices are located at 1150 Sheldahl Road,
Northfield, Minnesota 55057 and its telephone number is 507-663-8000. IFT and
Holdings were established in 1999 to acquire IBM Corporation's Fine-Line
Flexible Circuit Business. Certain products are developed, manufactured and sold
through IFT.

PRODUCTS

MATERIALS AND FLEX INTERCONNECT DIVISION (MFI)

Novaclad. Novaclad is a thin and flexible adhesiveless copper laminate used
in the design and manufacture of flexible interconnects and high-density
substrates. Novaclad consists of a polyimide film onto which copper has been
vacuum deposited on both sides. After the vacuum deposition process, additional
copper is plated onto the laminate to achieve a desired thickness of copper
ranging from 5 microns to 35 microns (a micron is one-millionth of a meter).
Novaclad provides a number of important benefits when compared to traditional
adhesive-based laminates, including the capability for finer circuit traces
(down to 1 mil, or .001 inch) and corresponding higher circuit density, greater
heat tolerance and dissipation, improved signal speed and impedance control,
increased dimensional stability, resistance to chemicals and greater durability.
Because of these characteristics, the Company believes that Novaclad is a
cost-effective, high-performance material solution for a broad range of
interconnect systems, especially high-density substrates for IC packages and
increasingly dense circuitry for personal communication devices and computers
and high-end disc drives.

Novaflex VHD. Novaflex VHD is a unique combination of the Company's
Novaclad adhesiveless material, laser generated microvias and ultra fine-line
photo imaging created for high volume, high performance applications. The
Company also uses ViaArray in the manufacture of circuits that require the very
fine features of an application outside of IC packages, such as direct chip
attach circuitry for high-end disk drives. Novaflex VHD, introduced in September
1998, utilizes similar processes to the Company's ViaThin product in
applications that require two layers of circuitry to provide an increased number
of interconnection in a relatively small physical space. The Company is
targeting this product to manufacturers of high speed internet connectors,
medical instrumentation, personal communications devices and various other
miniaturized electronic devices.

Novaflex HD. The Company uses its Novaclad as the base material for
flexible interconnect circuits and assemblies that, based on their end-use,
require a combination of circuit density and operating characteristics that
withstand harsh environments such as cell phone and pager technologies, computer
and peripheral interconnects and under-the-hood automotive applications.

Flexbase Flexible Interconnects. The Company uses its adhesive-based
laminates, which are marketed under the trade name Flexbase, as the base
material for a line of traditional flexible printed circuitry. The Company's
flexible printed circuitry is typically manufactured in a roll-to-roll process
from polyester or polyimide film to which copper is laminated. The laminate is
processed through various imaging, etching, and plating processes and then
selectively protected with a dielectric covering to produce a flexible printed
circuit. Automated screen-printing and photo imaging processes produce
single-and double-sided flexible circuits.

Additionally, through internal capabilities and contract assemblers the
Company offers value-added processing, including surface mount assembly, wave
soldering, connector and terminal staking, custom folding, stiffener attachment,
application of pressure-sensitive adhesive and hand soldering, in order to
deliver ready-to-use products to the end customer. The Company targets
applications where increased performance, reduced size and weight, circuitry
density, ability to accommodate packaging contours or a reduction in the number
of assembly steps is desired to reduce the customer's overall cost and enhances
the value of its product lines.

Laminate Materials. The Company's materials products consist of
adhesive-based tapes, laminates, and composite material made through vacuum
processes. Moisture barrier tape and flat cable tape are used in
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computer cables, clock spring cables and automobile air bag systems. Splicing
tape is used in the manufacture of commercial and industrial sandpaper belts.
Thermal insulating materials are used primarily in the aerospace/defense market
for satellites. Accentia(TM) is a relatively new product line of conductive
coatings on optically clear films. The applications for the Accentia(TM) product
line are electroluminecent lighting, touch panels, and flat panel displays.
ComClad(TM), also a relatively new product, provides a low cost, high frequency
laminate designed to meet the electrical performance demands of Microwave and RF
applications.

The Company produces its materials using coating, laminating, and vacuum
metalizing processes. Coating involves applying chemicals or adhesives to a thin
flexible material. Laminating consists of combining two or more materials
through applications of heat and pressure. Vacuum metalizing typically involves
placing a metal onto a thin film, foil, or fabric by evaporation, sputtering, or
pattern deposition. The Company's materials provide extended flexibility,
strength, conductivity, durability, and heat dissipation.

INTERNATIONAL FLEX TECHNOLOGIES DIVISION (IFT)

Tape Ball Grid Array (TBGA), ViaThin and Related Products. The Company uses
ViaArray in the manufacture of high-density substrates primarily for IC
packages. Those high-density substrates are called ViaThin. The material
properties of ViaArray allow for very dense circuitry patterns which enable IC
designers to improve the processing capabilities of ICs by increasing the number
of connections to the silicon die, while reducing the cost per connection.
ViaThin enhances signal speed because its traces are very smooth and its
dimensional stability is maintained. These features allow the Company's ViaThin
to be designed into ball grid array, pin grid array, and other high-density IC
packages. The Company's strategy is to target the high-density segment of the
market for IC packaging and multichip module applications where circuit density
requirements as small as 1 mil traces and vias can be met using ViaThin. As the
market for high-density substrates develops, the Company will consider licensing
the manufacturing process of its high-density substrates to increase the demand
for its ViaArray product.

FlexStrate Flexible Circuits. The Company uses its own base material for
its fine-line (to 25 micron), single- and double-sided flexible interconnect
circuits, called FlexStrate. The combination of adhesiveless construction, and
small copper traces and vias permit circuit designs to be extremely dense,
operate at high temperatures, and possess dynamic flex capability. Other
benefits include high signal propagation, high electrical and thermal
performance and customized circuitization with varying copper plating
thicknesses. The Company is targeting this product to manufacturers of high-end
computer systems, unique medical applications and fiber optic applications.

DendriPlate. The Company uses its own base material and adds palladium
dendrites with a proprietary electro-plating process to create its DendriPlate
product. Miniature palladium dendritic spikes on flexible circuit substrates
provide highly reliable, high-density connector contacts used for pad-on-pad
connectors in module-to-card, or card-to-card attachments. The dendrites create
an interface between mating surfaces that reduce contact impedance and improve
performance of the connection in high frequency and high-speed applications.
This state-of-the-art connection method provides excellent contamination
tolerance and reliability with very low contact force. The Company is targeting
this product to manufacturers of high-end computer systems in need of high
performance connections.

ViaArray. ViaArray is a higher-value-added form of Novaclad with
pre-drilled small holes, or vias, measuring down to 1 mil in diameter. ViaArray
is coated with copper and enables the transmission of electrical currents
between the two sides of the laminate. The combination of thin copper traces and
very small vias permits the design of circuits that are up to six times denser
than current flexible circuitry technology. Because of its adhesiveless
character, ViaArray provides all of the benefits of Novaclad. The combination of
these characteristics allows circuit fabricators the opportunity to eliminate
several costly processing steps in the manufacture of printed circuits. The
Company believes this product provides solutions for a variety of applications,
including high density interconnects, IC packages and multi-chip modules. The
Company believes there is also an opportunity for rigid printed circuit
manufacturers to use ViaArray based circuits as an interlayer in multilayer
circuit boards. There were no sales for ViaArray in the eleven months ended

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December 29, 2000. The Company has just commenced sales activity and expects
prototype sales orders for this product during fiscal 2001.

REVENUE BY PRODUCT

The following table shows the revenue of the Company by product for the
eleven months ended December 29, 2000 and on a pro forma combined basis,
including sales of Sheldahl and IFT:

PRO FORMA COMBINED
SHELDAHL AND IFT
IFT SALES SALES
--------- ------------------
AMOUNT % AMOUNT %
------ ------ ------ ------

MFI Division Sales:
Novaflex VHD...................................... -- -- $ 2.7 1.9%
Novaflex HD....................................... -- -- 36.2 26.3%
Flexbase Flexible Interconnects................... -- -- 46.3 33.6%
Laminate Materials................................ -- -- 23.8 17.3%
IFT Division Sales:
ViaThin........................................... -- -- 8.3 6.0%
Tape Ball Grid Array.............................. $16.8 82.3% 16.8 12.2%
FlexStrate Flexible Circuits...................... 1.5 7.4% 1.5 1.1%
DendriPlate....................................... 2.1 10.3% 2.1 1.6%
----- ------ ------ ------
Total:............................................ $20.4 100.0% $137.7 100.0%
===== ====== ====== ======

SALES AND CUSTOMER SUPPORT

MATERIALS AND FLEX INTERCONNECT DIVISION (MFI)

In the Company's MFI division, sales are directed by product or market
managers who are responsible for defining target markets and customers,
strategic product planning and new product introduction. These product or market
managers supervise a sales force of highly skilled account managers, who are
supported by engineers, technicians and customer service personnel. The Company
employs a team approach led by the account manager. The account manager works
extensively with the Company's customers from the design stage through the
completion of the program. The goal is to ensure that every customer has access
to a process predicated on excellence and embodies the disciplines required for
new product development and manufacturablilty. Whether it is simply a concept
that evolves into production or the re-engineering of an existing product, the
Company provides a seamless transition beginning with design, through prototype,
to production. The Company believes that its close ties with customers at all
stages of a project are a distinct differentiating factor distinguishing it from
many competitors who principally manufacture products according to customer
specifications without providing significant design, technical or consulting
services. To supplement its direct sales efforts, the Company uses domestic and
international distributors. The cornerstone of the Company's sales and customer
support strategy is to provide superior customer service, from prompt and
efficient technical support to rapid delivery of prototype and production orders
through its electronic data interchange and just-in-time delivery capabilities.

INTERNATIONAL FLEX TECHNOLOGIES DIVISION (IFT)

In the Company's IFT division, the cornerstone of the sales and customer
support strategy is providing superior flexible based packaging solutions and
excellent customer service. This includes efficient technical expertise and
rapid delivery of prototype and production orders. The Company employs a team
approach to sales and customer support lead by an applications engineer/account
manager and includes a sales engineer, design and process engineers, quality
engineering, and the customer service representative. The team develops a
partnership with each customer as they work through design and manufacturing
issues. The Company recognizes this partnership with customers as a strength and
a key differentiator from competitors. To

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supplement its direct sales efforts, the Company uses domestic and international
manufacturers' representatives.

INTERNATIONAL

MFI DIVISION. To capitalize on the rapidly growing international market,
the Company works with European and Asian manufacturers' and suppliers and has
established sales offices in France, Germany, Great Britain, Hong Kong and
Singapore. The Company is further extending its global footprint by
supplementing its direct sales efforts with independent manufacturers'
representatives and distributors in both Europe and Asia, principally for
flexible laminates.

IFT DIVISION. The Company uses a direct sales force in Europe, with an
office in the United Kingdom. The Company supplements its direct sales efforts
with independent manufacturers representatives in Taiwan, Hong Kong, Singapore
and Korea.

The Company's export sales during fiscal year 2000 were $1.1 million ($40.8
million on a pro forma combined basis including IFT and Sheldahl).

The Company's preference is to minimize foreign currency translation risk
by conducting business in US currency. The Company has a limited exposure to
foreign currency risk with smaller sales contracted in British Sterling, German
Marks and French Francs. These contracts and the exchange rate are reviewed
periodically. As of December 29, 2000, the Company had no material sales
contracts in any currency not mentioned above. On January 1, 1999, the Euro, the
new European currency began commercial use. As of December 29, 2000, a few of
the Company's customers or suppliers had suggested pricing contracts in Euro. In
order to remain competitive, the Company anticipates pricing certain contracts
in Euro and has systems in place to support such contracts. When warranted by
the size of foreign currency denominated sales contracts, the Company may use a
variety of hedging techniques, including financial derivatives, to prudently
reduce its exposure to foreign currency fluctuations. No such contracts existed
as of December 29, 2000.

MANUFACTURING

The Company manufactures and assembles its products in Northfield,
Minnesota; Britton, South Dakota; Longmont, Colorado and Endicott, New York. The
Company focuses on quality in its manufacturing efforts, and believes that its
vertically integrated manufacturing capabilities enhance its ability to control
product quality. The Company has been a qualified supplier to various automotive
manufacturers for many years and has received QS9000/ISO9001 certification in
its Minnesota and South Dakota facilities. The Company also employs
contract-manufacturing relationships for the assembly of products in Mexico,
Canada and the Philippines.

The Company uses a continuous roll-to-roll manufacturing process to
efficiently produce a large volume of high-quality flexible laminates using
coating, laminating, and vacuum metalizing techniques. The Company consumes
approximately one-half of the flexible laminates it produces for the manufacture
of a family of derivative products (see Products). The Company converts various
flexible laminates into circuits by using either photo exposing or screen
printing to image the circuit patterns onto flexible laminates. The laminates
then go through various etching and plating processes that result in copper
patterns remaining on the laminate. The circuits are then protected with a
dielectric covering. The Company processes certain of its derivative products
into value-added assemblies. These assembly process capabilities include
surface-mount assembly, wave soldering, connector and terminal staking, custom
folding, stiffener attach, application of pressure-sensitive adhesive, and hand
soldering. These operations are performed at the Company's facilities in
Britton, South Dakota, or at Maquilladora Operations in Mexico, and
subcontractor facilities in Canada and the Philippines.

In August 1995, Sheldahl entered into various agreements to form a joint
venture in Jiujiang Jiangxi, China with Jiangxi Changjiang Chemical Plant and
Hong Kong Wah Hing (China) Development Co., Ltd. Under the agreements, Sheldahl
licensed certain technology to the joint venture and provided certain technical
support. The Company has received a 20% ownership interest in the joint venture
and received cash

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payments totaling $900,000 upon completion of certain milestones. The joint
venture has been established to manufacture flexible adhesive-based laminates
and associated cover film tapes in China. Under the terms of the agreements, the
joint venture will market these products in China, Taiwan, Hong Kong and Macau,
and the Company will market the products produced by the joint venture in all
other markets. Manufacturing under this joint venture commenced in fiscal 1999.
As of December 29, 2000, the Company's investment in and the impact of
accounting for its investment in Jiujiang Jiangxi under the equity method has
not been material.

RESEARCH AND DEVELOPMENT

Sheldahl's recent research and development efforts have focused on
opportunities presented by the demand for higher density and thinner packaging
for electronic devices. The Company has also identified within its core
technologies other opportunities for participation in the trend towards
miniaturization within the electronics industry and has pursued these
opportunities independently and through various consortia. Research and
development expenses in fiscal 2001 are anticipated to increase as these
opportunities are developed.

In August 1994, Sheldahl acquired a minority ownership interest in Joint
Stock Company Sidrabe ("Sidrabe"), a privatized vacuum deposition developmental
company located in Riga, Latvia. Sidrabe historically was a developmental agency
for the former Soviet Union's military and aerospace programs, specializing in
the design and production of vacuum deposition equipment. With the Company's
ownership position in Sidrabe, the Company received worldwide rights to some key
elements of Sidrabe technology and the Company has access to Sidrabe's
scientific and technical personnel with extensive product and process expertise.
The Company has also purchased certain manufacturing equipment from Sidrabe. The
Company is currently exploring certain joint product development opportunities
with Sidrabe.

MOLEX JOINT VENTURE

On July 28, 1998, Sheldahl and Molex Incorporated ("Molex") formed a joint
venture to design, market and assemble modular interconnect systems to replace
wiring harnesses in primarily the automotive market. The new company was named
Modular Interconnect Systems, L.L.C. and it is a Delaware limited liability
company ("Origin"). Origin will utilize proprietary flexible products developed
by the Company and proprietary connectors developed by Molex in the development
of the new modular interconnect system as an alternative to conventional
automotive wiring harnesses and flex circuit assemblies. The Company and Molex
will supply their respective products to Origin pursuant to long-term supply
contracts. The Company owns 40% and Molex owns 60% of Origin. Each party has a
right of first refusal with respect to the other party's ownership interest.
Origin is being funded by contributions from the Company and Molex. Both the
Company and Molex granted Origin a non-exclusive license to certain of their
intellectual property for purposes of producing the new modular interconnect
systems. Each license takes effect and is contingent upon a change of control of
the Company or Molex and the purchase of such person's membership interest in
Origin. As of December 29, 2000, the Company's investment in and the impact of
accounting for its investment in Origin under the equity method has not been
material.

SUPPLIERS

The Company qualifies strategic suppliers through a Vendor Certification
Program, which limits the number of suppliers to those who provide the Company
with the best total value and quality. The Company closely monitors product
quality and delivery schedules of its supply base. Certain raw materials used by
the Company in the manufacture of its products are currently obtained from
single sources. The Company has not historically experienced significant
problems in the delivery of these raw materials. The Company currently depends
on one supplier for its polyimide supply, which serves as the base material for
the Company's Novaclad family of products. There have been no interruptions of
supply from this vendor over the last three years. The Company's IFT division
has an eight-year history of procurement and use of polyimide film from
alternate suppliers. The Company continues to evaluate other sources of supply
for polyimide film as well as other single sourced raw materials. The Company
believes that other manufacturers' products are available,
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thus any interruption in supply from these vendors would not have a material
adverse effect on the Company's operations. The Company expects to derive
economies of scale benefits and supplier consolidation from the Merger.

COMPETITION

The Company's business is highly competitive. Its advanced engineering
design capabilities, IC packaging expertise, and materials technologies are key
competitive advantages -- helping the customer to design new products reliably,
cost effectively and with a key time-to-market advantage. This vertical
integration advantage also allows the customer to achieve manufacturing
efficiencies, providing a total manufacturing solution, from material design
ideas to full program assembly. With the recent completion of the Merger, the
Company has gained market strength and expanded its technology base and market
presence.

The competitors include materials suppliers, flexible and rigid circuit
manufacturers, as well as electronics manufacturers who produce their own
materials and interconnect systems. Some of the Company's competitors have
substantially greater financial and other resources than the Company. The
Company's primary competitors with respect to its flexible printed circuitry and
interconnect systems include Pressac Limited (a U.K. company) and Parlex Corp.
in the automotive electronics market and Mektec Corp., Fujikura Ltd. (a Japanese
company) and Innovex, Inc. in the computer and telecommunications market. The
Company's primary competition for its flexible laminate products includes Rogers
Corporation and GTS Flexible Materials, Ltd. (a U.K. company)

The Company's Novaclad-based ViaArray and ViaThin and I-Flex-based
FlexStrate and DendriPlate compete with other substrates produced through
several alternative processes. These competing products include single- and
double-sided, polyimide-based, etched copper laminate produced using various
methods of production by Minnesota Mining and Manufacturing, Inc. ("3M"),
Japanese companies like Hitachi Cable and Nitto Denko, Korean companies like
Samsung, and Compass Technology Company in Hong Kong. The Company believes the
production processes required for each of these competing substrates, which
includes subtractive plating and traditional etching techniques, are inherently
less reliable and more expensive than the Company's method of production and
result in products that are not as easily utilized as the Company's products in
the design and production of higher-density IC packages. The Company's
substrates for silicon chip carrier products also compete with ceramic packaging
products produced by companies such as Kyocera of Japan, although the Company
believes these products are more expensive than the Company's substrate
products. The Company also competes with resin-based substrates supplied by
companies such as Amkor Electronics, Tessera, and Substrate Technologies, Inc.
(STI), which the Company believes are limited in their ability to accommodate
increased circuit densities beyond current levels. The Company expects these and
other competitors will continue to refine their processes or develop new
products that will compete on the basis of cost and performance with the
Company's emerging products.

LIQUIDITY AND GOING CONCERNS MATTERS

As discussed in Note 2 to the Consolidated Financial Statements, Holdings
began operations on February 1, 1999, and has incurred operating losses of
approximately $5.6 million during the twenty-three month period ended December
29, 2000. On a pro-forma basis, including the operations of Sheldahl, the
Company has incurred losses of approximately $47.9 million during the same
period. These losses have been principally financed through equity and debt
financing.

Fiscal 2001 capital expenditures for the Company, including the operations
of Sheldahl, are planned at approximately $8.5 million. Scheduled debt
repayments for fiscal 2001 (excluding amounts under the Credit Agreement and 12%
Senior Subordinated Notes that could be called by the lenders due to
non-compliance with the debt covenants -- see note 5 to the Consolidated
Financial Statements) will be approximately $4.1 million, including
approximately $2.5 million on the bank term facility and approximately $1.6
million for various other debts.

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reduction plans to improve operating performance. However, the Company
anticipates that it will be out of compliance with certain of its debt covenants
as of March 30, 2001 (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".) The inability of the Company to i) obtain
waivers for anticipated events of non-compliance under its credit agreement; ii)
implement cost reduction action plans; iii) achieve profitable execution of the
sales orders received for its IFT-Longmont business; iv) achieve operating
performance from the MFI division business above pro forma 2000 levels; v)
achieve other cost or productivity improvements; and vi) maintain adequate
liquidity to fund normal operations would result in the Company being out of
compliance with certain of its debt covenants thereby allowing the Company's
lenders to require full repayment of the outstanding borrowings under the
Company's credit agreement and/or leave the Company in a cash reserve position
that would require additional capital to fund operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management has and will continue to implement operational measures designed to
address the Company's operational and cash flow objectives. Should any of the
adverse matters discussed above ultimately occur, management will attempt to
take one or all of the following actions; i) seek continuing waivers of bank
covenants; ii) obtain new equity capital; iii) issue new debt; and/or iv)
significantly restructure the Company's operations. However, there can be no
assurance that the Company will be successful in obtaining waivers of bank
covenants, achieving positive operating results during fiscal 2001, in its
attempt to issue additional debt or to raise additional capital on terms
acceptable to the Company, or in the event of the failure of the foregoing,
successfully take the actions described above.

BACKLOG

The Company's backlog consists of those orders for which the Company has
delivery dates. Automotive customers typically provide for four to six weeks of
committed shipments while data communications customers generally provide for up
to eight weeks of committed shipments. The Company's backlog of unshipped orders
as of December 29, 2000 and January 29, 1999 was approximately $10.3 million and
$14.7 million ($27.4 and $33.7 respectively, on a pro forma combined basis
including Sheldahl and IFT), respectively. Generally, most orders in backlog are
shipped during the following three months except for the tape ball grid array
orders which are contracted for the fiscal year. Because of the Company's quick
turn of orders to work-in-process, the timing of orders, delivery intervals,
customer and product mix and the possibility of customer changes in delivery
schedules, the Company's backlog at any particular date may not be
representative of actual sales for any succeeding period.

PROPRIETARY TECHNOLOGY

The Company owns three United States patents for Novaclad and the processes
for making Novaclad and five additional applications are pending. Applications
are pending for foreign patents on Novaclad in Japan and Canada. The European
Patent was awarded in April 2000. Federal trademark registrations have been
obtained on Novaclad(R), ViaArray(R), ViaThin(R), Flexbase(R), Novaflex(R),
Novaflex(R) HD and VHD. Sheldahl also relies on internal security and secrecy
measures and on confidentiality agreements for protection of trade secrets and
proprietary know-how. There can be no assurance that Sheldahl's efforts to
protect its intellectual property will be effective to prevent misappropriation
or that others may not independently develop similar technology. The Company
believes that it possesses adequate proprietary rights to the technology
involved in its products and that its products, trademarks and other
intellectual property rights do not infringe upon the proprietary rights of
third parties. The Company's primary Novaclad patents expire between years 2009
and 2015.

International Flex Technologies , Inc. (IFT), was acquired from IBM
Corporation in 1999. As part of the acquisition from IBM, IFT gained licenses to
intellectual property, proprietary equipment and processes, and numerous trade
secrets required to produce single- and double-sided flexible circuits and
DendriPlate connectors. Licenses to 33 patents, 32 from IBM Corporation and 1
from Gould Corporation were obtained. In addition, IFT has two applications for
patents pending for circuitization process techniques. IFT also relies on
internal security and confidentiality agreements for protection of trade secrets
and proprietary know-how.

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Sheldahl was named as a defendant in a patent infringement matter regarding
its Novaclad products which was dismissed for lack of jurisdiction in January
1994 and which has not been commenced elsewhere. There can be no assurance that
this plaintiff or others will not bring other actions against the Company. The
Company is also aware of a patent, which may cover certain plated through holes
of the double-sided circuits made of the Company's Novaclad materials. Although
no claims have been made against the Company under this patent, the owner of the
patent may attempt to construe the patent broadly enough to cover certain
Novaclad products manufactured currently or in the future by the Company. The
Company believes that prior commercial art and conventional technology,
including certain patents of the Company, exist which would allow the Company to
prevail in the event any such claim is made under this patent. Any action
commenced by or against the Company could be time consuming and expensive and
could result in requiring the Company to enter into a license agreement or cease
manufacture of any products ultimately determined to infringe such patent.

See also the discussion related to the Lemelson Foundation in "Legal
Proceedings," Item 3 of Part I of this Form 10-K.

ENVIRONMENTAL REGULATIONS

The Company is subject to various federal, state and local environmental
laws relating to the Company's operations. The Company's manufacturing and
assembly facilities are registered with the U.S. Environmental Protection Agency
and are licensed, where required, by state and local authorities. The Company
has agreements with licensed hazardous waste transportation and disposal
companies for transportation and disposal of its hazardous wastes generated at
its facilities. The Company's Longmont facility has been specifically designed
to reduce water usage in the manufacturing process and employs a sophisticated
waste treatment system intended to substantially reduce discharge streams. The
Company's Endicott facility is leased from IBM. Pursuant to the lease, IBM
provides certain services with respect to receiving, storing and handling of the
Company's chemicals. Compliance with federal and state environmental laws and
regulations did not have a material effect on the Company's capital
expenditures, earnings or competitive position during fiscal 2000. Similarly,
fiscal 2001 capital expenditures to comply with such laws and regulations are
not expected to be material. The Company believes it is in material compliance
with federal and state environmental laws and regulations. As of December 29,
2000, the Company was not involved in any significant specific action, legal or
regulatory, regarding environmental regulations.

EMPLOYEES

As of December 29, 2000, the Company employed 966 people in the United
States, Europe and Asia including 569 in production, 57 in sales, marketing,
application engineering, and customer support, 18 in research and development
and 42 in administration. The production staff consists principally of full-time
workers employed in the Company's five currently operating manufacturing and
assembly plants. In Northfield, Minnesota, approximately 365 production workers
are represented by the Union of Needletrade, Industrial and Textile Employees
(the "Union"), which has been the bargaining agent for these workers since 1963.
The Company has a two-year collective bargaining agreement with the Union, which
expires on October 31, 2001. As part of this agreement, the Company agrees that
if a decision is made to sell the Company, either in whole or in part, the Union
shall be notified and, upon execution of a confidentiality agreement, shall be
given the necessary information as an interested buyer and shall be given the
opportunity to make bids on an equivalent basis and time period as other
parties. The Company also agreed with the Union that Sheldahl will consider
employee-ownership options if any sale of the Company or its parts is
considered. The Company has never experienced a work stoppage and believes that
its employee relations are good.

On March 22, 2001, the Company announced that it would reduce the size of
its work force by approximately 20%, or 190 employees. A reduction of
approximately 15% of the Company's work force would be from its Northfield,
Minnesota facilities and an additional 5% reduction would occur from other
Company operations in North America and Europe.

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ITEM 2. PROPERTIES

The Company owns two manufacturing facilities totaling 305,000 square feet
and a 20,000 square foot administration and sales support office in Northfield,
Minnesota. The Company also owns a 102,000 square foot facility in Longmont,
Colorado. The Company owns a 30,000 square foot assembly facility in Britton,
South Dakota. The Company also leases a 98,400 square foot office and
manufacturing facility in Endicott, New York, 2,500 square foot technical sales
and design office in Detroit, Michigan and a 1,653 square foot administrative
office in Connecticut. The Company also leases technical sales space in Hong
Kong and Singapore. Management believes that all facilities currently in use are
generally in good condition, well maintained and adequate for their current
operations.

ITEM 3. LEGAL PROCEEDINGS

The Company's operations expose it to the risk of certain legal and
environmental claims in the normal course of business. The Company believes that
these general matters will not have a material adverse effect on the Company's
results of operations or financial condition.

As is typical in the semiconductor equipment industry, the Company has from
time to time received, and may in the future receive, communications from third
parties asserting patents or copyrights on certain of the Company's equipment,
products and technologies. A number of users of machine-vision technology,
including the Company, have received notice of alleged patent infringement from,
and/or have been sued by, the Lemelson Medical, Education and Research
Foundation Limited Partnership ("Lemelson Foundation") alleging that equipment
used in the manufacture of electronic devices infringes certain patents issued
to Jerome H. Lemelson relating to "machine vision" or "barcode reader"
technologies. Although the Company has not fully evaluated the alleged
infringement claims nor has it been named a defendant in any related lawsuit,
the Company believes that if any liability for infringement exists, such
liability would not be born by the Company but rather would be born by the
Company's machine-vision equipment manufacturers. Accordingly, the Company has
given those manufacturers notice that it intends to seek indemnification from
them for any damages and expenses resulting from this matter if the Company is
found liable or if it settles the claims. The Company cannot predict the outcome
of this or any similar claim or its effect upon the Company, and there can be no
assurance that any such litigation or claim would not have a material adverse
effect upon the Company's financial condition or results of operations.

The Company has been named a defendant in Rick Matthews et al. v. Sheldahl,
Inc., Boulder County District Court, Case No. 2000CV1126-2. The Matthews family
previously lived directly west of the Company's facility in Longmont, Colorado.
The Matthews allege that due to excessive noise emanating from the facility's
cooling equipment that they have sustained economic and non-economic damages.
The plaintiffs constitute all four members of the family. Claims for nuisance,
trespass, negligence, loss of consortium, and punitive damages have been raised.
Plaintiffs alleged damages in excess of $300,000 based on decreased value in the
property, loss of improvements to the property, and physical and emotional pain
and suffering. On January 2, 2001, the action was settled with payment to the
plaintiffs of $65,000, $50,000 of which was covered by the Company's insurer.

Pioneer Engineering Technology Co., Ltd, a Taiwan company ("Pioneer") has
sued the Company for unpaid contract payments in the amount of $554,964 and for
breach of contract damages in excess of $75,000. The Company has answered the
complaint and has made a counterclaim against Pioneer for damages caused by
equipment malfunction.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None.

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ITEM 4A. EXECUTIVE OFFICERS OF REGISTRANT.

The executive officer of the Company as of April 2, 2001 who are appointed
annually to serve one year terms, are as follows:

NAME AGE POSITION
- ---- --- --------

Director, President, CEO and
Donald R. Friedman........................... 54 President -- IFT
William E. Offenberg......................... 48 President -- Materials and Flex Interconnect
Peter Duff................................... 55 Vice President -- Finance
Gregory D. Closser........................... 48 Vice President -- Flexible Interconnect
Michele C. Edwards........................... 36 Vice President -- Operations (Longmont)
James L. Havener............................. 57 Vice President -- Micro Products
Sidney J. Roberts............................ 54 Vice President -- Materials

Donald R. Friedman has served as President and Chief Executive Officer
since the Merger was completed on December 28, 2000. Prior to that he served as
President and Chief Executive Officer of International Flex Technologies since
its incorporation in January 1999. Previously, he spent 30 years at IBM in a
variety of senior management positions where he was responsible for worldwide
marketing and strategy for the $23 billion server business encompassing the
S/390, AS/400, RS/6000 and the Microelectronics Division. He has had extensive
and diverse international and domestic experience in general management and P&L
responsibility having run multiple business units.

William E. Offenberg has served as President of Materials and Flex
Interconnect since the Merger was completed on December 28, 2000 and was named
to that officer position in April, 2001. Prior to that he served as an operating
partner in Morgenthaler Ventures since 1998. He was previously President and
Chief Executive Officer of Gatan International, the world's leading manufacturer
of digital imaging and analytical instrumentation for transmission electron
microscopy, from 1993 to 1997. In addition, since its acquisition by Gatan in
1994, Mr. Offenberg served as the Chief Executive Officer of Molecular Imaging,
a pioneering developer of bimolecular applications of scanning probe
microscopes. Prior to joining Gatan, he had been Vice President of Sales and
Marketing and then President of Spectra-Physics Analytical, a $70 million
manufacturer of chromatography instrumentation and data systems. He also held
various sales and marketing positions, including Director of North American
Sales at Perkin-Elmer's Instrument Group.

Peter J. Duff has served as Vice President -- Finance since the Merger was
completed on December 28, 2000. Prior to that he served as Chief Financial
Officer of International Flex Technologies since its inception in January 1999.
During his previous 10 years with U.S. Industries he served as Executive Vice
President of EJ Footwear, then as Group Chief Financial Officer for several
other USI companies, followed by Chief Operating Officer of Sunlite Casual
Furniture. His international experience includes positions with
PriceWaterhouseCoopers, Deloitte & Touche, John Labatts, and Pfizer.

Gregory D. Closser has served as Vice President -- Flexible Interconnect
since April 2001. Prior to that, he served as Vice President -- Core Business.
From January 1996 to March 1999 he was Vice President -- Flexible Interconnect.
From 1993 to 1995, he was Vice President -- Interconnect Operations.

Michele C. Edwards was named to the position of Vice
President -- Operations (Longmont) in April 2001. Prior to that she was Vice
President -- Supply Chain Operations since September 1997. She joined Sheldahl
in 1989 as a manufacturing engineer in the Materials Business.

James L. Havener joined the Company is January 1998 as Vice
President -- Micro Products. He was previously Business Manager Strategic
Planning and Advanced Products Marketing for 3M Company's Electronic Products
Division. Mr. Havener resigned from the Company on March 30, 2001, effective
April 9, 2001.

Sidney J. Roberts joined the Company in 1973 and has held various positions
with the Company, including Director of Manufacturing and Engineering-Materials,
Business Director -- Novaclad, Manager of Research and Development-Materials and
Interfacial Engineering, and Technical Director -- Materials. He was named as
Vice President-Research and Development in November 1996 and Vice
President -- Materials in April 2001.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock is listed on the Nasdaq National Market under the symbol
"SHEL". The following table sets forth the high and low sales prices of the
Common Stock for the period indicated, as reported on the Nasdaq National
Market.

HIGH LOW
----- -----

ELEVEN MONTHS ENDED DECEMBER 29, 2000:
First Quarter.............................................. 8.625 4.000
Second Quarter............................................. 6.375 3.875
Third Quarter.............................................. 4.750 2.000
Fourth Quarter(1).......................................... 4.188 1.000

- ---------------
(1) Fourth quarter consists of two months as the Company changed its year-end
(see Note 2 to Consolidated Financial Statement included with this report).

TWELVE MONTHS ENDED JANUARY 29, 2000:
First Quarter.............................................. 7.000 5.250
Second Quarter............................................. 8.625 5.438
Third Quarter.............................................. 8.125 4.250
Fourth Quarter............................................. 6.375 4.000

On March 16, 2001, the last reported sales price of the Common Stock was
$2.375. As of this date, there were approximately 1,263 record holders of the
Company's Common Stock and an estimated additional 2,610 shareholders who held
beneficial interests in shares of Common Stock registered in nominee names of
banks and brokerages houses.

Pursuant to its current credit and security agreement, the Company is
restricted from declaring or paying cash dividends without the consent of the
Company's lenders. The Company has never declared or paid any dividends on its
Common Stock. The Company currently intends to retain any earnings for use in
its operations and expansion of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

On December 21, 2000, the Board of Directors of Sheldahl approved a series
of transactions as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments." As part
of these transactions, Sheldahl issued shares of its Common Stock, $.25 par
value per shares (the "Common Stock"), to two accredited investors (the
"Stockholders") in connection with the merger. In addition, Sheldahl issued
shares of Common Stock and its newly created Series G Convertible Preferred
Stock, $1.00 par value per share (the "Preferred Stock") and Warrants (the
"Series G Warrants") to purchase shares of the Company's Common Stock to three
accredited investors (the "Investors") who collectively invested an aggregate of
$25 million. Sheldahl also completed the issuance of $6.5 million of
subordinated notes to four accredited investors (the "Purchasers"), and in
connection with such issuance, the Purchasers received Warrants (the "Subdebt
Warrants") to purchase shares of Sheldahl common stock. The Board also
authorized granting the Stockholders, Investors and Purchasers certain
registration rights with respect to the shares of Common Stock and the Common
Stock underlying the Preferred Stock, the Series G Warrants and the Subdebt
Warrants issued in the transactions. The closing of the investment of $25
million, the subdebt investment and the merger occurred on December 28, 2000.
Based on the manner of sale and representations of the Investors, Stockholders
and Purchasers, all of which were accredited, the Company believes that pursuant
to Rule 506 of Regulation D, the private placement was a transaction not
involving any public offering within the meaning of Section 4(2) of the
Securities Act of 1933, as amended, and was,

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therefore, exempt from the registration requirements thereof. Sheldahl will use
the proceeds from the sale of the securities involved in the transactions for
working capital purposes.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere herein and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations". The consolidated statements
of operations data presented below as of and for the eleven months ended
December 29, 2000 and the twelve months ended January 29, 2000 and the
consolidated balance sheet data as of December 29, 2000 and January 29, 2000
have been derived from the Company's Consolidated Financial Statements included
elsewhere in this report. These financial statements have been audited by Arthur
Andersen LLP, independent public accountants, as of and for the eleven months
ended December 29, 2000, and by Ernst & Young LLP, independent public
accountants, as of and for the twelve months ended January 29, 2000.

ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 29, 2000 JANUARY 29, 2000
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Statements of Operations Data:
Net sales............................................. $ 20,417 $24,081
Cost of sales......................................... 16,333 17,051
-------- -------
Gross profit.......................................... 4,084 7,030
-------- -------
Expenses:
Sales and marketing................................ 1,337 804
General and administrative......................... 3,373 4,879
Research and development........................... 2,888 2,060
Interest........................................... 1,203 960
-------- -------
Total expenses................................... 8,801 8,703
-------- -------
Loss before income tax................................ (4,717) (1,673)
Benefit for income taxes.............................. 197 550
-------- -------
Loss applicable to common shareholders................ $ (4,520) $(1,123)
======== =======
Net loss per common share -- basic and diluted........ $ (0.51) $ (0.13)
======== =======
Weighted average common shares outstanding -- basic
and diluted........................................ 8,802 8,737
======== =======
Balance Sheet Data:
Working capital, net.................................. $ (3,437) $ 3,030
Total assets.......................................... 129,362 25,760
Long-term debt, excluding current portion............. 10,640 9,873
Total shareholders' investment.......................... 56,868 8,877

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

PROFILE

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Among other matters, this will require Sheldahl, in this report and all of its
future financial and informational filings with the SEC, to present the prior
historical, financial and other information of Holdings and IFT. Accordingly,
unless otherwise indicated to the contrary herein, the results of Holdings and
IFT will be presented herein as the "Company" for all periods prior to December
28, 2000 without inclusion of Sheldahl's results for the same period. See
"Recent Developments" below and the Company's consolidated financial statements
and notes thereto included elsewhere herein. For purposes of this report, unless
otherwise stated to the contrary, Company shall refer to Sheldahl, Holdings and
IFT on a combined basis for all periods on or after December 28, 2000.

The Company creates and distributes high-density substrates, high-quality
flexible printed circuitry, and thin, flexible laminates and their derivatives
to worldwide markets. The Company's laminates are of two types: adhesive-based
tapes and materials, and its patented adhesiveless material, Novaclad and
I-Flex. From these materials, the Company fabricates high-value derivative
products: single- and double-sided flexible interconnects and assemblies under
the trade names Flexbase(R), Novaflex(R) HD, Novaflex(R) VHD, FlexStrate,
DendriPlate(R) and substrates for silicon chip carriers under the trade names
ViaArray(R) and ViaThin(R). Management believes that Sheldahl's leading
technology products serve the electronic interface between the function of
electronic-based products and their integrated circuits. The Company targets
specific OEMs and contract assemblers in the telecommunications, computer,
medical, automotive and aerospace markets in the drive to create
electronic-based products that require increased functionality.

The Company's high performance products -- FlexStrate, ViaArray, ViaThin,
Novaflex HD and Novaflex VHD provide substantial benefits compared to
traditional flexible circuits, including the capability for very fine circuit
traces and very small holes, or vias, thus utilizing both sides of the laminate
for circuit routing reducing size and cost per function. The Company has
developed its ViaThin to enable Interconnect (IC) manufacturers to package
future generations of ICs economically by attaching the silicon die to a ViaThin
substrate manufactured by the Company or other circuitry manufacturers using the
Company's Novaclad or ViaArray products. As ICs are becoming increasingly
powerful, they produce more heat and require a greater number of connections to
attach the silicon die, placing substantially greater demands on IC packaging
materials. The Company's substrates for silicon chip carriers offer high-end
thermal, electrical and quality attributes.

RECENT DEVELOPMENTS

Merger

On December 28, 2000, Sheldahl acquired all of the outstanding securities
of International Flex Holdings, Inc. (Holdings) for approximately 8.7 million
shares of Sheldahl's common stock, plus shares issuable under stock options and
warrants of approximately 1.0 million shares, as amended, (the "Merger
Agreement") by and among Sheldahl, IFT West Acquisition Company, a newly formed
subsidiary of Sheldahl ("West"), Holdings, the sole shareholder of International
Flex Technologies, Inc., the operating company ("IFT"), and the stockholders of
Holdings (the "Stockholders"). Under the terms of the Merger Agreement, West
merged with and into Holdings, with Holdings surviving and becoming a
wholly-owned subsidiary of Sheldahl (the "Merger"). As consideration for the
Merger, holders of outstanding shares of Holdings' common stock, Class A Stock,
Class B Stock and Series A Preferred Stock received shares of
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16

Sheldahl Common Stock. Holdings' option holders and warrant holder received
equivalent options and a warrant to purchase shares of Sheldahl Common Stock.
The total number of shares of Sheldahl Common Stock issued, including shares to
be issued upon exercise of options and warrants, was approximately 9.7 million.

Common Stock and Series G Investment

Concurrent with consummating the Merger, Sheldahl completed an equity
investment pursuant to an amended stock purchase agreement (the "Stock Purchase
Agreement") by and among Sheldahl, and three accredited investors including
Morgenthaler Venture Partners V, L.P. ("Morgenthaler V"), and Ampersand IV
Limited Partnership and Ampersand IV Companion Fund Limited Partnership
(collectively the "Ampersand Funds"). Under the terms of the Stock Purchase
Agreement, Morgenthaler V and the Ampersand Funds (the "Investors") collectively
invested an aggregate of $25.0 million in equity capital in exchange for
approximately 9.8 million shares of Sheldahl Common Stock and 11,303 shares of a
newly created 11.06% Series G Convertible Preferred Stock of Sheldahl, par value
$1.00 per share (the "Series G Stock"), such shares being convertible at $1.40
per share in the aggregate into approximately 8.1 million shares of Sheldahl
Common Stock (the "Equity Investment"). The cash used by the Investors to
complete the Equity Investment came from the liquid assets of the Investors.

Subordinated Notes and Warrant Purchase Investment

Concurrent with consummating the Merger and Equity Investment, Sheldahl
consummated a debt investment pursuant to an amended and restated subordinated
notes and warrant purchase agreement (the "Debt Agreement") by and among
Sheldahl, Morgenthaler V, the Ampersand Funds and Molex Incorporated ("Molex").
Under the terms of the Debt Agreement, Morgenthaler V, the Ampersand Funds and
Molex (the "Purchasers") purchased $6.5 million of 12% Senior Subordinated Notes
("Notes") and related warrants (the "Warrants") (the "Debt Investment"). In
addition, the Purchasers collectively received Warrants to purchase 1,526,814
shares of Sheldahl Common Stock. The Warrants issued under the Debt Agreement
are exercisable at $.01 per share and are exercisable for seven years from the
date of issuance. The cash used by the Investors to complete the Debt Investment
came from the liquid assets of the Investors.

Governance Agreement

Concurrent with the closing of the Merger, the Equity Investment and the
Debt Investment (collectively, the "Transactions"), Sheldahl entered into a
governance agreement by and among it and Morgenthaler V, the Ampersand Funds and
Sound Beach Technology Partners, LLC, a former IFT stockholder ("Sound Beach")
(collectively, the "Parties") establishing the terms and conditions regarding
(i) future purchases and sales of the Company's securities, and (ii) the
Parties' relationship with the Company (the "Governance Agreement"). Donald
Friedman, the Company's Chief Executive Officer, is a significant shareholder
and officer of Sound Beach. Molex is not a party to the Governance Agreement.

Under the terms of the Governance Agreement, until the third anniversary of
the closing of the Transactions, the Parties and their respective affiliates are
restricted from beneficially owning any Sheldahl securities in excess of that
issued or issuable (i) in the Merger, (ii) under the Stock Purchase Agreement,
(iii) upon conversion of the Series G Stock, (iv) issuable in respect of
dividends due on the Series G Stock, and (v) upon exercise of the Warrants
issued under the Debt Agreement. The Parties are also restricted from doing a
business combination or proxy solicitation during the same period. This
restriction does not include, however, acquiring securities directly from the
Company or making business combination or tender offer proposals to the Company
or conducting a proxy solicitation in response to the same made by third
parties.

Also under the terms of the Governance Agreement, for one year from the
date of the closing of the Transactions, the Parties are restricted from
transferring any of their shares of Common Stock, Series G Stock and Warrants,
other than to their Affiliates or Associates. At any time prior to the third
anniversary of the closing of the Transactions, any transferees of such parties,
other than a partner or a member of a Party, must

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become a signatory to the Governance Agreement. After one year, any of the
Parties that is an investment fund may distribute its shares to its partners and
members.

The terms of the Governance Agreement also require that the initial
composition of Board of Directors of Sheldahl as of the closing of the
Transactions be comprised of (i) three continuing directors from Sheldahl (each
a "Continuing Director"), (ii) the director appointed by Molex (the "Molex
Director"), and (iii) three directors nominated by Morgenthaler V, the Ampersand
Funds and Sound Beach. With respect to the election of directors following the
closing of the Transactions, Morgenthaler V, the Ampersand Funds and Sound Beach
together shall be entitled to nominate three directors. The number of directors
which may be nominated by Morgenthaler V, the Ampersand Funds and Sound Beach
will be reduced as their collective ownership in the Company is reduced. The
terms of the Governance Agreement require that the identity of directors to
stand for election by the Company's shareholders or to fill vacancies on the
Board of Directors be determined by a nominating committee of the Board of
Directors (the "Nominating Committee"). For the 2001 Annual Meeting of
Shareholders, the Nominating Committee was to be comprised of one director
appointed by Morgenthaler V, the Ampersand Funds and Sound Beach together, one
Continuing Director and the Molex Director. Messrs. Lutsi, Auerbach and Friedman
have been nominated for election to the Company's Board of Directors at the
requests of Morgenthaler V, the Ampersand Funds and Sound Beach, respectively.

In the event the Company desires to enter into a transaction with any of
the holders of the Series G Stock or their affiliates, the Governance Agreement
requires that such transaction must be approved by a majority vote of the Board
of Directors, excluding any Series G Director who is a party to or otherwise has
an interest in the transaction.

Without the consent of Morgenthaler V and the Ampersand Funds, the Company
may not authorize or enter into any agreement relating to a merger, sale or
lease of substantially all of the Company's assets, set the number of directors
at a number other than seven (7), or repurchase or redeem any equity securities
of the Company, as long as such Party continues to hold at least 15% of the
shares of Common Stock issued or issuable to it pursuant to the Transactions.

Voting Agreement

In connection with the Transactions, Morgenthaler V, the Ampersand Funds
and Sound Beach together executed a voting agreement, as amended (the "Voting
Agreement"). The Company is not a party to this Voting Agreement. Under the
terms of the Voting Agreement, Morgenthaler V, the Ampersand Funds and Sound
Beach have agreed how they will designate individuals to be nominated for
election as directors as provided under the Governance Agreement. Additionally,
provided the parties hold a certain level of ownership in the Company,
Morgenthaler V, the Ampersand Funds and Sound Beach agree to vote their shares
in favor of such nominees to the Company's Board of Directors. Lastly, the
Voting Agreement restricts the ability of Sound Beach to dispose of its shares
provided Morgenthaler V and the Ampersand Funds maintain ownership of at least
60% of the securities received in the Transactions.

Molex Transactions

In connection with execution of the Merger Agreement, the Stock Purchase
Agreement and the Debt Agreement, the Company and Molex agreed to certain
amendments to the parties' (i) Agreement Relating to Sheldahl dated November 18,
1998 (the "Sheldahl Agreement"), and (ii) the Limited Liability Company
Agreement of Modular Interconnect Systems, L.L.C., dated July 28, 1998 (the "LLC
Agreement").

The Sheldahl Agreement was amended to provide that Molex shall have the
right to participate in future equity offerings of the Company so that Molex
retains up to a 10% ownership interest in the Company on a fully diluted basis.
Also, the Sheldahl Agreement was amended to provide that Molex shall have the
right to participate in future issuances of the Company's equity securities in
connection with an acquisition so that Molex retains up to a 5% ownership
interest in the Company on a fully diluted basis. Lastly, the Sheldahl Agreement
was amended to provide Molex with a right of first refusal on any acquisitions
of the Company by three Identified Parties (the "Right of First Refusal"). The
Right of First Refusal terminates at the earlier of
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the end of the thirty month period following the date of closing of the Merger
or the execution of a mutually acceptable supply and technology agreement
between Molex and Sheldahl.

The LLC Agreement was amended to provide that all past defaults by either
party thereto, if any, would be waived currently and that the Transactions would
not trigger the Change of Control provisions in the LLC Agreement.

RESULTS OF OPERATIONS

Since its inception on February 1, 1999, International Flex Technologies,
Inc. ("IFT") has had strong continued demand for its existing product line of
thermal compression bond Tape Ball Grid Array (TBGA), DendriPlate connectors and
flex products. The Company has expanded its product lines to include a wire bond
version of TBGA along with a flex product line to support the new and emerging
medical and optical markets. A significant part of the Company's first fiscal
year ended January 29, 2000 was spent developing the process and material sets
associated with these new product lines. During the fiscal year ended December
29, 2000, the first qualification and production orders for these new products
were achieved. However, longer than anticipated customer qualification,
installation of new tool sets and acceptance by customers of this new technology
impacted revenue for both fiscal years.

By the end of the fiscal year ended December 29, 2000, the Company was
experiencing customer demand increases across the entire new product line. A
production ramp-up schedule has been put in place and will be implemented
through fiscal 2001. The earlier recognized need for additional capacity will be
achieved as a result of the merger.

The following table shows the percentage of net sales represented by
certain line items from the Company's consolidated statements of operations:

ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 29, 2000 JANUARY 29, 2000
------------------- -------------------

Net sales............................ 100.0% 100.0%
Cost of sales........................ 80.0% 70.8%
------ ------
Gross profit......................... 20.0% 29.2%
------ ------
Expenses:
Sales and marketing................ 6.5% 3.3%
General and administrative......... 16.5% 20.2%
Research and development........... 14.2% 8.6%
Interest........................... 5.9% 4.0%
------ ------
Total expenses.................. 43.1% 36.1%
Loss before income taxes............. (23.1%) (6.9%)
====== ======

NET SALES. For the shorter fiscal year of 11 months ended December 29,
2000, sales decreased $3.7 million or 15.2% due to the reduction in demand for
the older product line of TBGA and Dendriplate coupled with the slower than
planned ramp-up of the wire bond version of TBGA. Tape Ball Grid Array sales
declined $1.3 million or 7.2%, Dendriplate sales declined $2.4 million or 52.2%
and Flexible circuits sales approximated the previous year.

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The table below shows, for the periods indicated, the Company's sales by
business product line (in thousands):

ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 29, 2000 JANUARY 29, 2000
------------------- -------------------

Tape ball grid array & related
products........................... $16,792 $18,091
DendriPlate.......................... 2,141 4,476
Flexible circuits.................... 1,484 1,514
------- -------
Total................................ $20,417 $24,081
======= =======

COST OF SALES/GROSS PROFIT. During the fiscal year ended December 29, 2000,
gross profit decreased to 20.0% of sales or approximately $4.1 million. This
decrease reflects the lower sales volume of the older Tape Ball Grid Array
products and the DendriPlate product and the increased expenses associated with
the development of the new product line.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $0.5
million or 66.3% in fiscal 2000. As a percentage of total Company net sales,
sales and marketing expenses were 6.5% in the 11 months ended December 29, 2000,
and 3.3% in the 12 months ended January 29, 2000. For the first year of
operation of the business ended January 29, 2000, commissions and other sales
support expenses were unusually low as the backlog was acquired on acquisition
of the assets with low resultant commissions and the required support staff were
hired only later in the fiscal year.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased $1.5 million, or 30.9%, to $3.4 million in the fiscal period ended
December 29, 2000. The decrease in expenses reflects $0.6 million from the
elimination of a transitional service agreement for information technology
services; $0.3 million savings in legal and accounting expense associated with
initial year organizational costs; and $0.3 million credit from a New York
Empire State development training grant for employee training.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $0.8 million or 40.2% in fiscal period ended December 29, 2000. The
increase in expenses reflected the staffing and prototype costs associated with
new product development.

INTEREST EXPENSE. Interest expense increased to $1.2 million in the fiscal
period ended December 29, 2000 from $1.0 million in the fiscal period ended
January 29, 2000, as interest rates increased and the Company accessed its
revolver to meet increased operational demands.

In connection with the acquisition of assets on February 1, 1999, the
Company entered into an Intellectual Property License Agreement with
International Business Machines Corporation (IBM). At the time of acquisition,
the Company obtained seller financing through a five year $7.5 million
non-interest bearing note. This financing has been discounted at a rate of
9.75%.

The following shows a breakdown of interest expense for the fiscal years
indicated (in thousands):

FISCAL YEARS ENDED
------------------
DECEMBER 29, 2000 JANUARY 29, 2000
----------------- ----------------

Note Payable -- IBM........................ $ 513 $530
National City Bank Revolver................ 690 430
------ ----
Net expense................................ $1,203 $960
====== ====
Percent of sales........................... 5.9% 4.0%

The Company had a $4.3 million note payable with National City Bank with
interest payable monthly at a rate of prime plus 1 1/4%. The Company also had
available a line of credit with National City Bank up to a maximum of $7.5
million. Interest on the credit line is based on the bank's published prime
rate. On December 28, 2000, both the note and the line of credit with National
City Bank were paid off in connection with the Merger.

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EBITDA. EBITDA, defined as earnings before interest, taxes, depreciation
and amortization, was ($.7) million for the eleven months ended December 29,
2000 and $1.7 million for the twelve months ended January 29, 2000.

INCOME TAXES. The income tax provisions for the fiscal year ended December
29, 2000 and January 29, 2000 reflect a benefit of $0.2 million and $0.6
million, respectively, related to investment tax credits associated with
incentives on investments in capital assets and employment refundable to the
Company from the State of New York. As of December 29, 2000, the Company has
provided a full valuation allowance for its deferred income tax assets as
management believes that it is more likely than not that such deferred tax
assets will not be realized.

FINANCIAL CONDITION

BANK FACILITY. At December 29, 2000, the Company's amended credit agreement
consisted of two separate facilities: a revolving credit facility of up to $25
million based on the Company's adjusted working capital; and a term facility for
$16 million based on the appraised value of the Company's unencumbered
equipment. Interest on the revolving credit facility and the term facility is
charged at the prime rate plus two percent (11.5% as of December 29, 2000). As
of December 29, 2000, the amount available to borrow on the revolving credit
facility was approximately $7.1 million, which reflects a $5 million reduction
by the Company's lenders for a liquidity reserve. All borrowings under the
credit agreement are secured by the Company's tangible and intangible assets.
The term facility requires monthly repayments of $205,000, with the remaining
outstanding balance under the term facility and the revolving credit facility
due June 1, 2002.

In connection with the obtainment of the credit agreement, the Company
issued to the lenders warrants to purchase 230,000 shares of common stock at a
price of $3.01 per share, exercisable through July 2003. The warrants are
subject to adjustment for certain anti-dilution provisions. As of December 29,
2000, none of the warrants had been exercised.

The credit agreement restricts the payments of cash dividends, capital
expenditures and the redemption of preferred stock, and requires the Company to
meet certain financial covenants, including maintaining certain levels of
pre-tax net income (loss), cash flow available for debt service and debt service
coverage ratios. Given the existing economic and industry conditions, as well as
operational performance of the Company's business units, the Company anticipates
that it will be out of compliance with certain of the financial covenants as of
the end of March 2001. In response, the Company is in process of implementing
cost reduction action plans and other matters as discussed in Note 3 to the
consolidated financial statements, and has initiated discussions with its
lenders with respect to amending such financial covenants (See Capital
Reserves.) While management currently believes that it will be successful in
obtaining an amendment, there can be no assurance that an amendment will be
obtained on terms acceptable to the Company. As a result of this pending event
of non-compliance, the Company has classified the borrowings under the Credit
Agreement as current in the accompanying December 29, 2000 consolidated balance
sheet. In addition, an event of default under the Credit Agreement will cause an
event of default under the terms of the 12% Senior Subordinated Notes. As such,
the 12% Senior Subordinated Notes have also been classified as current in the
accompanying December 29, 2000 consolidated balance sheet. No other adjustments
to the carrying amount or classification of assets or liabilities in the
accompanying financial statements have been made with respect to this pending
event of non-compliance.

Net working capital was ($3.4) million at December 29, 2000, down from $3.0
million at January 29, 2000. This decrease in working capital is due in part to
the Company classifying its debt under the Credit Agreement and the 12% Senior
Subordinated Note as current. The Company's accounts receivable and inventory
increased by $34.6 million during the same period. These increases are the
result of the Merger on December 28, 2000.

COMMON STOCK AND SERIES G CONVERTIBLE PREFERRED STOCK INVESTMENTS. As part
of the Merger transaction discussed in "Recent Developments" and in Note 2 to
the Consolidated Financial Statements, Sheldahl completed an equity investment
pursuant to a stock purchase agreement (the "Stock Purchase Agreement") by and
among Sheldahl and three accredited investors (the "Investors"), who
collectively invested an aggregate of $25.0 million in equity capital in
exchange for approximately 9.8 million shares of

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21

Sheldahl common stock and 11,303 shares of Series G Convertible Preferred Stock
of Sheldahl, par value $1.00 per share. Such shares being convertible in the
aggregate into approximately 8.1 million shares of Sheldahl common stock (the
"Equity Investment").

The Series G preferred stock earns an approximate 11.06% dividend rate,
payable annually. The dividend is payable in shares of common stock of the
Company for the twenty-four months from the date of issuance at a stated value
of $1.625 per share. Thereafter the Company may pay the dividend in shares of
its common stock or, at its option, cash. The Series G preferred stock is
convertible into approximately 8.1 million shares of common stock at a fixed
rate of $1.40 per share. The Series G preferred stock is subordinated to the
Series D, E and F preferred stock with regard to payment of dividends and
proceeds upon liquidation.

SUBORDINATED NOTES AND WARRANT PURCHASE INVESTMENT. Concurrent with
consummating the Merger and Equity Investment, Sheldahl completed the issuance
of $6.5 million of subordinated notes. Under the terms of the agreement, the
purchasers acquired $6.5 million of 12% senior subordinated notes (the
"Subordinated Notes") and related warrants (the "Warrants") (collectively, the
"Debt Investment"). The purchasers collectively received Warrants to purchase
1,526,814 shares of Sheldahl common stock. The Warrants issued under the Debt
Investment are exercisable at $.01 per share for a period of seven years. As
discussed in Note 5 to the consolidated financial statements, the warrants were
recorded at their estimated value at the date of issuance as a credit to equity
and a discount to the Subordinated Notes, and will be accreted to interest
expense over the five-year period of the Subordinated Notes.

OTHER EQUITY ISSUANCES. Prior to the Merger, Sheldahl completed the
following equity issuances:

- In January 2000, the Company issued 1,800 shares of Series F Convertible
Preferred Stock with a total stated value of $1,800,000. This Series F
preferred stock earns a 5% dividend rate, payable annually in shares of
common stock or cash at the Company's option, and is convertible into
nearly 330,000 shares at a fixed rate of $5.46 per share as of December
29,2000, adjustable for certain anti-dilution provisions. The purchasers
of the Series F preferred stock were also issued 55,800 warrants to
purchase the Company's Common Stock at a price of $5.46 per share,
adjustable for certain anti-dilution provisions. These warrants expire in
January 2005. None of the warrants have been exercised as of December 29,
2000. Net proceeds from the Series F preferred stock were approximately
$1,800,000. As of December 29, 2000, 1,800 shares of Series F preferred
stock were outstanding. Accrued dividends of approximately $88,000 are
included in accounts payable in the accompanying December 29, 2000,
consolidated balance sheet.

- In February and March of 1999, the Company issued 8,560 shares of Series
E Convertible Preferred Stock with a total stated value of $8,560,000.
This Series E preferred stock earns a 5% dividend rate, payable annually
in shares of common stock or cash at the Company's option, and is
convertible into nearly 1.4 million shares at a fixed rate of $6.25 per
share as of December 29, 2000, adjustable for certain anti-dilution
provisions. The purchasers of the Series E preferred stock were also
issued 85,600 warrants to purchase the Company's common stock at a price
of $7.8125 per share, adjustable for certain anti-dilution provisions.
These warrants expire in February 2004. None of the warrants have been
exercised as of December 29, 2000. Net proceeds from the Series E
preferred stock were approximately $8,460,000. As of December 29, 2000,
8,060 shares of Series E convertible preferred stock were outstanding.
Accrued dividends of approximately $344,000 are included in accounts
payable in the accompanying December 29, 2000, consolidated balance
sheet.

- In July 1998, the Company issued 32,917 shares of Series D Convertible
Preferred Stock with a total stated value of $32,917,000. This Series D
preferred stock earns a 5% dividend rate, payable annually in shares of
common stock or cash at the Company's option, and is convertible into
nearly 5.4 million shares at a fixed rate of $6.12 per share per share as
of December 29,2000, adjustable for certain anti-dilution provisions. The
holders of the Series D preferred stock were also issued 329,170 warrants
to purchase the Company's common stock at a price of $7.6875 per share,
adjustable for certain anti-dilution provisions. These warrants expire in
July 2001. None of the warrants have been exercised as of December 29,
2000. Net proceeds from the Series D preferred stock were $32,409,000. As
of December 29, 2000, 32,353 shares of Series D preferred stock were
outstanding. Accrued dividends of
20
22

approximately $683,000 are included in accounts payable in the
accompanying December 29, 2000, consolidated balance sheet.

CAPITAL RESERVES. As discussed in Note 2 to the Consolidated Financial
Statements, International Flex Holdings Inc., (Holdings) began operations on
February 1, 1999, and has incurred operating losses of approximately $5.9
million during the twenty-three month period ended December 29, 2000. On a
pro-forma basis, including the operations of Sheldahl, the Company has incurred
losses of approximately $41.8 million during the same period. These losses have
been principally financed through equity and debt financing.

Fiscal 2001 capital expenditures for the Company, including the operations
of Sheldahl, are planned at approximately $8.5 million. Debt repayments for
fiscal 2001 will be approximately $4.1 million, including approximately $2.5
million on the bank term facility and approximately $1.6 million for various
other debts.

The Company experienced significant softening of sales orders during the
later half of 2000 and consequently poor operating performance. The Company is
continuing to develop a combined operational and financial plan for the Company.
In the interim, the Company has developed and has begun to implement cost
reduction plans to improve operating performance. However, the Company
anticipates that it will be out of compliance with certain of its debt covenants
at the end of March 2001 (see Note 5). The inability of the Company to i) obtain
waivers for anticipated events of non-compliance under its credit agreement;
(ii) implement cost reduction action plans; iii) achieve profitable execution of
the sales orders received for its IFT-Longmont business; iv) achieve operating
performance from the MFI division business above pro forma 2000 levels; v)
achieve other cost or productivity improvements; and vi) maintain adequate
liquidity to fund normal operations would result in the Company being out of
compliance with certain of its debt covenants thereby allowing the Company's
lenders to require full repayment of the outstanding borrowings under the
Company's credit agreement and/or leave the Company in a cash reserve position
that would require additional capital to fund operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management has and will continue to implement operational measures designed to
address the Company's operational and cash flow objectives. Should any of the
adverse matters discussed above ultimately occur, management will attempt to
take one or all of the following actions; i) seek continuing waivers of bank
covenants; ii) obtain new equity capital; iii) issue new debt; and/or iv)
significantly restructure the Company's operations. However, there can be no
assurance that the Company will be successful in obtaining waivers of bank
covenants, achieving positive operating results during fiscal 2001, in its
attempt to issue additional debt or to raise additional capital on terms
acceptable to the Company, or in the event of the failure of the foregoing,
successfully take the actions described above.

FOREIGN CURRENCY RISK. The Company periodically maintains a limited
exposure to foreign currency risk with smaller programs contracted in British
Sterling, German Marks and French Francs. These contracts and the exchange rate
are reviewed periodically. As of December 29, 2000, the Company has no material
contracts outstanding.

On January 1, 1999, the Euro, the new European currency, initiated internal
commercial use. As of December 29, 2000, none of the Company's sales order or
purchase orders are priced in Euro. However, in order to remain competitive, the
Company anticipates pricing certain contracts in Euro and has systems in place
to support such contracts by converting foreign currency transactions to six
decimal places. When warranted by the size of foreign currency contracts, the
Company will use a variety of hedging techniques, including financial
derivatives, to prudently reduce, but not eliminate, its exposure to foreign
currency fluctuations.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and hedging Activities," effective for
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying
21
23

hedges allow a derivative's gains or losses to offset related results on the
hedged item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. The Company adopted SFAS No. 133 December 30, 2000 and the
adoption did not have a material impact on the Company's results of operations
or financial position.

CAUTIONARY STATEMENT

Statements included in this management's discussion and analysis of
financial condition and results of operations, in the letter to shareholders,
elsewhere in this Form 10-K, in the Company's annual report, and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and oral statements made with the approval of an
authorized executive officer that are not historical, or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Certain risks and
uncertainties could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual financial performance and cause it to differ
materially from that expressed in any forward-looking statement: (i) the
Company's ability to begin full volume production at its Longmont, Colorado
facility is dependent upon final qualification by the Company's customers and,
in some cases, their customers, of ViaThin as well as the ability of its
production equipment to produce sufficient quantities of product at acceptable
quality levels; (ii) delays in achieving full volume production at the Longmont,
Colorado facility will have a material adverse impact on the Company's results
of operations and liquidity position; (iii) a continued general downturn in the
automotive market, the Company's principal market, could have a material adverse
effect on the demand for the electronic components supplied by the Company to
its customers; (iv) the Company's ability to continue to make significant
capital expenditures for equipment, expansion of operations, and research and
development is dependent upon funds generated from operations and the
availability of capital from other sources; (v) the extremely competitive
conditions that currently exist in the automotive and data communications
markets are expected to continue, including development of new technologies, the
introduction of new products, and the reduction of prices; (vi) the ability of
the Company to obtain waivers for anticipated events of non-compliance under the
credit agreement; (vii) the ability of the Company to implement cost reduction
plans and other cost or productivity improvements to achieve levels of sales
growth and operational performance that sustain sufficient cash flow to operate
the business; (viii) the ability of the Company to integrate its Longmont,
Colorado operations and Endicott, New York operations. The foregoing list should
not be construed as exhaustive and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect the events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's Credit and Security Agreement, described in Note 5 to the
Consolidated financial statements as well as in the Management's Discussion and
Analysis of Financial Condition and Results of Operations carries interest rate
risk. Amounts borrowed under this Agreement are subject to interest charges at a
rate equal to the lender's prime rate plus two percent, which as of March 15,
2001 was 10.5%. Should the lenders base rate change, the Company's interest
expense will increase or decrease accordingly. As of December 29, 2000, the
Company had borrowed approximately $15.9 million subject to interest rate risk.
On this amount, a 1% increase in the interest rate would cost the Company
$159,000 in additional gross interest cost on an annual basis.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements are listed under Item 14 of this
report. Unaudited quarterly financial data for the eleven months ended December
29, 2000 and the twelve months ended January 29, 2000 is set forth in Note 13 to
the Consolidated Financial Statements included with this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

On December 28, 2000, Sheldahl engaged in a series of transactions as more
fully described in "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments," including a merger
transaction whereby Sheldahl acquired all of the outstanding securities of IFT's
parent and sole shareholder, International Flex Holdings, Inc. ("Holdings").
Although Sheldahl is the legal survivor of the merger and remains the registrant
with the Securities and Exchange Commission ("SEC") and a listed company on
Nasdaq, under United States generally accepted accounting principles, due to the
number of shares issued and sold in the transactions, Holdings is considered the
"acquiror" of Sheldahl for financial reporting purposes. Prior to engaging in
the transaction with Sheldahl, Holdings used the firm of Ernst & Young LLP to
audit its financial statements. Because Sheldahl must now report Holdings'
historical financial statements as its own, the firm of Ernst & Young LLP is
deemed to be the auditors of Sheldahl unless Sheldahl chooses differently.
Sheldahl, however, has historically used the firm of Arthur Andersen LLP.
Accordingly, on February 8, 2001, the Audit Committee and the Board of Directors
of Sheldahl have taken formal action to dismiss Ernst & Young LLP and approve
Arthur Andersen LLP to continue as the independent accountants for Sheldahl,
Inc. post-merger with Holdings.

Ernst & Young LLP's prior reports and the financial statements of Holdings
did not include an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
Additionally, there are no disagreements between Holdings and Ernst & Young LLP
on any matter of accounting principles or practice, financial statement
disclosure or auditing scope or procedure, which disagreements, if not resolved
satisfactorily, would have caused Ernst & Young LLP to make reference to the
subject matter of such in connection with any of its reports.

PART III

Pursuant to General Instruction G(3), Registrant omits Part III, Items 10
(Directors and Executive Officers of Registrant), 11 (Executive Compensation),
12 (Security Ownership of Certain Beneficial Owners and Management), and 13
(Certain Relationships and Related Transactions), except that portion of Item 10
related to Executive Officers of the Registrant, which is set forth in Item 4A
of Part I of this report as a definitive proxy statement will be filed with the
Commission pursuant to Regulation 14(A) within 120 days after the end of the
Registrant's fiscal year, and such information required by such items is
incorporated herein by reference from the proxy statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as a part of the report:

FORM 10-K
PAGE REFERENCE
--------------

1. Consolidated Financial Statements
Index to Consolidated Financial Statements..................
Report of Independent Public Accountants -- Arthur Andersen
LLP......................................................... F-1
Report of Independent Public Accountants -- Ernst & Young
LLP......................................................... F-2
Consolidated Balance Sheets as of December 29, 2000 and
January 29, 2000............................................ F-3
Consolidated Statements of Operations for the Eleven Months
Ended December 29, 2000 and Twelve Months Ended January 29,
2000........................................................ F-4
Consolidated Statements of Changes in Shareholders'
Investment for the Eleven Months Ended December 29, 2000 and
Twelve Months Ended January 29, 1999........................ F-5
Consolidated Statements of Cash Flows for the Twelve Months
Ended December 29, 2000 and Eleven Months January 29,
2000........................................................ F-6
Notes to Consolidated Financial Statements.................. F-7

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2. Consolidated Financial Statement Schedules

FORM 10-K
DESCRIPTION PAGE REFERENCE
- ----------- --------------

Schedule II -- Valuation and Qualifying Accounts....... S-1

(b) Reports on Form 8-K

The Company filed the following reports during the fourth quarter of fiscal
2000: Current Reports on Form 8-K filed on November 13, 2000 (reporting
Items 1, 2, 5, 7 and 8) and December 20, 2000 (reporting Item 5 -- Other
Events).

EXHIBIT NO. DESCRIPTION
- ----------- -----------

2.1.1 Agreement and Plan of Merger dated November 10, 2000 among
the Registrant, IFT West Acquisition Company, International
Flex Holdings, Inc., and the Stockholders of International
Flex Holdings, Inc., incorporated by reference from Exhibit
2.0 of the Registrant's Form 8-K filed November 13, 2000.
2.1.2 Amendment Number One to the Agreement and Plan of Merger
Among Registrant, IFT West Acquisition Company ,
International Flex Holdings, Inc. and the Stockholders of
International Flex Holdings, Inc., incorporated by
referenced from Exhibit 2.1 of the Registrant's Form 8-K
filed January 12, 2001.
3.1 Amended and Restated Articles of Incorporation, incorporated
by reference from Exhibit 3.1 of the Registrant's Form 10-Q
for the quarter ended February 26, 1999.
3.2 Bylaws, as amended.
4.3.1 Rights Agreement dated as of June 16, 1996 and amended July
25, 1998 between the Company and Norwest Bank Minnesota,
N.A., is incorporated by reference to Exhibit 1 to the
Company's Form 8-A dated June 20, 1996 and Amendment No. 1
thereto dated July 30, 1998.
4.3.2 Amendment No. 2 dated November 10, 2000 to Rights Agreement
dated as of June 16, 1996, and amended July 25, 1998 between
Sheldahl, Inc. and Norwest Bank Minnesota, N.A. now known as
Wells Fargo Bank, N.A., is incorporated by reference to
Exhibit 1 to the Company's Amended Form 8-A filed on
November 13, 2000.
4.3.3 Certificate of Designation, Preferences and Rights of Series
A Junior Participating Preferred Stock, incorporated by
reference from Exhibit 1 of Registrant's Form 8-A dated June
20, 1996.
4.4.1 Convertible Preferred Stock Purchase Agreement among the
Company and the Series D Purchasers listed in Exhibit A
thereto, incorporated by reference from Exhibit 4.1 of the
Registrant's Form 8-K filed August 18, 1998.
4.4.2 Certificate of Designation, Preferences and Rights of Series
D Convertible Preferred Stock, incorporated by reference
from Exhibit 4.2 of the Registrant's Form 8-K filed August
18, 1998.
4.4.3 Form of Warrant issued to the Series D Purchasers,
incorporated by reference from Exhibit 4.3 of Registrant's
Form 8-K filed August 18, 1998.
4.5.1 Convertible Preferred Stock Purchase Agreement among the
Company and the Series E Investors listed in Exhibit A
thereto, incorporated by reference from Exhibit 4.1 of the
Registrant's Form 8-K filed March 9, 1999.
4.5.2 Certificate of Designation, Preferences and Rights of Series
E Convertible Preferred Stock, incorporated by reference
from Exhibit 4.2 of the Registrant's Form 8-K filed March 9,
1999.

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26

EXHIBIT NO. DESCRIPTION
- ----------- -----------

4.5.3 Form of Warrant issued to the Series E Investors,
incorporated by reference from Exhibit 4.3 of Registrant's
Form 8-K filed March 9, 1999.
4.5.4 Registration Rights Agreement among the Company and the
Series E Investors listed in Exhibit A thereto, incorporated
by reference from Exhibit 4.4 of Registrant's Form 8-K filed
March 9, 1999.
4.6.1 Convertible Preferred Stock Purchase Agreement among the
Company and the Series F Investors listed in Exhibit A
thereto, incorporated by reference from Exhibit 4.1 of the
Registrant's Form 8-K filed January 11, 2000.
4.6.2 Certificate of Designation, Preferences and Rights of Series
F Convertible Preferred Stock, incorporated by reference
from Exhibit 4.2 of the Registrant's Form 8-K filed January
11, 2000.
4.6.3 Form of Warrant issued to the Series F Investors,
incorporated by reference from Exhibit 4.3 of Registrant's
Form 8-K filed January 11, 2000.
4.6.4 Registration Rights Agreement among the Company and the
Series F Investors listed in Exhibit A thereto, incorporated
by reference from Exhibit 4.4 of Registrant's Form 8-K filed
January 11, 2000.
4.7.1 Stock Purchase Agreement dated November 10, 2000 among the
Registrant and the individuals and entities listed on
Exhibit A thereto, incorporated by reference from Exhibit
4.0 of Registrant's Form 8-K filed November 13, 2000.
4.7.2 First Amendment to Stock Purchase Agreement among the
Registrant and the individuals and entities listed on
Exhibit A thereto, incorporated by reference from Exhibit
4.1 of Registrant's Form 8-K filed January 12, 2001.
4.7.3 Form of Certificate of Designation, Preferences and Rights
of Series G Convertible Preferred Stock, incorporated by
reference from Exhibit 4.2 of Registrant's Form 8-K filed
January 12, 2001.
4.7.4 Form of Registration Rights Agreement among the Registrant
and the individuals listed on Exhibit A thereto,
incorporated by reference from Exhibit 4.12 of Registrant's
Form 8-K filed January 12, 2001.
4.8.1 Amended and Restated Subordinated Notes and Warrant Purchase
Agreement dated December 28, 2000 among the Registrant and
the entities listed on Schedule I thereto, incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed
January 12, 2001.
4.8.2 Note to Morgenthaler Venture Partners V, L.P. issued under
Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.4 of Registrant's
Form 8-K filed January 12, 2001.
4.8.3 Note to Ampersand IV Limited Partnership issued under issued
under Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.5 of Registrant's
Form 8-K filed January 12, 2001.
4.8.4 Note to Ampersand IV Companion Fund Limited Partnership
issued under Subordinated Notes and Warrant Purchase
Agreement, incorporated by reference from Exhibit 4.6 of
Registrant's Form 8-K filed January 12, 2001.
4.8.5 Note to Molex Incorporated issued under Subordinated Notes
and Warrant Purchase Agreement, incorporated by reference
from Exhibit 4.7 of Registrant's Form 8-K filed January 12,
2001.
4.8.6 Warrant to Morgenthaler Venture Partners V, L.P. issued
under Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.8 of Registrant's
Form 8-K filed January 12, 2001.

25
27

EXHIBIT NO. DESCRIPTION
- ----------- -----------

4.8.7 Warrant of Ampersand IV Limited Partnership issued under
Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.9 of Registrant's
Form 8-K filed January 12, 2001.
4.8.8 Warrant of Ampersand IV Companion Fund Limited Partnership
issued under Subordinated Notes and Warrant Purchase
Agreement, incorporated by reference from Exhibit 4.10 of
Registrant's Form 8-K filed January 12, 2001.
4.8.9 Warrant of Molex Incorporated issued under Subordinated
Notes and Warrant Purchase Agreement, incorporated by
reference from Exhibit 4.11 of Registrant's Form 8-K filed
January 12, 2001.
4.9 Dublin Investments, LLC Warrant, incorporated by reference
from Exhibit 4.15 of Registrant's Form 8-K filed January 12,
2001.
4.10 Governance Agreement among the Registrant and the
individuals and entities listed on the signature pages
thereto, incorporated by reference from Exhibit 4.13 of
Registrant's Form 8-K filed January 12, 2001.
4.11 Amended and Restated Agreement Relating to Sheldahl dated
November 10, 2000 by and between the Registrant and Molex
Incorporated, incorporated by reference from Exhibit 4.8 of
Registrant's Form 8-K filed November 13, 2000.
4.12 Piper Jaffray Warrant, incorporated by reference from
Exhibit 4.14 of Registrant's Form 8-K filed January 12,
2001.
10.1 1987 Stock Option Plan, incorporated by reference from
Exhibit 10.1 of the Registrant's Form 10-K for the fiscal
year ended August 27, 1993.
10.2 1994 Stock Option Plan, as amended, incorporated by
reference from Exhibit 4.1 of the Registrant's Form S-8
dated August 1, 2000 (File No. 333-42724).
10.3 Employee Stock Purchase Plan, incorporated by reference from
Exhibit 4.1 of the Registrant's Form S-8 filed November 21,
1997 (File No. 333-40719).
10.4 Credit and Security Agreement dated June 19, 1998, among the
Registrant, Norwest Bank Minnesota, N.A., Harris Trust and
Savings Bank, NBD Bank, N.A., and The CIT Group/ Equipment
Financing, Inc., incorporated by reference from Exhibit 10.1
of the Registrant's Form S-3 dated July 1, 1998 (File No.
333-58307).
10.4.1 First Amendment to Credit and Security Agreement dated
November 25, 1998, among the Registrant, Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, NBD Bank,
N.A., and the CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.4.1 of the
Registrant's Form 10-K filed December 3, 1998.
10.4.2 Second Amendment to the Credit and Security Agreement, dated
March 4, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group., incorporated
by reference from Exhibit 10.1 of the Registrant's Form 10-Q
filed April 9, 1999.
10.4.3 Third Amendment to the Credit and Security Agreement, dated
April 5, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group., incorporated
by reference from Exhibit 10.2 of the Registrant's Form 10-Q
filed April 9, 1999.
10.4.4 Fourth Amendment to the Credit and Security Agreement, dated
November 12, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group., incorporated
by reference from Exhibit 10.7.4 of the Registrant's Form
10-K for the fiscal year ended August 27, 1999.

26
28

EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.4.5 Fifth Amendment to the Credit and Security Agreement, dated
June 16, 2000 between the Company and Norwest Bank
Minnesota, N.A. and The CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.1 of the
Registrant's Form 10-Q filed July 10, 2000.
10.4.6 Sixth Amendment to the Credit and Security Agreement, dated
June 27, 2000 between the Company and Norwest Bank
Minnesota, N.A. and The CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.2 of the
Registrant's Form 10-Q filed July 10, 2000.
10.4.7 Seventh Amendment to the Credit and Security Agreement,
dated November 7, 2000 between the Company and Wells Fargo
Bank, N.A. and The CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.4.7 of the
Registrant's Form 10-K filed November 30, 2000.
10.4.8 Eighth Amendment to the Credit and Security Agreement, dated
December 26, 2000 between the Company and Wells Fargo Bank,
N.A. and The CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.1 of the
Registrant's Form 10-Q filed January 16, 2001.
10.5 Form of Warrant issued in connection with Credit and
Security Agreement dated June 19, 1998, among the
Registrant, Norwest Bank Minnesota, N.A., Harris Trust and
Savings Bank, NBD Bank, N.A., and The CIT Group/Equipment
Financing, Inc., incorporated by reference from Exhibit 10.2
of the Registrant's Form S-3 dated July 1, 1998 (File No.
333-58307).
10.6 Deed of Trust and Security Agreement by and between Sheldahl
Colorado LLC, the Registrant, the Public Trustee of Boulder
County, Colorado and Morgan Guaranty Trust Company of New
York dated November 16, 1999, incorporated by reference from
Exhibit 10.4 of the Registrant's Form 10-K for the fiscal
year ended August 27, 1999.
10.7 Fixed Rate Note between the Registrant as the sole member of
Sheldahl Colorado LLC and Morgan Guaranty Trust Company of
New York dated November 16, 1999, incorporated by reference
from Exhibit 10.5 of the Registrant's Form 10-K for the
fiscal year ended August 27, 1999.
10.8 Guaranty by the Registrant to Morgan Guaranty Trust Company
of New York dated November 16, 1999, incorporated by
reference from Exhibit 10.6 of the Registrant's Form 10-K
for the fiscal year ended August 27, 1999.
10.9(*) Limited Liability Company Agreement of Modular Interconnect
Systems, L.L.C., dated July 28, 1998, without exhibits,
incorporated by reference from Exhibit 10.1 of the
Registrant's Form 8-K filed August 28, 1998.
10.9.1 First Amendment to Limited Liability Company Agreement of
Modular Interconnect Systems, L.L.C. dated November 10,
2000, incorporated by reference from Exhibit 10.0 of the
Registrant's Form 8-K filed November 13, 2000.
10.10 Loan Agreement, dated February 26, 1998, between the Company
and Relational Funding Corporation, incorporated by
reference from Exhibit 10.1 of the Company's Report on Form
10-Q filed April 13, 1998.
10.11 Promissory Note dated February 26, 1998, between the Company
and Relational Funding Corporation, incorporated by
reference from Exhibit 10.2 of the Company's Report on Form
10-Q filed April 13, 1998.
10.12 Form of Employment (change of control) Agreement for
Executive Officers of the Registrant, incorporated by
reference from Exhibit 10.4 of the Registrant's Form 10-K
for the fiscal year ended August 30, 1996.

27
29

EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.12.1 Form of Amendment No. 1 to Employment (change of control)
Agreement for Executive Officers of the Registrant,
incorporated by reference from Exhibit 10.10.1 of the
Registrant's Form 10-K filed for the fiscal year ended
August 28, 1998.
10.12.2 Form of Amendment No. 2 to Employment (change of control)
Agreement for Executive Officers of the Registrant,
incorporated by reference from Exhibit 10.12.2 of the
Registrant's Form 10-K filed for the fiscal year ended
August 27, 1999.
10.13 Supplementary Executive Retirement Plan Agreement between
the Registrant and James E. Donaghy dated November 5, 1996,
incorporated by reference from Exhibit 10.12 of the
Registrant's Form 10-K for the fiscal year ended August 28,
1998.
10.14 Letter Agreement between John V. McManus and the Registrant
dated October 15, 1999, incorporated by reference from
Exhibit 10.14 of the Registrant's Form 10-K for the fiscal
year ended August 27, 1999.
10.15 Abstract of Agreement between the Union of Needletrades
Industrial and Textile Employees and the Registrant dated
November 12, 1999, incorporated by reference from Exhibit
10.15 of the Registrant's Form 10-K for the fiscal year
ended August 27, 1999.
10.16 Lease dated June 15, 1989 between Aberdeen Development
Corporation and the Registrant, incorporated by reference
from Exhibit 10.13 of the Registrant's Form 10-K for the
fiscal year ended August 27, 1993.
10.17 Loan Authorization dated October 1, 1994 between South
Dakota Board of Economic Development Registrant,
incorporated by reference from Exhibit 10.1 of the
Registrant's Form 10-Q for the quarter ended February 25,
1994.
10.18 Agreement Relating to Employment dated October 1, 1994
between the South Dakota Board of Economic Development and
the Registrant, incorporated by reference from Exhibit 10.2
of the Registrant's Form 10-Q for the quarter ended February
25, 1994.
10.19 Promissory Note dated October 4, 1993 due to the South
Dakota Board of Economic Development, incorporated by
reference from Exhibit 10.3 of the Registrant's Form 10-Q
for the quarter ended February 25, 1994.
10.20 Agreement dated January 10, 1994 between the MCM-L
Consortium and the Advanced Projects Research Agency,
incorporated by reference from Exhibit 10.4 of the
Registrant's Form 10-Q for the quarter ended February 25,
1994.
10.21 Articles of Collaboration dated November 30, 1993 for the
MCM-L Consortium, incorporated by reference from Exhibit
10.5 of the Registrant's Form 10-Q for the quarter ended
February 25, 1994.
10.22 Agreement relating to Joint Venture dated August 1, 1995
between Registrant, Jiangxi Changjiang Chemical Plant, Hong
Kong Wah Hing (China) Development Co., Ltd. and Jiujiang
Flex Co., Ltd., incorporated by reference from Exhibit 10.23
of the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.23 Agreement relating to payments dated August 1, 1995 between
Registrant and Jiangxi Changjiang Chemical Plant, Hong Kong
Wah Hing (China) Development Co., Ltd. and Jiujiang Flex
Co., Ltd., incorporated by reference from Exhibit 10.24 of
the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.24 Manufacturing Agreement dated August 1, 1995 between
Registrant and Jiujiang Flex Co., Ltd., incorporated by
reference from Exhibit 10.25 of the Registrant's Form 10-K
for the fiscal year ended September 1, 1995.
10.25 Marketing and License Agreement dated August 1, 1995 between
Registrant and Jiujiang Flex Co., Ltd., incorporated by
reference from Exhibit 10.26 of the Registrant's Form 10-K
for the fiscal year ended September 1, 1995.

28
30

EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.26 Technology Development Agreement dated August 15, 1995
between Low Cost Flip Chip Consortium and the Advanced
Projects Research Agency, incorporated by reference from
Exhibit 10.27 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
10.27 Articles of Collaboration dated July 10, 1995 for the Low
Cost Flip Chip Consortium, incorporated by reference from
Exhibit 10.28 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
10.28 Technology Development Agreement dated March 23, 1995
between Plastic Packaging Consortium and the Advanced
Projects Research Agency, incorporated by reference from
Exhibit 10.29 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
10.29 Articles of Collaboration dated March 17, 1995 for the
Plastic Packaging Consortium, incorporated by reference from
Exhibit 10.30 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
10.30 License Agreement dated June 20, 1994 between Sidrabe and
Registrant, incorporated by reference from Exhibit 10.31 of
the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.30.1 Amendment No. 1 to License Agreement dated June 20, 1994
between Sidrabe and the Registrant, incorporated by
reference from Exhibit 10.28.1 of the Registrant's Form 10-K
for the fiscal year ended August 28, 1998.
10.31 Consulting Agreement dated August 17, 1988 between James S.
Womack and Sheldahl, Inc. incorporated by reference from
Exhibit 10.2 of the Registrant's Form 10-K for the fiscal
year ended August 27, 1993.
10.32 Sheldahl, Inc. Supplemental Executive Retirement Program
effective as of January 1, 1995 incorporated by reference
from Exhibit 10.34 of the Registrant's Form 10-K filed
November 30, 2000.
10.32.1 First Amendment to the Sheldahl, Inc. Supplemental Executive
Retirement Plan effective as of October 14, 1997
incorporated by reference from Exhibit 10.34.1 of the
Registrant's Form 10-K filed November 30, 2000.
10.32.2 Second Amendment to the Sheldahl, Inc. Supplemental
Executive Retirement Plan effective as of September 16, 1998
incorporated by reference from Exhibit 10.34.2 of the
Registrant's Form 10-K filed November 30, 2000.
10.33 Sheldahl, Inc. Retirement Benefit Program for Directors
incorporated by reference from Exhibit 10.35 of the
Registrant's Form 10-K filed November 30, 2000.
22 Subsidiaries of Registrant.
23.1 Consent of Independent Public Accountants -- Arthur Andersen
LLP.
23.2 Consent of Independent Auditors -- Ernst & Young LLP.

- -------------------------
(*) Certain portions of this Exhibit have been deleted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
24b-2. Spaces corresponding to the deleted portions are represented by
brackets with asterisks.

29
31

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: April 5, 2001

SHELDAHL, INC.

By: /s/ Donald R. Friedman
------------------------------------
Donald R. Friedman
President and Chief Executive
Officer

By: /s/ Peter Duff
------------------------------------
Peter Duff, Vice President-Finance

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant on April 5, 2001 and in the capacities indicated.

(POWER OF ATTORNEY)

Each person whose signature appears below constitutes and appoints Donald
R. Friedman and Peter Duff as such person's true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and resubmission,
for such person and in such person's name, place and stead, in any and all
capacities, to sign any of all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact as agents, each acting alone, or such person's substitute or
substitutes may lawfully do or cause to be done by virtue thereof.

By: /s/ Donald R. Friedman President and Chief Executive Officer
and Director (Principal Executive
- -------------------------------------------------------- Officer)
Donald R. Friedman

By: /s/ Peter Duff Vice President-Finance (Principal
Accounting Officer)
- --------------------------------------------------------
Peter Duff

By: /s/ John D. Lutsi Chairman of the Board of Directors
- --------------------------------------------------------
John D. Lutsi

By: /s/ Stuart A. Auerbach Director
- --------------------------------------------------------
Stuart A. Auerbach

By: /s/ William B. Miller Director
- --------------------------------------------------------
William B. Miller

By: /s/ Raymond C. Wieser Director
- --------------------------------------------------------
Raymond C. Wieser

30
32

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Public Accountants -- Arthur Andersen
LLP....................................................... F-1
Report of Independent Public Accountants -- Ernst & Young
LLP....................................................... F-2
Consolidated Balance Sheets as of December 29, 2000, and
January 29, 2000.......................................... F-3
Consolidated Statements of Operations for the Eleven Months
Ended December 29, 2000, and Twelve Months Ended January
29, 2000.................................................. F-4
Consolidated Statements of Changes in Shareholders'
Investment for the Eleven Months Ended December 29, 2000,
and Twelve Months Ended January 29, 2000.................. F-5
Consolidated Statements of Cash Flows for the Eleven Months
Ended December 29, 2000, and Twelve Months Ended January
29, 2000.................................................. F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II -- Valuation and Qualifying Accounts............ S-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Sheldahl, Inc.:

We have audited the accompanying consolidated balance sheet of Sheldahl,
Inc. (a Minnesota corporation) and Subsidiaries as of December 29, 2000, and the
related consolidated statements of operations, changes in shareholders'
investment and cash flows for the eleven month period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sheldahl, Inc. and
Subsidiaries as of December 29, 2000, and the results of their operations and
their cash flows for the eleven month period then ended, in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations
and is unable to ascertain whether it will have sufficient liquidity available
under its current credit agreement to fund operations or whether the Company
will meet various covenant requirements contained in its credit agreement. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 3. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ Arthur Andersen LLP

Minneapolis, Minnesota,
March 12, 2001

F-1
34

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Sheldahl, Inc.:

We have audited the accompanying consolidated balance sheet of Sheldahl,
Inc. (a Minnesota corporation) and Subsidiaries (formerly International Flex
Holdings, Inc,) as of January 29, 2000, and the related consolidated statements
of operations, changes in shareholders' investment and cash flows for the year
then ended. Our audit also included the financial statement schedule listed in
the index at Item 14(a). These financial statements and the schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sheldahl, Inc. and
Subsidiaries at January 29, 2000, and the results of their operations and their
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ Ernst & Young LLP

Syracuse, New York
March 8, 2000

F-2
35

SHELDAHL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 29, JANUARY 29,
2000 2000
------------- ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)

ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,701 $ 573
Accounts receivable, net of allowance of $1,623 and
$155................................................... 17,657 3,666
Inventories............................................... 25,205 4,630
Prepaid expenses and other current assets................. 1,538 1,171
-------- -------
Total current assets................................... 54,101 10,040
-------- -------
Plant and equipment:
Land and buildings........................................ 16,596 --
Machinery and equipment................................... 50,950 13,397
Construction in progress.................................. 8,238 1,329
Accumulated depreciation.................................. (3,863) (1,819)
-------- -------
Net plant and equipment................................ 71,921 12,907
-------- -------
Intangible and other assets, net............................ 3,340 2,813
-------- -------
$129,362 $25,760
======== =======
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of debt................................ $ 22,450 $ 4,215
Accounts payable.......................................... 16,933 945
Accrued compensation...................................... 2,388 540
Other accrued liabilities................................. 15,767 1,310
-------- -------
Total current liabilities.............................. 57,538 7,010
Long-term debt, less current maturities..................... 10,640 9,873
Other non-current liabilities............................... 4,316 --
-------- -------
Total liabilities...................................... 72,494 16,883
-------- -------
Commitments and contingencies (Notes 2, 3, 5, 7, 8, 9 and
11).......................................................
Shareholders' investment:
Preferred stock, $1 par value, 500,000 shares authorized;
Series D, E, F and G cumulative convertible preferred,
32,353, 8,060, 1,800; and 11,303 shares issued and
outstanding at December 29, 2000...................... 53 --
Common stock, $.25 par value, 50,000,000 shares
authorized; 30,590,011 and 8,736,890 shares issued and
outstanding............................................ 7,648 2,184
Additional paid-in capital................................ 54,830 7,836
Accumulated deficit....................................... (5,663) (1,143)
-------- -------
Total shareholders' investment......................... 56,868 8,877
-------- -------
$129,362 $25,760
======== =======

The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
36

SHELDAHL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 29, JANUARY 29,
2000 2000
------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net sales............................................ $20,417 $24,081
Cost of sales........................................ 16,333 17,051
------- -------
Gross profit......................................... 4,084 7,030
------- -------
Expenses:
Sales and marketing................................ 1,337 804
General and administrative......................... 3,373 4,879
Research and development........................... 2,888 2,060
Interest, net...................................... 1,203 960
------- -------
Total expenses.................................. 8,801 8,703
------- -------
Loss before income taxes............................. (4,717) (1,673)
Income tax benefit................................... 197 550
------- -------
Loss applicable to common shareholders............... $(4,520) $(1,123)
======= =======
Loss per common share - basic and diluted............ $ (0.51) $ (0.13)
======= =======
Weighted average number of shares outstanding - basic
and diluted........................................ 8,802 8,737
======= =======

The accompanying notes are an integral part of these consolidated financial
statements.
F-4
37

SHELDAHL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT

ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 29, JANUARY 29,
2000 2000
-------------------- --------------------
(IN THOUSANDS)

Common stock - shares:
Balance at beginning of period.................... 8,737 --
Initial capitalization............................ -- 8,737
Shares deemed issued in Merger.................... 12,069 --
Sale of common stock.............................. 9,784 --
------- -------
Balance end of period............................. 30,590 8,737
======= =======
Series D convertible preferred stock:
Balance at beginning of period.................... $ -- $ --
Shares deemed issued in Merger.................... 32 --
------- -------
Balance at end of period.......................... $ 32 $ --
======= =======
Series E convertible preferred stock:
Balance at beginning of period.................... $ -- $ --
Shares deemed issued in Merger.................... 8 --
------- -------
Balance at end of period.......................... $ 8 $ --
======= =======
Series F convertible preferred stock:
Balance beginning of period....................... $ -- $ --
Shares deemed issued in Merger.................... 2 --
------- -------
Balance at end of period.......................... $ 2 $ --
======= =======
Series G convertible preferred stock
Balance at beginning of period.................... $ -- $ --
Sale of stock..................................... 11 --
------- -------
Balance at end of period.......................... $ 11 $ --
======= =======
Common stock:
Balance at beginning of period.................... $ 2,184 $ --
Initial capitalization............................ -- 2,184
Shares deemed issued in Merger.................... 3,018 --
Sale of common stock.............................. 2,446 --
------- -------
Balance at end of period.......................... $ 7,648 $ 2,184
======= =======
Additional paid-in capital:
Balance at beginning of period.................... $ 7,836 $ --
Initial capitalization............................ -- 7,836
Deemed equity value at Merger..................... 22,840 --
Proceeds from sale of common stock................ 11,251 --
Proceeds from sale of series G preferred stock.... 11,292 --
Value of warrants issued with subordinated
notes.......................................... 1,611 --
------- -------
Balance at end of period.......................... $54,830 $ 7,836
======= =======
Accumulated deficit:
Balance at beginning of period.................... $(1,143) $ --
Common stock issued at initial capitalization for
no consideration............................... -- (20)
Net loss.......................................... (4,520) (1,123)
------- -------
Balance at end of period.......................... $(5,663) $(1,143)
======= =======

The accompanying notes are an integral part of these consolidated financial
statements.
F-5
38

SHELDAHL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

ELEVEN MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 29, JANUARY 29,
2000 2000
------------------- -------------------
(IN THOUSANDS)

Operating activities:
Net loss.............................................. $ (4,520) $(1,123)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization...................... 2,807 2,433
Provision for bad debts............................ 14 155
Non-cash interest.................................. 513 527
Net change in other operating activities:
Accounts receivable................................ 2,238 (3,821)
Inventories........................................ (250) (983)
Prepaid expenses and other current assets.......... 556 (1,171)
Accounts payable and accrued liabilities........... 2,806 576
-------- -------
Net cash provided by (used in) operating activities... 4,164 (3,407)
-------- -------
Investing activities:
Capital expenditures, net............................. (4,614) (3,026)
Increase in other assets.............................. (945) (494)
-------- -------
Net cash used in investing activities.............. (5,559) (3,520)
-------- -------
Financing activities:
Net proceeds from credit facility..................... 10,062 --
Issuance of senior subordinated notes................. 6,500 --
Borrowings of long-term debt.......................... -- 5,250
Repayments of long-term debt.......................... (10,915) --
Proceeds from sale of common stock.................... 13,697 --
Proceeds from sale of preferred stock................. 11,303 --
-------- -------
Net cash provided by financing activities.......... 10,523 5,250
-------- -------
Net increase (decrease) in cash and cash equivalents.... 9,128 (1,677)
-------- -------
Cash and cash equivalents, beginning of period.......... 573 2,250
-------- -------
Cash and cash equivalents, end of period................ $ 9,701 $ 573
======== =======
Supplemental cash flow information:
Interest paid......................................... $ 1,130 $ 378
======== =======
Income taxes paid..................................... $ 13 $ 160
======== =======

The accompanying notes are an integral part of these consolidated financial
statements.
F-6
39

SHELDAHL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Business Description

Sheldahl, Inc. (the Company or Sheldahl) creates and distributes
high-density substrates, high-quality flexible printed circuitry, and thin,
flexible laminates and their derivatives to worldwide markets. The Company's
laminates are of two types: adhesive-based tapes and materials, and its patented
adhesiveless material, Novaclad(R) and I-Flex. From these materials, the Company
fabricates high-value derivative products: single- and double-sided flexible
interconnects and assemblies under the trade names Flexbase(R), Novaflex(R) HD,
Novaflex(R) VHD, FlexStrate, DendriPlate(R) and substrates for silicon chip
carriers under the trade names ViaArray(R) and ViaThin(R). Management believes
that Sheldahl's leading technology products serve the electronic interface
between the function of electronic-based products and their integrated circuits.
The Company targets specific OEMs and contract assemblers in the
telecommunications, computer, medical, automotive and aerospace markets in the
drive to create electronic-based products that require increased functionality.

The Company operates in two business divisions identified as the Materials
and Flex Interconnect Division (MFI), and the International Flex Technologies
Division (IFT). The MFI business division specializes in high quality,
roll-to-roll flexible circuits and specialty materials for the automotive,
communications, and aerospace markets. The IFT business division consists of
fine-line, roll-to-roll flexible circuits including substrates for silicon chip
carriers. These products target the telecommunications, computer and medical
markets.

(2) Merger Transaction and Basis of Presentation

Merger --

On December 28, 2000, Sheldahl acquired all of the outstanding securities
of International Flex Holdings, Inc. (Holdings) for approximately 8.7 million
shares of Sheldahl's common stock, plus shares issuable under stock options and
warrants of approximately 1.0 million shares, under the terms of a definitive
merger agreement, as amended, (the Merger Agreement) by and among Sheldahl, IFT
West Acquisition Company, a newly formed subsidiary of Sheldahl (West),
Holdings, the sole shareholder of International Flex Technologies, Inc., the
operating company, and the stockholders of Holdings (the Holdings Stockholders).
Under the terms of the Merger Agreement, West merged with and into Holdings,
with Holdings surviving and becoming a wholly owned subsidiary of Sheldahl (the
Merger). As consideration for the Merger, holders of outstanding shares of
Holdings' equity securities received shares of Sheldahl common stock. Holdings'
option holders and warrant holder received options and a warrant to purchase
shares of Sheldahl common stock based upon the exchange ratio, as defined.

Common Stock and Series G Convertible Preferred Stock Investment --

Concurrent with consummating the Merger, Sheldahl completed an equity
investment pursuant to a stock purchase agreement (the Stock Purchase Agreement)
by and among Sheldahl and three accredited

F-7
40

investors (the Investors), who collectively invested an aggregate of $25.0
million in equity capital in exchange for approximately 9.8 million shares of
Sheldahl common stock and 11,303 shares of a newly created 11.06% Series G
Convertible Preferred Stock of Sheldahl, par value $1.00 per share (the Series G
Convertible Preferred Stock), such shares are convertible in the aggregate into
approximately 8.1 million shares of Sheldahl common stock (the Equity
Investment).

The Series G Convertible Preferred Stock is convertible into shares of
Sheldahl common stock at any time. Each holder of the Series G Convertible
Preferred Stock is entitled to convert each share of Series G Convertible
Preferred Stock into that number of shares of Sheldahl common stock that equals
$1,000 plus accrued dividends divided by the Conversion Price. The Conversion
Price is $1.40 per share and is subject to adjustment from time-to-time under
certain anti-dilution provisions, as defined. The Series G Convertible Preferred
Stock is entitled to approximately 11.06% dividends, payable annually. For a
period of twenty-four months from the date of issuance, Sheldahl is obligated to
pay the dividend in shares of its common stock at a Dividend Conversion Price of
$1.625, as adjusted from time-to-time under certain anti-dilution provisions, as
defined. Thereafter, Sheldahl may pay the dividend in shares of its common
stock, or, at its option, cash. One year of dividends at the Dividend Conversion
Price would equate to approximately 769,300 shares.

The Series G Convertible Preferred Stock is subordinate to the Company's
Series D, E and F Convertible Preferred Stock with regard to payment of
dividends and proceeds upon liquidation. Upon a liquidation of all of the assets
of Sheldahl, the holders of the Series G Convertible Preferred Stock would be
entitled to receive $25.0 million plus any accrued but unpaid dividends less the
market value of the shares of common stock purchased under the Stock Purchase
Agreement and retained by the holders of the Series G Convertible Preferred
Stock following the adoption of a plan of liquidation, provided that any shares
of common stock purchased under the Stock Purchase Agreement may be turned into
Sheldahl for cancellation at the election of the holders of the Series G
Preferred Stock after eighteen months from the original issue date. The Company
may require holders of the Series G Convertible Preferred Stock to convert to
common stock provided that Sheldahl's common stock trades at a price greater
than $12.50 for at least thirty consecutive business days and the average daily
trading volume of Sheldahl's common stock on the NASDAQ National market for
thirty consecutive business days exceeds 50,000 shares.

Subordinated Notes and Warrant Purchase Investment --

Concurrent with consummating the Merger and Equity Investment, Sheldahl
completed the issuance of $6.5 million of subordinated notes. Under the terms of
the agreement, the purchasers acquired $6.5 million of 12% senior subordinated
notes (the Subordinated Notes) and related warrants (the Warrants)
(collectively, the Debt Investment). The purchasers collectively received
Warrants to purchase 1,526,814 shares of Sheldahl common stock. The Warrants
issued under the Debt Investment are exercisable at $.01 per share for a period
of seven years. As discussed in Note 5, the warrants were recorded at their
estimated value at the date of issuance as an increase to equity and a discount
to the Subordinated Notes, and will be accreted to interest expense over the
five-year period of the Subordinated Notes.

Post Transactions Ownership --

After completion of the Merger, Equity Investment and Debt Investment (the
Transactions), the parties that acquired securities in the Transactions
collectively hold securities representing ownership of approximately 60% of
Sheldahl's currently outstanding common stock and 60% of Sheldahl on a fully
diluted basis (assuming conversion of all Sheldahl convertible securities). In
addition, as part of the Transactions, the Company issued warrants to purchase
175,000 shares of Sheldahl common stock to its investment advisor, exercisable
at $2.77 per share for seven years.

Basis of Presentation --

The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and include the
accounts of the Company and its wholly owned subsidiaries. The Merger discussed
above resulted in Sheldahl acquiring all of the outstanding securities of

F-8
41

Holdings, with Holdings becoming a wholly owned operating subsidiary of
Sheldahl. Although Sheldahl is the legal survivor in the Merger and remains the
registrant with Securities and Exchange Commission, under United States
generally accepted accounting principles, as a result of the number of shares
issued and sold in the Transactions, the Merger will be accounted for as a
reverse acquisition, whereby Holdings is considered the 'acquirer' of Sheldahl
for financial reporting purposes. Among other matters, this will require
Sheldahl to present in all financial statements and other public informational
filings, post completion of the Transactions, prior historical financial and
other information of Holdings, and require a retroactive restatement of Holdings
historical shareholders' investment for the equivalent number of shares of
common stock received in the Merger. Accordingly, the accompanying consolidated
financial statements present the results of Holdings from the date it commenced
operations (February 1, 1999). Immediately prior to the commencement of its
operations, Holdings acquired certain assets from International Business
Machines Corporation (IBM). The aggregate purchase price was approximately $18
million and was funded by a $10 million capital contribution and debt financing.

The accompanying financial statements include the results of Holdings since
it commenced operations (February 1, 1999) and reflect the acquisition of
Sheldahl on December 28, 2000 under the purchase method of accounting. The
equity accounts and equity transactions of the combined entity reflect that of
the legal acquirer, Sheldahl, as required under reverse acquisition accounting.
The aggregate purchase price was approximately $25.9 million. The assets
acquired and liabilities assumed have been recorded at their estimated fair
values as of the date of acquisition. The excess fair value of the assets
acquired and liabilities assumed over the purchase price paid has been recorded
as negative goodwill. This amount, approximating $8.8 million, has been recorded
as a reduction to property and equipment. Certain of the assets acquired and
liabilities assumed have been recorded based upon preliminary estimates as of
the date of acquisition. The final purchase price allocation may be materially
different from preliminary allocations with respect to property and equipment
and other intangible assets based upon finalization of fair value determination.
Any changes to the preliminary estimates within one year of the purchase date
will be reflected as an adjustment to negative goodwill resulting in an
adjustment to property and equipment. The operating results of Sheldahl have
been included in the consolidated financial statements since its deemed date of
acquisition under reverse acquisition accounting, December 28, 2000. The pro
forma effects of the acquisition are included in the table below. No financial
information is available for periods prior to February 1, 1999, with respect to
Holdings. All significant intercompany transactions have been eliminated in
consolidation.

Subsequent to the Transactions, Sheldahl's Board of Directors determined
that it would be in the best interests of the Company to change its fiscal year
end to the Friday closest to December 31 of each year, beginning with December
29, 2000.

Pro Forma Financial Information --

The accompanying unaudited consolidated pro forma results of operations
give effect to the Transactions discussed above as if such Transactions had
occurred at the beginning of the period (in thousands, except per share
amounts):

DECEMBER 29, 2000 JANUARY 29, 2000
----------------- ----------------

Net sales.................................. $137,673 $153,152
Operating loss............................. (22,780) (19,516)
Net loss................................... (25,699) (22,178)
Basic and diluted loss per share........... $ (0.84) $ (0.73)

Acquisition Integration --

In connection with the Merger, the Company has developed and began to
implement facility consolidation plans designed to better integrate the combined
operations and to reduce its cost structure. Purchase liabilities recorded by
the Company as part of the acquisition included approximately $0.2 million for
costs associated with the shutdown and consolidation of certain acquired
facilities and $1.6 million for severance and other related costs. None of these
reserves were used in the eleven month period ended December 29, 2000.

F-9
42

Certain of the plans will continue to be modified and adjusted throughout 2001
as the Company finalizes its consolidation plans. The Company currently
anticipates the employee terminations and facility consolidation will be
completed by the end of 2001, except for contractual obligations that will
continue through 2003.

(3) Liquidity and Going Concern Matters

As discussed in Note 2, Holdings began operations on February 1, 1999, and
has incurred operating losses of approximately $5.6 million during the
twenty-three month period ended December 29, 2000. On a pro-forma basis,
including the operations of Sheldahl, the Company has incurred losses of
approximately $47.9 million during the same period. These losses have been
principally financed through equity and debt financing.

Fiscal 2001 capital expenditures for the Company, including the operations
of Sheldahl, are planned at approximately $8.5 million. Scheduled debt
repayments for fiscal 2001 (excluding amounts under the Credit Agreement and 12%
Senior Subordinated Notes that could be called by the lenders due to
non-compliance with the debt covenants -- see note 5) will be approximately $4.1
million, including approximately $2.5 million on the bank term facility and
approximately $1.6 million for various other debts.

The Company experienced significant softening of sales orders during the
later half of 2000 and consequently poor operating performance. The Company is
continuing to develop a combined operational and financial plan for the Company.
In the interim, the Company has developed and will begin to implement cost
reduction plans to improve operating performance. However, the Company
anticipates that it will be out of compliance with certain of its debt covenants
as of March 30, 2001 (see Note 5). The inability of the Company to i) obtain
waivers for anticipated events of non-compliance under its credit agreement;
(ii) implement cost reduction action plans; iii) achieve profitable execution of
the sales orders received for its IFT- Longmont business; iv) achieve operating
performance from the SMFI business above pro forma 2000 levels; v) achieve other
cost or productivity improvements; and vi) maintain adequate liquidity to fund
normal operations would result in the Company being out of compliance with
certain of its debt covenants thereby allowing the Company's lenders to require
full repayment of the outstanding borrowings under the Company's credit
agreement and/or leave the Company in a cash reserve position that would require
additional capital to fund operations. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management has and
will continue to implement operational measures designed to address the
Company's operational and cash flow objectives. Should any of the adverse
matters discussed above ultimately occur, management will attempt to take one or
all of the following actions; i) seek continuing waivers of bank covenants; ii)
obtain new equity capital; iii) issue new debt; and/or iv) significantly
restructure the Company's operations. However, there can be no assurance that
the Company will be successful in obtaining waivers of bank covenants, achieving
positive operating results during fiscal 2001, in its attempt to issue
additional debt or to raise additional capital on terms acceptable to the
Company, or in the event of the failure of the foregoing, successfully take the
actions described above.

(4) Summary of Significant Accounting Policies

Use of Estimates --

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

Fair Value of Financial Instruments --

The carrying amounts reported in the consolidated balance sheet for
accounts receivable and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments. The carrying
amount for long-term debt under the Company's credit agreement approximates fair
value because of the variable rate feature and because the related interest
rates are comparable to rates
F-10
43

currently available to the Company for debt with similar terms. The fair value
of the Company's outstanding notes payable, excluding the note payable to IBM,
were recorded at fair value in connection with the Merger discussed in Note 2.
The fair value approximated carrying value based upon quoted market rates. The
fair value of the Company's note payable to IBM, based on the present value of
estimated future cash flows, approximates fair value.

Significant Customers --

The Company's two largest customers accounted for 70% and 53% of net sales
in the eleven months ended December 29, 2000 and the twelve months ended January
29, 2000 respectively. No other customers accounted for more than 10% of net
sales. At December 29, 2000, amounts due from these customers approximated
$138,000 and $244,000, respectively.

Export Sales --

The Company had export sales of approximately $1,130,000 for the eleven
month period ended December 29, 2000 and approximately $916,000 for the twelve
month period ended January 29, 2000.

Revenue Recognition --

The Company recognizes revenue principally as products are shipped. In
addition, the Company grants credit to customers and generally does not require
collateral or any other security to support amounts due.

Inventories --

Inventories are stated at the lower of cost or market, with cost determined
on the first-in, first-out (FIFO) method. Cost includes the cost of materials,
direct labor, and applicable manufacturing overhead.

The components of inventories are as follows (in thousands):

DECEMBER 29, 2000 JANUARY 29, 2000
----------------- ----------------

Raw material............................... $ 9,769 $ 941
Work-in-process............................ 7,589 1,747
Finished goods............................. 7,847 1,942
------- ------
Total...................................... $25,205 $4,630
======= ======

Plant and Equipment --

Plant and equipment acquired prior to the Merger discussed in Note 2 are
stated at cost and include expenditures that increase the useful lives of
existing plant and equipment. Maintenance, repairs and minor renewals are
charged to operations as incurred. When plant and equipment are disposed of, the
related cost and accumulated depreciation are removed from the respective
accounts and any gain or loss is reflected in the results of operations. As
discussed in Note 2, in connection with the Merger, acquired plant and equipment
was recorded at estimated fair value. The Merger resulted in negative goodwill
of approximately $8.8 million, which has been recorded as a reduction to the
carrying value of acquired plant and equipment. Certain of these assets have
been recorded based upon preliminary estimates and are subject to adjustment
based upon finalization of fair value determination.

For financial reporting purposes, plant and equipment are depreciated
principally on a straight-line basis over the estimated useful lives of 20 to 40
years for buildings and 3 to 15 years for machinery and equipment. For income
tax reporting purposes, straight-line and accelerated depreciation methods are
used.

Earnings per Share --

The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Basic earnings per share is computed
using the weighted average number of shares of common

F-11
44

stock outstanding for the period. Diluted earnings per share is computed using
the weighted average number of shares of common stock, the dilutive common
equivalent shares related to stock options and warrants outstanding during the
period and the equivalent common shares of convertible preferred stock, if those
equivalent shares are dilutive. During the eleven month period ended December
29, 2000, and the twelve month period ended January 29, 2000, stock options,
warrants and convertible preferred stock equivalents were anti-dilutive and,
therefore, not included in the computation of diluted earnings per share.

New Accounting Pronouncements --

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," December 30, 2000. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains or losses to offset
related results on the hedged item in the income statement and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The adoption of SFAS No. 133 did not
have a material impact on the Company's results of operations or financial
position.

Start-up Costs --

The Company expenses start-up costs as incurred. Start-up activities are
broadly defined and include one-time activities related to opening a new
facility, introducing a new product or service, conducting business in a new
territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, commencing some new operation,
and organizing a new entity.

Intangible and Other Assets --

Intangible and other assets consist principally of purchased patent rights
that are being amortized on a straight-line basis over a five year period, and
are presented net of accumulated amortization of approximately $1,211,000 and
$634,000 at December 29, 2000, and January 29, 2000, respectively.

The Company is in process of determining the value, if any, of certain
intangible assets associated with the Merger discussed in Note 2. The fair value
associated with any intangible assets acquired will be recorded and amortized
over their useful lives, and will result in a reduction of the negative goodwill
resulting from the acquisition, which was recorded as a reduction to the
carrying value of plant and equipment.

The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its long-lived assets. If such events or circumstances were
to indicate that the carrying amount of these assets would not be recoverable,
the Company would estimate the future cash flows expected to result from the use
of the assets and their eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) were less than the
carrying amount of the long-lived assets, the Company would recognize an
impairment charge.

F-12
45

(5) Financing

Debt consisted of the following (in thousands):

DECEMBER 29, JANUARY 29,
2000 2000
------------ -----------

Revolving credit facility, interest at prime plus two
percent (11.5% at December 29, 2000)...................... $ 4,765 $ --
Term facility, interest at prime plus two percent (11.5% at
December 29, 2000)........................................ 11,077 --
12% Senior Subordinated Notes, net.......................... 4,889 --
Note payable to insurance company, secured by real estate
mortgage. Interest at 8.53% with monthly payments of $48,
including principal and interest through December 2009.... 4,252 --
Note payable to IBM......................................... 5,627 5,838
Note payable to bank, due on demand, interest at prime plus
1 1/4% (9.50% at January 29, 2000). Repaid in connection
with Transactions (see Note 2)............................ -- 4,250
Line of credit with a bank, secured by receivables and
inventory. Interest at prime (8.25% at January 29, 2000).
Repaid in connection with Transactions (see Note 2)....... -- 4,000
Capitalized lease obligations payable to an investment
company secured by computer equipment and software.
Interest at 10.17% with monthly payments of $40, including
principal and interest through July 2002.................. 655 --
Capitalized lease obligation payable to a bank, secured by
computer, communications equipment and related software.
Interest at 7.8% with monthly payments of $14, including
principal and interest through October 2003............... 274 --
Installment note due a finance company, secured by computer
hardware and software, interest at 9.69% with monthly
payments of $49, including principal and interest through
January 2003.............................................. 1,102 --
Note payable to Economic Development Agency, interest at
3.0% with monthly interest only payments of $1 until
October 2001, due August 2009............................. 450 --
-------- -------
33,090 14,088
Less-current maturities..................................... (22,450) (4,215)
-------- -------
$ 10,640 $ 9,873
======== =======

At December 29, 2000, the Company's amended credit agreement consists of
two separate facilities: a revolving credit facility of up to $25 million based
on the Company's adjusted working capital; and a term facility for $16 million
based on the appraised value of the Company's unencumbered equipment. Interest
on the revolving credit facility and the term facility is charged at the prime
rate plus two percent (11.5% as of December 29, 2000). As of December 29, 2000,
the amount available to borrow on the revolving credit facility was
approximately $7.1 million, which reflects a $5 million reduction by the
Company's lenders for a liquidity reserve. All borrowings under the credit
agreement are secured by the Company's tangible and intangible assets. The term
facility requires monthly repayments of $205,000, with the remaining outstanding
balance under the term facility and the revolving credit facility due June 1,
2002.

F-13
46

ratios. Existing economic and industry conditions, as well as operational
performance of the Company's business units, have resulted in the Company
anticipating being out of compliance with certain of the financial covenants as
of March 30, 2001. In response, the Company is in process of implementing cost
reduction action plans and other matters as discussed in Note 3, and will
initiate discussions with its lenders with respect to amending such financial
covenants. While management currently believes that it will be successful in
obtaining an amendment, there can be no assurance that an amendment will be
obtained on terms acceptable to the Company. As a result of this pending event
of non-compliance, the Company has classified the borrowings under the Credit
Agreement as current in the accompanying December 29, 2000 consolidated balance
sheet. In addition, an event of default under the Credit Agreement will cause an
event of default under the terms of the 12% Senior Subordinated Notes. As such,
the 12% Senior Subordinated Notes have also been classified as current in the
accompanying December 29, 2000 consolidated balance sheet. No other adjustments
to the carrying amount or classification of assets or liabilities in the
accompanying financial statements have been made with respect to this pending
event of non-compliance.

As part of the Transactions discussed in Note 2, Sheldahl completed the
issuance of $6.5 million of Senior Subordinated Notes. In addition, the
purchasers collectively received warrants to purchase 1,526,814 shares of
Sheldahl common stock. The warrants are exercisable at $.01 per share for a
period of seven years. The fair value of the warrants, as determined using the
Black-Scholes pricing model, amounting to approximately $1.6 million, has been
reflected as a discount to the carrying value of the Senior Subordinated Notes
and as a credit to additional paid-in capital. The $1.6 million will be accreted
to interest expense over the five-year period of the Senior Subordinated Notes.

In connection with the formation of Holdings, the Company entered into an
intellectual property and license agreement with IBM. The Company obtained
seller financing through a five-year $7.5 million non-interest bearing note.
This financing was discounted at a rate of 9.75%, with accrued interest being
added to the carrying value of the note. Semi-annual principal payments began
July 2000 and continue until January 2004.

Future maturities of debt as of December 29, 2000 are as follows (in
thousands):

2001........................................................ $22,450
2002........................................................ 2,340
2003........................................................ 2,415
2004........................................................ 1,551
2005........................................................ 130
Thereafter.................................................. 4,204
-------
$33,090
=======

(6) Effect of the Merger on Shareholders' Investment and Earnings Per Share

As a result of the Merger discussed in Note 2, the historical shareholder's
investment of Holdings, deemed the accounting acquirer for financial reporting
purposes, has been retroactively restated to reflect the effect of the exchange
ratio established as part of the Merger. Shareholders' investment presents the
equivalent number of shares received in the Merger after giving effect to the
difference in par value of common stock, with the offset to additional paid-in
capital. The accumulated deficit of Holdings, as the accounting acquirer, has
been carried forward. Operations prior to the Merger are those of Holdings as
the accounting acquirer. Earnings per share for periods prior to the Merger have
been retroactively restated to reflect the number of equivalent shares of common
stock received by Holdings as the acquiring company. The shares of common and
preferred stock outstanding of Sheldahl prior to the Merger are reflected as
being issued at the date of the Merger in the accompanying December 29, 2000,
statement of shareholders' investment.

F-14
47

(7) Preferred Stock and Warrants

Preferred Stock --

As discussed in Note 2, as part of the Transactions, the Company sold
11,303 shares of Series G Convertible Preferred Stock in December 2000 with a
total stated value of $11,303,000. This Series G preferred stock earns an
approximate 11.06% dividend rate, payable annually. The dividend is payable in
shares of common stock of the Company for the twenty four months from the date
of issuance at a stated value of $1.625 per share. Thereafter the Company may
pay the dividend in shares of its common stock or, at its option, cash. The
Series G preferred stock is convertible into approximately 8.1 million shares of
common stock at a fixed rate of $1.40 per share. The Series G preferred stock is
subordinated to the Series D, E and F preferred stock with regard to payment of
dividends and proceeds upon liquidation. Accrued dividends of approximately
$4,000 are included in accounts payable in the accompanying December 29, 2000,
consolidated balance sheet.

Prior to the Merger discussed in Note 2, Sheldahl completed the following
equity issuances:

- The Company issued 1,800 shares of Series F Convertible Preferred Stock
with a total stated value of $1,800,000. This Series F preferred stock
earns a 5% dividend rate, payable annually in shares of common stock or
cash at the Company's option, and is convertible into nearly 330,000
shares at a fixed rate of $5.46 per share, adjustable for certain
anti-dilution provisions. The purchasers of the Series F preferred stock
were also issued 55,800 warrants to purchase the Company's Common Stock
at a price of $5.46 per share, adjustable for certain anti-dilution
provisions. These warrants expire in January 2005. None of the warrants
have been exercised as of December 29, 2000. Net proceeds from the Series
F preferred stock were approximately $1,800,000. As of December 29, 2000,
1,800 shares of Series F preferred stock were outstanding. Accrued
dividends of approximately $88,000 are included in accounts payable in
the accompanying December 29, 2000, consolidated balance sheet.

- The Company issued 8,560 shares of Series E Convertible Preferred Stock
with a total stated value of $8,560,000. This Series E preferred stock
earns a 5% dividend rate, payable annually in shares of common stock or
cash at the Company's option, and is convertible into nearly 1.4 million
shares at a fixed rate of $6.25 per share, adjustable for certain
anti-dilution provisions. The purchasers of the Series E preferred stock
were also issued 85,600 warrants to purchase the Company's common stock
at a price of $7.8125 per share, adjustable for certain anti-dilution
provisions. These warrants expire in February 2004. None of the warrants
have been exercised as of December 29, 2000. Net proceeds from the Series
E preferred stock were approximately $8,460,000. As of December 29, 2000,
8,060 shares of Series E convertible preferred stock were outstanding.
Accrued dividends of approximately $344,000 are included in accounts
payable in the accompanying December 29, 2000, consolidated balance
sheet.

- The Company issued 32,917 shares of Series D Convertible Preferred Stock
with a total stated value of $32,917,000. This Series D preferred stock
earns a 5% dividend rate, payable annually in shares of common stock or
cash at the Company's option, and is convertible into nearly 5.4 million
shares at a fixed rate of $6.12 per share, adjustable for certain
anti-dilution provisions. The holders of the Series D preferred stock
were also issued 329,170 warrants to purchase the Company's common stock
at a price of $7.6875 per share, adjustable for certain anti-dilution
provisions. These warrants expire in July 2001. None of the warrants have
been exercised as of December 29, 2000. Net proceeds from the Series D
preferred stock were $32,409,000. As of December 29, 2000, 32,353 shares
of Series D preferred stock were outstanding. Accrued dividends of
approximately $683,000 are included in accounts payable in the
accompanying December 29, 2000, consolidated balance sheet.

Warrants --

In addition to the warrants issued and outstanding discussed in Notes 2 and
5, and those issued in conjunction with the preferred stock discussed above, the
Company has issued and outstanding additional warrants for the purchase of
484,600 shares of the Company's common stock at a price of $1.67 per share,
expiring January 2004.

F-15
48

(8) Stock Based Compensation

The shareholders of the Company have approved stock option plans (the
Plans) for officers, other full-time key salaried employees, and non-employee
directors of the Company to reward outstanding performance and enable the
Company to attract and retain key personnel. Under the Plans, options are
granted at an exercise price equal to the fair market value of the Company's
common stock at the date of grant and are generally exercisable for five or ten
years. The Plans also provide for automatic grants of 25,000 target grant
replacement stock options to each non-employee director of the Company on the
date that each such director is first elected to the Board of Directors, and
expire, to the extent not already expired, one year after termination of service
as a Director. As of December 29, 2000, the Plans authorize the future granting
of options to purchase up to approximately 1,976,000 shares of common stock.

The following table summarizes the stock option transactions for the
periods indicated and includes, for the periods prior to the Merger discussed in
Note 2, option activity of both Holdings and Sheldahl. Options of Holdings
outstanding at the date of the Merger were converted to options of Sheldahl at
the exchange ratio defined as part of the Merger.

SHARES PRICE PER SHARE
--------- ------------------

Outstanding at February 1, 1998........................... 1,451,832 $ 5.000 to $22.125
Granted................................................. 268,715 $ 5.125 to $17.125
Exercised............................................... (32,569) $ 5.000 to $7.0125
Lapsed.................................................. (112,936) $ 5.000 to $22.125
---------
Outstanding at January 31, 1999........................... 1,575,042 $ 5.00 to $22.125
Granted................................................. 466,777 $0.2564 to $6.6875
Exercised............................................... (834) $ 5.25 to $5.25
Lapsed.................................................. (184,078) $ 5.00 to $22.125
---------
Outstanding at January 29, 2000........................... 1,856,907 $ 5.00 to $22.125
Granted................................................. 155,463 $ 0.2564 to $5.00
Lapsed.................................................. (118,235) $ 5.00 to $22.125
---------
Outstanding at December 29, 2000.......................... 1,894,135 $0.2564 to $22.125
=========

Options exercisable were 1,394,540 as of December 29, 2000; 1,088,671 as of
January 29, 2000; and 954,008 as of January 31, 1999.

The options outstanding as of December 29, 2000, expire five or ten years
after the grant date as follows:

NUMBER OF OPTIONS
FISCAL YEARS THAT EXPIRE
------------ -----------------

2001................................................ 40,575
2002................................................ 129,469
2003................................................ 107,016
2004................................................ 64,820
2005................................................ 134,280
2006................................................ 229,320
2007................................................ 175,488
2008................................................ 393,427
2009................................................ 583,773
2010................................................ 35,967

F-16
49

As provided for in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company continues to measure
compensation cost for its plans using the method of accounting prescribed by
Accounting Principles Board Opinion No. 25. Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income (loss) and,
if presented, earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been followed. The following tables and
information with respect to SFAS No. 123 includes, for the periods prior to the
Merger discussed in Note 2, option activity of both Holdings and Sheldahl.
Options outstanding at the date of the Merger of Holdings were converted to
options of Sheldahl at the exchange ratio defined as part of the Merger.

The following weighted average assumptions were utilized by the Company:

ELEVEN MONTH PERIOD TWELVE MONTH PERIOD
ENDED DECEMBER 29, 2000 ENDED JANUARY 29, 2000
----------------------- ----------------------

Risk-free interest rate........................ 5.42 - 6.63% 5.61 - 6.32%
Expected lives................................. 7 years 7 years
Expected volatility............................ 52% 52%

Using the Black-Scholes option pricing model, the total value of stock
options granted during the eleven month period ended December 29, 2000, was
$24,000, and during the twelve month period ended January 29, 2000 was $572,000
which would be amortized on a pro forma basis over the vesting period of the
options (typically ranging from six months to four years). The weighted average
fair value of options granted during those periods was $4.47 and $5.19 per
share, respectively.

If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss per share (basic and
diluted) would have been as follows:

ELEVEN MONTH PERIOD TWELVE MONTH PERIOD
ENDED ENDED
DECEMBER 29, 2000 JANUARY 29, 2000
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net loss.......................................... $(4,520) $(7,773) $(1,123) $(5,431)
Loss per share.................................... $ (0.51) $ (0.92) $ (0.13) $ (0.63)

(9) Commitments and Contingencies

Lease Commitments --

The Company has non-cancelable operating lease commitments for certain
manufacturing facilities and equipment, which expire at various dates through
2003. Minimum commitments as of December 29, 2000, under operating leases are
approximately $5.1 million in 2001, $3.2 million in 2002, $3.1 million in 2003
and $2.6 million in 2004. In accordance with the terms of the lease agreements,
the Company is required to pay maintenance and property taxes related to the
leased property. Operating lease expense was approximately $2.6 million for the
eleven months ended December 29, 2000 and approximately $2.9 million for the
twelve months ended January 29, 2000.

F-17
50

The Company has entered into various capital lease arrangements for the
purchase of certain communication and computer equipment and related software
totaling approximately $2.7 million. The following is a schedule of future gross
minimum capital lease payments (in thousands):

2001........................................................ $521
2002........................................................ 408
----
929
Less amount representing interest........................... (81)
----
Present value of net minimum capital lease payments......... $849
====

Employment Agreements --

The Company has employment agreements with certain officers not affiliated
with Holdings prior to the merger which, as a result of the Merger discussed in
Note 2, require severance benefits of $1.2 million, or a greater amount, if any,
payable under the Company's severance pay plan, which provides generally for
payment based on length of service of up to two times an employee's base pay in
effect on the date of termination if an employee is terminated at the Company's
initiative and such employee is in good standing at the time of such
termination. Benefits under the employment agreements are available upon
termination of employment if the officer continues employment with the Company
for at least one year from the date of the Merger or if certain other events
occur resulting in a termination of employment within three years of the date of
the Merger.

Certain officers which were affiliated with Holdings prior to the Merger
have employment agreements which provide severance payments ranging from 12 to
18 months of an employee's base pay in the event of a termination of employment
by the Company without cause of by the employee for good reason, as defined. One
officer's employment agreement provides additional severance benefits if his
employment is terminated within one year following a change of control either by
the Company without cause or by the officer for good reason. In such event, the
officer receives severance pay through the end of the term of the agreement plus
twelve months.

Litigation --

The nature of the Company's operations exposes it to the risk of certain
legal and environmental claims in the normal course of business. Although the
outcome of these matters cannot be determined, management believes, based upon
the advice and consultations with its legal counsel, that final disposition of
these matters will not have a material adverse effect on the Company's operating
results or financial condition.

(10) Income Taxes

The Company accounts for income taxes following the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
requires recognition of deferred income tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income tax
assets and liabilities are determined based upon the difference between the
financial statement and tax bases of assets and liabilities using currently
enacted tax rates. From a tax attribute perspective, the Merger discussed in
Note 2 is treated as if Holdings was the acquiree; thus, the tax attributes of
the Company post Merger are those of the continuing legal entity, Sheldahl, as
if Sheldahl had acquired Holdings.

F-18
51

Significant components of the provision (benefit) for income taxes for the
eleven month period ended December 29, 2000, and the twelve month period ended
and January 29, 2000, are as follows (in thousands):

DECEMBER 29, JANUARY 29,
2000 2000
------------ -----------

Current:
Federal......................................... $ -- $ 50
State........................................... (242) (555)
Deferred.......................................... 45 (45)
----- -----
$(197) $(550)
===== =====

A reconciliation of the provision (benefit) for income taxes at the
statutory rate to the reported income tax provision (benefit) for the respective
following periods is as follows (in thousands):

DECEMBER 29, JANUARY 29,
2000 2000
------------ -----------

Federal provision at statutory rate............... (34)% (34)%
Change in valuation allowance..................... 40 52
New York state refundable credits................. (5) (45)
Federal AMT....................................... -- 3
State taxes, net of federal benefit............... (6) (6)
Other............................................. 1 --
--- ---
(4)% (33)%
=== ===

A summary of deferred income taxes is as follows (in thousands):

DECEMBER 29, JANUARY 29,
2000 2000
------------ -----------

Deferred tax assets:
Net operating loss carryforwards.......................... $ 30,573 $ 150
Inventory reserves........................................ 1,956 235
Accrued compensation related costs........................ 1,462 48
Post-retirement benefit obligations....................... 1,246 --
Revenue recognition....................................... 771 328
Allowance for doubtful accounts........................... 602 64
New York state investment credits......................... 404 373
Intangibles............................................... 356 --
Facility closure and consolidation costs.................. 285 --
Income tax credit carry forward........................... 805 50
Other..................................................... 172 142
-------- ------
Deferred tax assets....................................... 38,632 1,390
-------- ------
Deferred tax liabilities:
Depreciation and property basis differences............... (817) (289)
State refund credit....................................... (99) (192)
-------- ------
Deferred tax liabilities.................................. (916) (481)
-------- ------
Valuation allowance......................................... (37,716) (864)
-------- ------
Net deferred income taxes................................... $ -- $ 45
======== ======

F-19
52

As of December 29, 2000, the Company has federal net operating loss
carryforwards of approximately $85 million and federal income tax credit
carryforwards of approximately $800,000 that expire through 2021. Future use of
these tax benefits are dependent upon profitability of the Company. The future
use of federal tax benefits are subject to limitation under Internal Revenue
Code Section 382 due to a change in control as defined thereunder having
occurred. In addition, for the respective periods ended December 29, 2000, and
January 29, 2000, the Company generated approximately $95,000 and $1.1 million
of New York state investment tax credits. The Company has not utilized any of
these state income tax credits to offset income tax liabilities. Approximately
$612,000 of the New York state investment tax credits will be carried forward to
future tax years and will expire, if unused, in the year 2010. The Company
realized New York state refundable wage credits of approximately $190,000 for
the period ended December 29, 2000 and refundable state income taxes of
approximately $52,000 and $565,000 for the periods ended at December 29, 2000
and January 29, 2000, respectively, representing the balance of New York state
investment tax credits that will be refunded to the Company. The refundable
amounts result from certain incentives on investments in capital assets and
employment granted by the state of New York in the initial four years of a new
entity's operations.

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has
established a full valuation allowance for its net deferred tax assets at
December 29, 2000, due to the uncertainty related to their ultimate realization.
The Company arrived at such a decision considering several factors, including
but not limited to, historical cumulative losses incurred by the Company and
anticipated continued operating losses. The Company will continue to evaluate
the need for the valuation allowance, and at such time it is determined that it
is more likely than not that such deferred tax assets will be realized, the
valuation allowance, or a portion thereof, will be reversed.

(11) Pension and Postretirement Benefits

Defined Benefit Plan --

The Company sponsors a defined benefit pension plan covering substantially
all hourly employees of the Company's Northfield, Minnesota, facility (the
Northfield Plan). Pension costs are funded in compliance with the Employee
Retirement Income Security Act of 1974. As a result of the accounting treatment
of the Merger discussed in Note 2, the Northfield Plan had no impact on
operations for either periods presented in the accompanying consolidated
statements of operations, as Holdings was not the sponsor of the Northfield
Plan. The benefit obligation under the Northfield Plan was approximately
$7,142,000 and the fair value of the plan assets were approximately $8,006,000.
Other information regarding the Northfield Plan based upon a measurement date of
October 1, 2000, is as follows:

RECONCILIATION OF FUNDED STATUS
Funded status............................................. $ 863,911
Unrecognized actuarial gain............................... (2,648,242)
Unrecognized transition obligation........................ 16,711
Unrecognized prior service cost........................... 1,249,764
-----------
Accrued benefit cost................................... $ (517,856)
===========
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................. 8.00%
Expected rate of return on plan assets.................... 8.50%

Defined Contribution Plans --

The Company sponsors a defined contribution plan (the Plan) covering
employees who meet certain age and service requirements and who are not
participants in the Northfield Plan. The Company matches 100% of the first 2% of
participants' voluntary contributions to the Plan, subject to certain
limitations. The Company leases employees from ADP Totalsource at its Endicott,
New York facility, and contributes 50% of the first 8% of these individuals
voluntary contributions to ADP Totalsource Retirement Savings Plan. Employer

F-20
53

contributions totaled approximately $168,000 and $143,000 for the eleven month
period ended December 29, 2000 and the twelve month period ended January 29,
2000, respectively.

Postretirement Benefits --

The Company recognizes expense for the expected cost of providing post
retirement benefits other than pensions to its employees. The expected cost of
providing these benefits is charged to expense during the years that the
employees render service. The Company's plan, which is unfunded, provides
medical and life insurance benefits for select employees. These employees, who
retire after age 40 with 20 years or more service, have access to the same
medical plan as active employees. As a result of the accounting treatment of the
Merger discussed in Note 2, the cost of the benefits provided hereunder had no
impact on operations for either periods presented in the accompanying
consolidated statements of operations, as Holdings was not the sponsor of these
benefits. The benefit obligation under this plan was approximately $825,000 and
there were no assets attributable to this plan. Other information regarding this
plan based upon a measurement date of October 1, 2000, is as follows:

RECONCILIATION OF FUNDED STATUS
Funded status............................................. $(824,761)
Unrecognized actuarial loss (gain)........................ (156,040)
---------
Accrued benefit cost...................................... (980,801)
Employer contribution after measurement date.............. 88,328
---------
Accrued benefit cost................................... $(892,473)
=========
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate............................................. 8.00%

For measurement purposes, an 8.50 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed at December 29,
2000. The rate was assumed to decrease gradually to 5.50 percent for fiscal 2007
and remain at that level thereafter. Assumed health care cost trend rates can
have a significant effect on the amounts reported for post retirement medical
benefit plans. A one percentage point change in assumed health care cost trend
rates would not have had a material impact on total service and interest cost
components or on the post retirement benefit obligation.

(12) Segment Information

The Company's revenue producing business segments are identified as the
materials and flexible interconnect business (MFI) and the international flex
technology business (IFT). The Management Team, a group of operating executives,
is responsible for defining the strategies and directions for the businesses.
The MFI segment consists of flexible advanced laminates, high performance tapes
and derivative products, principally flexible interconnect circuits and
assemblies. These products are targeted across all markets served by the Company
with the automotive market generating a majority of pro forma December 29, 2000,
sales for this segment. The Company's Novaclad, Novaflex HD and VHD products are
marketed and sold by this business. The IFT business segment provides flexible
circuits for use in high end tape ball grid array, wire bond, flip chip and
interconnect applications. These products are principally targeted to the data
communications market.

The Company markets and sells its products to major North American and
European automotive original equipment manufacturers (OEM's) and first and
second tier suppliers to the automotive industry. The Company also markets and
sells its products to the data communications (electronics) market in areas that
require dense electronic packaging such as integrated circuit packages, laptop
computers, high-end disc drives and portable communication devices.

The Company's manufacturing and assembly sites with their related assets
are used to manufacture specific product offerings of the Company regardless of
business segment. For instance, the Longmont, Colorado, facility today
contributes to the manufacture of all Novaclad-based products. The Company

F-21
54

allocates its shared production assets based on approximate percentage of asset
utilization with unused capacity being assigned to the segment originating the
investment. Principally all of the Company's long-term assets are located in and
all of the Company's sales revenue is generated from North America.

As a result of the Merger discussed in Note 2, all of the sales, operating
profit, depreciation and amortization and capital expenditures reflected in the
accompanying consolidated financial statements are those of the IFT business
segment. The following is a summary of long-term assets by segment:

DECEMBER 29, 2000 JANUARY 29, 2000
----------------- ----------------

MFI........................................ $21,263 $ --
IFT........................................ 39,304 12,907
Corporate and other assets................. 11,354 --
------- -------
Total assets............................... $71,921 $12,907
======= =======

Sales by product line for the eleven month and twelve month periods,
respectively, are as follows:

DECEMBER 29, 2000 JANUARY 29, 2000
----------------- ----------------

Tape ball grid array & related products.... $16,792 $18,091
DendriPlate................................ 2,141 4,476
Flexible circuits.......................... 1,484 1,514
------- -------
Total...................................... $20,417 $24,081
======= =======

(13) Quarterly Results of Operations (Unaudited)

The consolidated results of operations for the four quarters of 2000 and
1999 are as follows (in thousands, except per share data):

ELEVEN MONTHS ENDED DECEMBER 29, 2000
-------------------------------------
FIRST SECOND THIRD FOURTH(1)
------ ------ ------ ---------

Net sales........................................... $5,872 $6,352 $5,304 $ 2,889
Gross profit........................................ 1,694 1,652 1,346 (608)
Operating loss...................................... (463) (334) (645) (2,072)
Loss applicable to common shareholders.............. (808) (478) (671) (2,563)
Loss per common share -- basic and diluted.......... $(0.09) $(0.05) $(0.08) $ (0.29)
Weighted average common shares outstanding -- basic
and diluted....................................... 8,737 8,737 8,737 8,980

- ---------------
(1) Note that the fourth quarter consists of two months, as the Company changed
its year end (see Note 2).

TWELVE MONTHS ENDED JANUARY 29, 2000
------------------------------------
FIRST SECOND THIRD FOURTH
------ ------ ------- ------

Net sales............................................ $7,266 $5,145 $ 4,640 $7,030
Gross profit......................................... 2,277 1,354 605 2,794
Operating income (loss).............................. 635 (517) (1,114) 283
Income (loss) applicable to common shareholders...... 343 250 (779) (937)
Income (loss) per common share -- basic.............. $ 0.04 $ 0.03 $ (0.09) $(0.11)
Income (loss) per common share -- diluted............ $ 0.04 $ 0.03 $ (0.09) $(0.11)
Weighted average common shares
outstanding -- basic............................... 8,737 8,737 8,737 8,737
Weighted average common shares
outstanding -- diluted............................. 8,849 8,915 8,737 8,737

F-22