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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required).
For the fiscal year ended May 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
For the transition period from ________________ to ________________

Commission file number: 333-28987.
---------------
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)

CALIFORNIA 94-2424084
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)

1667 PLYMOUTH STREET, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (650) 691-9400
---------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value

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
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the 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. [ ]

The aggregate market value of the Registrant's Common Stock, par value
$.01 per share, held by non-affiliates of the Registrant, based upon the
closing price of $4.25 on July 30, 1999, as reported on the Nasdaq National
Market, was approximately $22,954,174. For purposes of this disclosure, shares
of Common Stock held by persons who hold more than 5% of the outstanding
shares of Common Stock (other than such persons of whom the Registrant became
aware only through the filing of a Schedule 13G filed with the Securities and
Exchange Commission) and shares held by officers and directors of the
Registrant have been excluded because such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
conclusive for other purposes.

The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding at July 30, 1999 was 6,779,368.

Documents Incorporated By Reference
Certain information required by Items 10, 11, 12 and 13 of this report on
Form 10-K is incorporated by reference from the Registrant's proxy statement
for the Annual Meeting of Shareholders to be held on October 20, 1999 (the
"Proxy Statement"), which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrant's fiscal year
ended May 31, 1999.

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AEHR TEST SYSTEMS

FORM 10-K
FISCAL YEAR ENDED MAY 31, 1999

TABLE OF CONTENTS

PART I
Item 1. Business ................................................ 3
Item 2. Properties ............................................. 10
Item 3. Legal Proceedings ....................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ..... 10

PART II

Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters ................................... 11
Item 6. Selected Financial Data ................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................. 13
Item 7a. Quantitative and Qualitative Disclosures about
Market Risks .......................................... 26
Item 8. Financial Statements and Supplementary Data ............. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 43

PART III

Item 10. Directors and Executive Officers of the Registrant ...... 43
Item 11. Executive Compensation .................................. 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management ............................................ 43
Item 13. Certain Relationships and Related Transactions .......... 44

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K .............................................. 44

Signatures .............................................. 48

This Annual Report on Form 10-K contains forward-looking statements with
respect to Aehr Test Systems ("Aehr Test" or the "Company") which involve
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements due to a number
of factors, including those described herein and the documents incorporated
herein by reference, and those factors described in Part II, Item 7 under
"Factors that May Affect Future Results of Operations."

PART I

Item 1. Business

THE COMPANY

Aehr Test Systems develops, manufactures and sells systems which are
designed to reduce the cost of testing DRAMs and other memory devices, perform
reliability screening or burn-in of complex logic and memory devices, and
enable IC manufacturers to perform test and burn-in of bare die. Leveraging
its expertise as a long-time leading provider of burn-in equipment, with over
2,000 systems installed worldwide, the Company has developed and introduced
two innovative product families, the MTX system and the DiePak-Registered
Trademark- carrier. The MTX is a massively parallel test system capable of
processing thousands of memory devices simultaneously. The MTX system
performs not only burn-in but also many of the tests traditionally performed
in final test by lower-throughput, higher-cost memory testers. The DiePak
carrier is a reusable, temporary package that enables IC manufacturers to
perform cost-effective final test and burn-in of bare die.

INDUSTRY BACKGROUND

Semiconductor manufacturing is a complex, multi-step process and defects
or weaknesses that may result in the failure of an IC may be introduced at any
process step. Failures may occur immediately or at any time during the
operating life of an IC, sometimes after several months of normal use.
Semiconductor manufacturers rely on testing and reliability screening to
detect failures that occur during the manufacturing process.

Testing and reliability screening involves multiple steps. The first set
of tests is typically performed before the processed semiconductor wafer is
cut into individual die, in order to avoid the cost of packaging defective die
into their plastic or ceramic packages. After the die are packaged and before
they undergo reliability screening, a short test is typically performed in
order to detect packaging defects. Most leading-edge microprocessors,
microcontrollers, digital signal processors, and memory ICs then undergo an
extensive reliability screening and stress testing procedure known as "burn-
in." The burn-in process screens for early failures by operating the IC at
elevated voltages and temperatures, usually at 125 degrees Celsius (257
degrees Fahrenheit), for periods typically ranging from 12 to 48 hours. Burn-
in systems can process thousands of ICs simultaneously. After burn-in, the
ICs undergo a final test process using automatic test equipment ("testers").
Traditional memory testers can test up to 64 ICs simultaneously and perform a
variety of tests at multiple temperatures.

PRODUCTS

The Company manufactures and markets massively parallel test systems,
burn-in systems, die carriers, test fixtures and related accessories.

All of the Company's systems are modular, allowing them to be configured
with optional features to meet customer requirements. Systems can be
configured for use in production applications, where capacity, throughput and
price are most important, or for reliability engineering and quality assurance
applications, where performance and flexibility, such as extended temperature
ranges, are essential.

MASSIVELY PARALLEL TEST SYSTEM

The MTX massively parallel test system is designed to reduce the cost of
memory test by processing thousands of memory devices simultaneously,
including DRAMs, SDRAMs, Rambus DRAMs, SRAMs and most application-specific
memories. The MTX system can perform a significant number of tests usually
performed by traditional memory testers, including pattern sensitivity tests,
functional tests, data retention tests and refresh tests. The Company
estimates that transferring these tests from traditional memory testers to the
MTX system can reduce the time that a memory device

must be tested by a traditional memory tester by up to 70%, thereby reducing
the required number of memory testers and, as a result, reducing capital and
operating costs.

The MTX system consists of several subsystems: pattern generation and test
electronics, control software, network interface, environmental chamber and
automation. The MTX system has an algorithmic test pattern generator which
allows it to duplicate most of the tests performed by a traditional memory
tester. Pin electronics at each performance test board ("PTB") position are
designed to provide accurate signals to the memory ICs being tested and detect
whether a device is failing the test. An optional enhanced fault collection
capability allows the MTX to identify which cells in a memory IC are failing,
resulting in information which can be used to sort partially good devices, and
for engineering characterization of new device types.

Devices being tested are placed on PTBs and loaded into environmental
chambers which typically operate at temperatures from 25 degrees Celsius (77
degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit)
(optional chambers can produce temperatures as low as -55 degrees Celsius (-67
degrees Fahrenheit)). A single PTB can hold up to 336 64 megabit ("Mb")
Rambus DRAMs, and a production chamber holds 30 PTBs, resulting in up to
10,080 devices being tested in a single system. For production environments,
the system may include an automatic PTB insertion/ejection mechanism for more
efficient handling of production quantities of PTBs.

BURN-IN SYSTEMS

The MAX system is designed for dynamic burn-in of memory and logic
devices. The production version holds 64 burn-in boards ("BIBs"), each of
which may hold 350 or more devices, resulting in a system capacity of 22,400
or more devices. The MAX system's 48-channel pin electronics and ability to
run stored test patterns also allow it to be used for application-specific
memory devices and many logic devices. The pin electronics are designed to
provide precisely-controlled voltages and signals to the devices on the BIBs
and to protect them from damage during the burn-in process. The MAX2 system
features multi-tasking Windows NT-based software which includes lot tracking
and reporting software that are needed for production and military
applications. The MAX3 system, introduced in fiscal 1999, increases the pin
electronics to 96 channels, and handles the latest low voltage ICs. The MAX2
and MAX3 also have extended stored test program capability for more complete
exercise of complex logic devices such as digital signal processors.

The ATX system is designed for dynamic and monitored burn-in of high pin-
count VLSI devices, including microprocessors, microcontrollers, application-
specific ICs ("ASICs"), and certain memory devices. The ATX system uses much
of the same software as the MAX system and contains additional features such
as an interface to CAE systems for program development and output monitoring
to ensure that the devices receive the specified voltages and signals. Its
256-channel pin electronics configuration allows it to handle complex logic
devices, and its ability to burn-in different device types in each of the
system's 32 BIB positions is useful for quality assurance applications. The
Windows NT-based ATX2, introduced in fiscal 1999, includes a high current
feature to allow the system to burn-in more devices, plus an extended pattern
generation capability.

DIEPAK CARRIERS

The Company's DiePak product line includes a family of reusable, temporary
die carriers and associated sockets which enable the test and burn-in of bare
die using the same test and burn-in systems used for packaged ICs. DiePak
carriers offer cost-effective solutions for providing known good die for most
types of ICs, including memory, microcontroller and microprocessor devices.
The DiePak carrier was introduced in fiscal 1995 following a development
effort that included the Company and Nitto Denko Corporation, the manufacturer
of the interconnect substrate.

The DiePak carrier consists of an interconnect substrate, which provides
electrical connection between the die pads and the socket contacts, and a
mechanical support system. The substrate is customized for each IC product.
The DiePak carrier comes in 108, 172 and 320 pin versions to handle ICs
ranging from low pin-count memories to high pin-count microprocessors. The
DiePak carrier and socket feature a small footprint which reduces test and
burn-in cost because more devices may be processed simultaneously on a test
fixture.

TEST FIXTURES

The Company manufactures and sells custom designed test fixtures including
performance test boards for use with the MTX massively parallel test system
and burn-in boards for its burn-in systems. PTBs and BIBs hold the devices

undergoing test or burn-in and electrically connect the devices under test to
the system electronics. The capacity of each PTB or BIB depends on the type
of device being tested or burned-in, ranging from several hundred in memory
production to as few as eight for high pin-count complex ASIC devices. PTBs
and BIBs are sold both with new Aehr Test systems and for use with the
Company's installed base of systems. Due to the advanced test requirements of
the MTX system, PTBs are substantially more complex than BIBs. The Company
has patented certain features of the PTB and to date has licensed one other
company to supply PTBs.

CUSTOMERS

The Company markets and sells its products throughout the world to
semiconductor manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies.

Sales to the Company's five largest customers accounted for approximately
62.7%, 75.2% and 69.2% of its net sales in fiscal 1999, 1998 and 1997,
respectively. During fiscal 1999, 1998 and 1997, Infineon (formerly the
semiconductor group of Siemens) accounted for 21.9%, 47.0% and 55.7% of the
Company's net sales, respectively. During fiscal 1999, Texas Instruments and
Motorola accounted for 18.1% and 11.9% of the Company's net sales,
respectively. During fiscal 1998 Motorola accounted for 12.8% of the
Company's net sales. No other customers represented more than 10% of the
Company's net sales for any of such periods. The Company expects that sales
of its products to a limited number of customers will continue to account for
a high percentage of net sales for the foreseeable future. In addition, sales
to particular customers may fluctuate significantly from quarter to quarter.
The loss or reduction or delay in orders from a significant customer, or a
delay in collecting or failure to collect accounts receivable from a
significant customer could adversely affect the Company's business, financial
condition and operating results.

MARKETING, SALES AND CUSTOMER SUPPORT

The Company has sales and service operations in the United States, Japan
and Germany and has established a network of distributors and sales
representatives in other key parts of the world.

The Company's customer service and support program includes system
installation, system repair, applications engineering support, spare parts
inventories, customer training, and documentation. The customer support
organization has both applications engineering and field service personnel
located at the corporate headquarters in Mountain View, California and at the
Company's subsidiaries in Germany and Japan. The Company's distributors
provide applications and field service support in other parts of the world.
The Company customarily provides a warranty on its products. The Company
offers service contracts on its systems directly and through its subsidiaries,
distributors, and representatives.

BACKLOG

As of May 31, 1999 and 1998, the Company's backlog was $1.8 million and
$4.6 million, respectively. The reduction in backlog was primarily the result
of a downturn in the Company's burn-in system business. The Company's backlog
consists of product orders for which confirmed purchase orders have been
received and which are scheduled for shipment within 12 months. Most orders
are subject to rescheduling or cancellation by the customer with limited
penalties. Because of the possibility of customer changes in delivery
schedules or cancellations and potential delays in product shipments, the
Company's backlog as of a particular date may not be indicative of net sales
for any succeeding period.

RESEARCH AND PRODUCT DEVELOPMENT

The Company historically has devoted a significant portion of its
financial resources to research and development programs and expects to
continue to allocate significant resources to these efforts. The Company's
research and development expenses during fiscal 1999, 1998 and 1997 were
approximately $4.9 million, $4.5 million and $4.5 million, respectively.

The Company conducts ongoing research and development to develop new
products and to support and enhance existing product lines. The Company is
currently developing capability and performance enhancements to the MTX, MAX
and ATX systems for future generation ICs. The Company is also developing
DiePak carriers to accommodate additional types of devices.

Building upon the expertise gained in the development of its existing
products, the Company is developing a system for performing test and burn-in
of entire processed wafers, rather than individual die or packaged parts.
This wafer-level burn-in and test project is being financed by the Company and
the Defense Advanced Research Projects Agency ("DARPA") under a cost-sharing
agreement entered into in 1994. The Company has received $5.6 million from
DARPA through May 31, 1999, representing less than 50% of total project
spending to date. The Company has demonstrated certain key technologies
required for the wafer-level burn-in and test system, and expects to
demonstrate feasibility of the system design in calendar year 2000.

MANUFACTURING

The Company assembles its products from components and parts manufactured
by others, including environmental chambers, power supplies, metal
fabrications, printed circuit assemblies, integrated circuits, burn-in sockets
and interconnect substrates. Final assembly and test are performed within the
Company's facilities. The Company's strategy is to use in-house manufacturing
only when necessary to protect a proprietary process or if a significant
improvement in quality, cost or lead time can be achieved. The Company's
principal manufacturing facility is located in Mountain View, California. The
Company's Tokyo, Japan facility provides final test, limited manufacturing and
product customization.

The Company relies on subcontractors to manufacture many of the components
or subassemblies used in its products. The Company's MTX, MAX and ATX systems
contain several components, including environmental chambers, power supplies
and certain ICs, which are currently supplied by only one or a limited number
of suppliers. The DiePak products include an interconnect substrate which has
primarily been supplied by Nitto Denko Corporation. Nitto Denko is currently
manufacturing DiePak substrates, but it has notified the Company of its
intention to stop manufacturing these substrates. The Company is currently
qualifying an alternate supplier for the DiePak substrate. The Company's
reliance on subcontractors and single source suppliers involves a number of
significant risks, including the loss of control over the manufacturing
process, the potential absence of adequate capacity and reduced control over
delivery schedules, manufacturing yields, quality and costs. In the event
that any significant subcontractor or single source supplier was to become
unable or unwilling to continue to manufacture subassemblies, components or
parts in required volumes, the Company would have to identify and qualify
acceptable replacements. The process of qualifying subcontractors and
suppliers could be lengthy, and no assurance can be given that any additional
sources would be available to the Company on a timely basis. Any delay,
interruption or termination of a supplier relationship could have a material
adverse effect on the Company's business, financial condition and operating
results.

COMPETITION

The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, flexibility, automation, cost of
ownership, reliability, throughput, product availability and customer service.
In each of the markets it serves, the Company faces competition from
established competitors and potential new entrants, many of which have greater
financial, engineering, manufacturing and marketing resources than the
Company.

Because the Company's MTX system performs burn-in and many of the
functional tests performed by memory testers, the Company expects that the MTX
system will face intense competition from burn-in system suppliers and
traditional memory tester suppliers. The market for burn-in systems is highly
fragmented, with many domestic and international suppliers. Some users, such
as independent test labs, build their own burn-in systems, and some other
users, particularly large Japanese IC manufacturers, acquire burn-in systems
from captive or affiliated suppliers. Competing suppliers of burn-in and
functional test systems include Ando Corporation, Japan Engineering Company
and Reliability Incorporated. In addition, suppliers of memory test equipment
including Advantest Corporation and Teradyne, Inc. may seek to offer
competitive parallel test systems in the future.

The Company's MAX dynamic and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe
competition, especially from local, low cost manufacturers.

The Company's DiePak products face significant competition. Texas
Instruments Incorporated sells a temporary, reusable bare die carrier which is
intended to enable burn-in and test of bare die, and the Company believes that
several other companies have developed or are developing other such products.
As the bare die market develops, the Company expects that other competitors
will emerge. The DiePak products also face severe competition from other
alternative test solutions. The Company expects that the primary competitive
factors in this market will be cost, performance, reliability and assured
supply.

The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many companies
design and manufacture BIBs, including BIBs for use with the Company's MAX and
ATX systems. The Company's strategy is to provide higher performance BIBs,
and the Company generally does not compete to supply lower cost, low
performance BIBs. The Company has granted a royalty-bearing license to one
company to make PTBs for use with its MTX systems, in order to assure
customers of a second source of supply, and the Company may license others as
well. Sales of PTBs by licensees result in royalties to the Company but
reduce the Company's own sales of PTBs.

The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price
and performance characteristics. New product introductions by the Company's
competitors or by new market entrants could cause a decline in sales or loss
of market acceptance of the Company's products. Increased competitive
pressure could also lead to intensified price-based competition, resulting in
lower prices which could adversely affect the Company's business, financial
condition and operating results. The Company believes that to remain
competitive it must invest significant financial resources in new product
development and expand its customer service and support worldwide. There can
be no assurance that the Company will be able to compete successfully in the
future.

PROPRIETARY RIGHTS

The Company relies primarily on the technical and creative ability of its
personnel, its proprietary software, and trade secret and copyright
protection, rather than on patents, to maintain its competitive position. The
Company's proprietary software is copyrighted and licensed to the Company's
customers. The Company currently holds four issued United States patents and
has several additional United States patent applications and foreign patent
applications pending. The Company has one United States trademark
registration. One issued patent covers the method used to connect the PTBs
with the MTX system. Another issued patent relating to the MTX includes
claims covering certain details of the electronic implementation used to
obtain high performance in the MTX system and also covering certain testing
methods.

The Company's ability to compete successfully is dependent in part upon
its ability to protect its proprietary technology and information. Although
the Company attempts to protect its proprietary technology through patents,
copyrights, trade secrets and other measures, there can be no assurance that
these measures will be adequate or that competitors will not be able to
develop similar technology independently. Further, there can be no assurance
that claims allowed on any patent issued to the Company will be sufficiently
broad to protect the Company's technology, that any patent will issue from any
pending application or that foreign intellectual property laws will protect
the Company's intellectual property. Litigation may be necessary to enforce
or determine the validity and scope of the Company's proprietary rights, and
there can be no assurance that the Company's intellectual property rights, if
challenged, will be upheld as valid. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and operating results,
regardless of the outcome of the litigation. In addition, there can be no
assurance that any of the patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company.

There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. Such claims could
include assertions that the Company's products infringe, or may infringe, the
proprietary rights of third parties, requests for indemnification against such
infringement or suggestions that the Company may be interested in acquiring a
license from such third parties. There can be no assurance that any such
claim made in the future will not result in litigation, which could involve
significant expense to the Company, and, if the Company is required or deems
it appropriate to obtain a license relating to one or more products or
technologies, there can be no assurance that the Company would be able to do
so on commercially reasonable terms, or at all.

EMPLOYEES

As of July 31, 1999, the Company and its two foreign subsidiaries employed
134 persons full-time, of whom 38 were engaged in research, development, and
related engineering, 44 in manufacturing, 39 in marketing, sales, and customer
support, and 13 in general administration and finance. 28 persons are
employed by the Company's subsidiary in Japan. In addition, the Company from
time to time employs a number of part-time employees and contractors,
particularly in manufacturing. The Company's success is in part dependent on
its ability to attract and retain highly skilled workers, who are in high
demand. None of the Company's employees is represented by a union and the
Company has never experienced a work stoppage. Management considers its
relations with its employees to be good.

GEOGRAPHIC AREAS

The Company operates in several geographic areas. Selected financial
information is included in Part II, Item 8, Note 12 "Segment Information,
Foreign Operations" and certain risks related to such operations are discussed
in Part II, Item 7, under the heading "Dependence on International Sales and
Operations."

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The directors of the Company are elected annually. The executive officers
of the Company serve with no specific term of office. The executive officers
and directors of the Company are as follows:

Name of Executive Officer Age Positions with the Company
- -------------------------- ---- -----------------------------------
Rhea J. Posedel............ 57 President, Chief Executive Officer and
Chairman of the Board of Directors

Gary L. Larson............. 49 Vice President of Finance and Chief
Financial Officer

William D. Barraclough..... 55 Vice President of Test Systems
Engineering

Carl N. Buck............... 47 Vice President of Marketing

Carl J. Meurell ........... 39 Vice President of Worldwide Sales

Richard F. Sette........... 61 Vice President of Operations

Raul V. Tan................ 39 Vice President of Research and
Development Engineering

Yasushi Naitoh............. 46 President, Aehr Test Systems Japan

William W. R. Elder (1)(2). 60 Director

Mario M. Rosati (1)........ 53 Director and Secretary

David Torresdal (2)........ 61 Director

Mukesh Patel .............. 41 Director

- ------------------------
(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

RHEA J. POSEDEL is a founder of the Company and has served as President,
Chief Executive Officer and Chairman of the Board of Directors since its
inception in 1977. Prior to founding the Company, Mr. Posedel held

various project engineering and engineering managerial positions at Lockheed
Martin Corporation (formerly "Lockheed Missile & Space Corporation"), Ampex
Corporation, and Cohu, Inc. He received a B.S. in Electrical Engineering from
the University of California, Berkeley, an M.S. in Electrical Engineering from
San Jose State University and an M.B.A. from Golden Gate University.

GARY L. LARSON joined the Company in April 1991 as Chief Financial Officer and
was elected Vice President of Finance in February 1992. From 1986 to 1990, he
served as Chief Financial Officer, and from 1988 to 1990 also as President and
Chief Operating Officer, of Nanometrics Incorporated, a manufacturer of
measurement and inspection equipment for the semiconductor industry. Mr.
Larson received a B.S. in Mathematics/Finance from Harvey Mudd College.

WILLIAM D. BARRACLOUGH joined the Company as an Account Manager in
February 1989 and held various positions until he was elected Vice President
of Test Systems Engineering in August 1996. From 1984 to 1989, Mr.
Barraclough served as Vice President of Marketing at Thermonics, Inc., a
manufacturer of temperature control equipment for electronics devices. Mr.
Barraclough received a B.S.E.E. from the University of Southern California.

CARL N. BUCK joined the Company as a Product Marketing Manager in 1983 and
held various positions until he was elected Vice President of Engineering in
November 1992, Vice President of Research and Development Engineering in
November 1996, and Vice President of Marketing in September 1997. From 1978
to 1983, Mr. Buck served as Product Marketing Manager at Intel Corporation, an
integrated circuit and microprocessor company. Mr. Buck received a B.S.E.E.
from Princeton University, an M.S. in Electrical Engineering from the
University of Maryland and an M.B.A. from Stanford University.

CARL J. MEURELL joined the Company as Vice President of Worldwide Sales in
March 1999. From May 1996 to March 1999, Mr. Meurell served as Vice President
and General Manager of the test and repair division of Photon Dynamics, a
supplier of test inspection and repair systems for the flat panel display
industry. From April 1995 to May 1996, he served as a director at Megatest, a
division of Teradyne, Inc. From October 1993 to April 1995, he served as Vice
President and General Manager of Catapult Software Training, an IBM company.
From December 1980 to October 1993, he held various sales management positions
at Megatest. Mr. Meurell received an M.B.A. from Union College, a B.S. in
Electronic Engineering, magna cum laude, from the University of Massachusetts
and an A.S. in Electrical Engineering Technology, With Distinction, from
Pennsylvania State University.

RICHARD F. SETTE rejoined the Company as Vice President of Operations in
January 1996, after serving in that same position from 1984 to 1987. He
served as Senior Director of Operations of Northrop Grumman Corp., a
manufacturer of aircraft and aircraft subsystems, from 1987 to 1993, as Vice
President of Operations of Symtek, Inc., which manufactures handling equipment
for the semiconductor industry, from 1993 to 1994 and as Director of
Engineering at SatCom Technologies Corp., a developer of energy storage
systems, from 1994 to 1995. Mr. Sette received a B.S.E.E. and an M.S.E.E.
from Northeastern University.

RAUL V. TAN joined the Company as Director of Factory Automation in March
1997, and was elected Vice President of Research and Development Engineering
in September 1997. Prior to joining the Company, Mr. Tan served as Director
of Software at Lam Research Corporation. From 1987 to 1991, Mr. Tan held
various engineering management positions with General Signal Corporation's
Semiconductor Group. Mr. Tan received a Master of Engineering in Robotics
from Carnegie-Mellon University and a B.S. cum laude in Mechanical Engineering
from De La Salle University.

YASUSHI NAITOH joined the Company as President, Aehr Test Systems Japan
K.K., the Company's Japanese subsidiary, in October 1997. He was employed at
Tokyo Electron Limited, a leading worldwide semiconductor equipment
manufacturer from 1983 to 1997, during which time he held various positions,
including serving as Senior Department Manager of Test Systems and Senior
Department Manager of Automation Systems. Mr. Naitoh graduated from Kanagawa
University in Kanagawa, Japan where he majored in Mechanical Engineering.

WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr.
Elder was the Chief Executive Officer of Genus, Inc. ("Genus"), a
semiconductor company, from his founding of Genus in 1981 to September 1996,
and has been serving in that same position again since April 1998. Dr. Elder
has been a director of Genus since its inception. Dr. Elder holds a B.S.I.E.
and an honorary Doctorate Degree from the University of Paisley in Scotland.

MARIO M. ROSATI has served as Secretary and a director of the Company
since 1977. He is a member of the law firm of Wilson Sonsini Goodrich &
Rosati, which he joined in 1971. Mr. Rosati is a graduate of Boalt Hall,
University of California at Berkeley. Mr. Rosati is a director of C*ATS
Software Inc., Genus, Inc., Meridian Data, Inc., Ross Systems, and Sanmina
Corporation, as well as several private companies.

DAVID TORRESDAL has been a director of the Company since 1977. He has been
President of Davtron, Inc., a manufacturer of aircraft electronic equipment,
since 1970. Mr. Torresdal received an A.A.S. in Engineering from Oregon
Technical Institute.

MUKESH PATEL was appointed to the Company's Board of Directors in June
1999. Mr. Patel co-founded SMART Modular Technologies, Inc., where he has
served on its Board of Directors since its inception; he acted in various
executive capacities from 1989 to 1998, and in 1999 assumed his current
position of Vice President, Memory Division. Mr. Patel holds a B.S. degree in
Engineering with emphasis on digital electronics from Bombay University,
India. Mr. Patel also serves on the Boards of Directors of Krypton Isolation,
Inc. and Jedi Technologies, Inc.

DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS

Rhea J. Posedel, the only inside director of the Company, does not receive
any cash compensation for his services as a member of the Board of Directors.
Each outside director receives (1) an annual retainer of $5,000, (2) $1,000
for each regular board meeting he attends, and (3) $500 for each committee
meeting he attends if not held in conjunction with a regular board meeting, in
addition to being reimbursed for certain expenses incurred in attending Board
and committee meetings. An inside director is a director who is a regular
employee of the Company, whereas an outside director is not an employee of the
Company. Directors are eligible to participate in the Company's stock option
plans. Outside directors were granted no options in fiscal 1997 and 1998.
William Elder, Mario Rosati and David Torresdal were each granted options to
purchase 5,000 shares at $4.25 per share in fiscal 1999.

The Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations to the Board of
Directors regarding executive compensation matters, including decisions
relating to salary and bonus and grants of stock options. The Audit Committee
approves the appointment of the Company's independent auditors, reviews the
results and scope of annual audits and other accounting related services, and
reviews and evaluates the Company's internal control functions.

Item 2. Properties

The Company's principal administrative and production facilities are
located in Mountain View, California, in a 61,364 square foot building. The
lease on this building has been extended and expires in December 1999, after
which time the Company plans to relocate its headquarters to a 51,289 square
foot facility in Fremont, California. The Company also leases a sales office
in Irvine, California. The Company's Japan facility is located in Tokyo in an
11,029 square foot building under a lease which expires in 2004. The Company
leases a sales and support office on a month-to-month basis in Utting,
Germany. The Company's and its subsidiaries' annual rental payments currently
aggregate approximately $1.2 million. The Company believes that alternate
facilities would be available if needed.

Item 3. Legal Proceedings

Item 4. Submission of matters to a vote of security holders

None.

PART II

Item 5. Market for the registrant's common equity and related shareholder
matters

(a) The Company's Common Stock has been publicly traded on the Nasdaq
National Market under the symbol "AEHR" since the Company's initial public
offering ("IPO") on August 15, 1997. The initial public offering price was
$12.00 per share. The following table sets forth, for the periods indicated,
the high and low sale prices for the Common Stock on such market.

High Low
--------- ---------

Fiscal 1998:
First quarter ended August 31, 1997
(beginning August 15, 1997) ...................... $20.25 $14.13
Second quarter ended November 30, 1997............. 25.25 9.00
Third quarter ended February 28, 1998.............. 10.00 5.75
Fourth quarter ended May 31, 1998.................. 7.19 5.75

Fiscal 1999:
First quarter ended August 31, 1998................ $ 6.44 $ 4.13
Second quarter ended November 30, 1998............. 5.50 3.19
Third quarter ended February 28, 1999.............. 7.38 4.13
Fourth quarter ended May 31, 1999.................. 6.38 3.75

At August 12, 1999, the Company had 143 holders of record of its
Common Stock. The Company estimates the number of beneficial owners of the
Company's Common Stock at August 12, 1999 to be 830.

The market price of the Company's Common Stock has been volatile. For
a discussion of the factors affecting the Company's stock price, see "Factors
that may affect future results of operations -- possible volatility of stock
price."

The Company has not paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.

(b) Use of Proceeds from the IPO:

On August 18, 1997, the Company's Registration Statement on Form S-1
covering the IPO of 3,600,000 shares of the Company's Common Stock, Commission
file number 333-28987, was declared effective. The IPO closed on August 26,
1997, managed by Oppenheimer & Co., Inc. and Needham & Company, Inc. as
representatives of the several underwriters named in the Registration
Statement ("Underwriters").

Of the 3,600,000 shares sold pursuant to the Offering, 2,500,000 shares
were sold by the Company and 1,100,000 were sold by certain selling
shareholders ("Selling Shareholders"). In addition, the Underwriters
exercised an over-allotment option to purchase an additional 540,000 shares of
the Company's Common Stock from the Selling Shareholders. The total purchase
prices to the public for the shares offered and sold by the Company and the
Selling Shareholders were $30,000,000 and $19,680,000, respectively.

The amount of expenses incurred for the Company's account in connection
with the IPO are as follows:

Underwriting discounts and commissions: $ 2,100,000
Finders fees None
Expenses paid to or for the Underwriters None
Other expenses 1,067,703
-----------
Total expenses $ 3,167,703
===========

All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons owning
ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates
of the Company.

The net proceeds of the IPO to the Company (after deducting the foregoing
expenses) were $26,832,297. From the effective date of the Registration
Statement, the net proceeds have been used for the following purposes:

Purchase and installation of machinery and equipment $ 1,082,274
Repayment of indebtedness 4,455,179
Working capital 370,844
Temporary investments, including cash and cash equivalents 20,924,000
------------
Total $26,832,297
============

Item 6. Selected Financial Data (in thousands except per share data):

Fiscal Year Ended May 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------

CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $18,146 $40,805 $42,020 $33,234 $23,257
Cost of sales................................. 12,201 24,359 25,715 19,942 16,192
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 5,945 16,446 16,305 13,292 7,065
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 6,892 8,618 8,878 7,534 6,316
Research and development.................... 4,918 4,529 4,536 4,113 3,783
Research and development cost
reimbursement--DARPA ..................... (1,233) (900) (793) (891) (954)
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 10,577 12,247 12,621 10,756 9,145
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................. (4,632) 4,199 3,684 2,536 (2,080)
Interest income (expense)..................... 1,184 904 (577) (446) (341)
Other income (expense), net................... 441 (364) (565) (559) 255
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest in subsidiary............. (3,007) 4,739 2,542 1,531 (2,166)
Income tax expense (benefit).................. (677) 2,334 (773) 130 10
Minority interest in subsidiary............... - - - (1) 189
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $(2,330) $2,405 $3,315 $1,400 $(1,987)
========== ========== ========== ========== ==========

Net income (loss) per share (basic)........... $ (0.34) $ 0.38 $ 0.77 $ 0.33 $ (0.46)
Net income (loss) per share (diluted)......... $ (0.34) $ 0.36 $ 0.74 $ 0.32 $ (0.46)

Shares used in per share calculation
Basic....................................... 6,854 6,327 4,297 4,303 4,308
Diluted..................................... 6,854 6,761 4,500 4,364 4,308

May 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------

CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents..................... $ 5,336 $ 6,748 $ 1,176 $ 535 $ 598
Working capital............................... 31,016 36,885 7,895 4,799 3,564
Total assets.................................. 41,187 47,105 24,389 23,749 19,890
Long-term obligations, less current portion... 391 168 356 533 1,004
Total shareholders' equity.................... 36,678 39,964 10,070 6,789 5,544

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

This Management's Discussion and Analysis section and other parts of this
Annual Report on Form 10-K contain forward-looking statements within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Business." The
forward-looking statements contained herein are made as of the date hereof,
and the Company assumes no obligation to update such forward-looking
statements or to update reasons actual results could differ materially from
those anticipated in such forward-looking statements.

OVERVIEW

The Company was founded in 1977 to develop and manufacture burn-in and
test equipment for the semiconductor industry. Since its inception, the
Company has sold more than 2,000 systems to semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide. The Company's principal products currently are the MTX massively
parallel test system, the MAX and ATX burn-in systems, the DiePak carrier and
test fixtures.

Prior to fiscal 1995, the Company primarily sold burn-in systems and
related products. The Company experienced significant operating losses in
fiscal 1993 through fiscal 1995 due to a decline in net sales of burn-in
systems and significant investment in the development of new products. In
fiscal 1993, the Company initiated development of the MTX massively parallel
test system and the DiePak carrier. The Company began shipping the MTX in
March 1995 and DiePak carriers in volume in fiscal 1997.

In 1994, the Company entered into a cost-sharing agreement with DARPA, a
U.S. government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The agreement
provides that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for government
purposes and (iii) DARPA can require the Company to license the inventions to
third parties on reasonable terms if the Company fails to adequately
commercialize the inventions. Payments by DARPA depend on satisfaction of
development milestones, and DARPA has the right to terminate project funding
at any time. The level of payments may vary significantly from quarter to
quarter. There can be no assurance that the Company will meet the development
milestones or that DARPA will continue funding the project. DARPA payments
are reflected as credits to research and development expenses. There also can
be no assurance that the development project will result in any marketable
products. The Company has completed certain development milestones and
received DARPA payments of $5.6 million through May 31, 1999. The remaining
funding is subject to milestones scheduled to be completed through December
1999, although the Company expects that completion of certain milestones will
be delayed beyond that date.

The Company has a wholly-owned subsidiary in Germany which performs sales
and service and a 94.8% owned subsidiary in Japan, which performs sales,
service and limited product engineering and manufacturing. The Company's
consolidated financial statements combine the subsidiaries' financial results
with those of the Company and account for the minority shareholders' interest
in the Japanese subsidiary. There was no minority interest recorded in the
financial statements at May 31, 1999, May 31, 1998 and May 31, 1997 due to the
subsidiary's cumulative losses.

The Company's net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. The Company recognizes revenue upon shipment of product and
records a provision for estimated future warranty costs.

A substantial portion of the Company's net sales is derived from the sale
of products for overseas markets. Consequently, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
Company's products compared to products sold by local companies in such
markets. Although most sales to German customers are denominated in dollars,
substantially all sales to Japanese customers are denominated in yen. Since
the price is determined at the time a purchase order is accepted, the Company
is exposed to the risks of fluctuations in the yen-dollar exchange rate during
the lengthy period from purchase order to ultimate payment. The length of
time between receipt of order and ultimate payment typically ranges from six
to twelve months. The exchange rate risk is partially offset to the extent
the Company's Japanese subsidiary incurs yen-denominated expenses. To date,
the Company has not invested in instruments designed to hedge currency risks,
but it may do so in the future. The Company's Japanese subsidiary typically
carries debt or other obligations due to the Company that may be denominated
in yen or dollars. Since the financial statements of the Japanese subsidiary
are based in yen and the Company's financial

statements are based in dollars, the Japanese subsidiary and the Company
recognize income or loss in any period in which the value of the yen rises or
falls in relation to the dollar.

In accordance with SFAS 86, the Company capitalizes its systems software
development costs incurred after a system achieves technological feasibility
and before first commercial shipment. Such costs typically represent a small
portion of total research and development costs. Capitalized cost, net of
accumulated amortization, of approximately $57,000 was included as of May 31,
1997. System software development costs were fully amortized as of May 31,
1998, and no new systems software development costs were capitalized in fiscal
1999.

RESULTS OF OPERATIONS

The following table sets forth statements of operations data as a
percentage of net sales for the periods indicated.

Year Ended May 31,
----------------------------
1999 1998 1997
--------- --------- --------

Net sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 67.2 59.7 61.2
--------- --------- --------
Gross profit ............................. 32.8 40.3 38.8

Operating expenses:
Selling, general and administrative .... 38.0 21.1 21.1
Research and development ............... 27.1 11.1 10.8
Research and development cost
reimbursement--DARPA ................. (6.8) (2.2) (1.9)
--------- --------- --------
Total operating expenses ............. 58.3 30.0 30.0
--------- --------- --------
Income (loss) from operations ........ (25.5) 10.3 8.8

Interest income (expense) ................ 6.5 2.2 (1.4)
Other income (expense), net .............. 2.4 (0.9) (1.3)
--------- --------- --------
Income (loss) before income taxes .... (16.6) 11.6 6.1

Income tax expense (benefit) ............. (3.8) 5.7 (1.8)
--------- --------- --------
Net income (loss) ........................ (12.8)% 5.9% 7.9%
========= ========= ========

FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998

NET SALES. Net sales consist primarily of sales of systems, die carriers,
test fixtures, upgrades and spare parts and revenues from service contracts.
The Company recognizes revenue upon shipment of product. Net sales decreased
to $18.1 million in the fiscal year ended May 31, 1999 from $40.8 million in
the fiscal year ended May 31, 1998, a decrease of 55.5%. The decrease in net
sales in fiscal 1999 resulted primarily from reduced shipments of MTX
products. The Company anticipates an increase in orders for MTX systems in
the first half of fiscal 2000.

GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit decreased to $5.9 million
in the fiscal year ended May 31, 1999 from $16.4 million in the fiscal year
ended May 31, 1998, a decrease of 63.9%. The decrease in gross profit was
primarily due to the decrease in net sales. Gross profit margin decreased to
32.8% in the fiscal year ended May 31, 1999 from 40.3% in the fiscal year
ended May 31, 1998. The decrease in gross profit margin was primarily due to
excess production capacity and manufacturing overhead expenses spreading over
lower shipment levels and a change in product mix toward products with
somewhat higher material costs, partially offset by reductions in provisions
for warranty and inventory reserves. The Company anticipates lower gross
margins in the first quarter of fiscal 2000 than in the last quarter of fiscal
1999, and expects to record a net loss in the first quarter of fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion and other professional services. SG&A
expenses decreased to $6.9 million in the fiscal year ended May 31, 1999 from
$8.6 million in the fiscal year ended May 31, 1998, a decrease of 20.0%. The
decrease in SG&A expenses was primarily due to decreases in employment related
expenses, commissions paid to outside sales representatives, and a reduction
in provision for doubtful accounts. As a percentage of net sales, SG&A
expenses increased to 38.0% in the fiscal year ended May 31, 1999 from 21.1%
in the fiscal year ended May 31, 1998, reflecting lower net sales. The
Company anticipates higher SG&A expenses in the first quarter of fiscal 2000
than in the last quarter of fiscal 1999.

RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
increased to $4.9 million in the fiscal year ended May 31, 1999 from $4.5
million in the fiscal year ended May 31, 1998, an increase of 8.6%. The
increase in R&D expenses was primarily due to increases in professional
consulting and employment related expenses. As a percentage of net sales, R&D
expenses increased to 27.1% in the fiscal year ended May 31, 1999 from 11.1%
in the fiscal year ended May 31, 1998, reflecting lower net sales.

RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA ("R&D - DARPA") is a credit
representing reimbursements by DARPA of costs incurred in the Company's wafer-
level burn-in development project. R&D - DARPA increased to $1.2 million in
the fiscal year ended May 31, 1999 from $900,000 in the fiscal year ended May
31, 1998, an increase of 37.0%. Payments by DARPA depend on satisfaction of
development milestones, and the level of payments may vary significantly from
fiscal year to fiscal year. As of May 31, 1999, there were no outstanding
payments due from DARPA.

INTEREST INCOME (EXPENSE). Interest income, net of interest expense,
increased to $1.2 million in the fiscal year ended May 31, 1999 from $904,000
in the fiscal year ended May 31, 1998, an increase of 31.0%. Interest income
in both fiscal years was primarily due to investment income from the proceeds
obtained from the initial public offering in August 1997; interest income in
the fiscal year ended May 31, 1998 was partially offset by interest expense of
the short-term domestic debt which was subsequently repaid. Interest expense
was $15,000 in fiscal 1999 and $144,000 in fiscal 1998.

OTHER INCOME (EXPENSE), NET. Other income, net was $441,000 in the fiscal
year ended May 31, 1999, compared with other expense, net of $364,000 in the
fiscal year ended May 31, 1998. The increase in other income, net was
primarily due to currency exchange gains recorded in the fiscal year ended May
31, 1999 compared with currency exchange losses recorded in the fiscal year
ended May 31, 1998.

INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $677,000 in the
fiscal year ended May 31, 1999, compared with income tax expense of $2.3
million in the fiscal year ended May 31, 1998. The income tax benefit in the
fiscal year ended May 31, 1999 was primarily due to the tax benefit recorded
as a result of losses incurred in the Company's U.S. operations. Such tax
benefit will be carried back to previous fiscal years in which the Company
paid taxes when its U.S. operations were profitable. The Company's Japanese
subsidiary experienced significant cumulative losses since fiscal 1993, and
thus generated certain net operating losses available to offset future taxes
payable in Japan. As a result of the subsidiary's cumulative operating
losses, a valuation allowance has been established for the full amount of the
subsidiary's net deferred tax assets. The income tax rate did not approximate
the statutory tax rates of the jurisdictions in which the Company operates
because no tax benefit was recorded for losses in the Company's Japanese
subsidiary.

FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997

NET SALES. Net sales decreased to $40.8 million in the fiscal year ended
May 31, 1998 from $42.0 million in the fiscal year ended May 31, 1997, a
decrease of 2.9%. The decrease in net sales in fiscal 1998 was primarily due
to a decline in net sales in the Company's subsidiary in Japan, and reduced
shipment of traditional burn-in products.

GROSS PROFIT. Gross profit increased to $16.4 million in the fiscal year
ended May 31, 1998 from $16.3 million in the fiscal year ended May 31, 1997,
an increase of 0.9%. Gross profit margin increased to 40.3% in the fiscal
year ended May 31, 1998 from 38.8% in the fiscal year ended May 31, 1997. The
increase in gross profit margin was primarily due to lower material costs as a
percentage of net sales.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $8.6
million in the fiscal year ended May 31, 1998 from $8.9 million in the fiscal
year ended May 31, 1997, a decrease of 2.9%. The decrease in SG&A expenses
was primarily due to a decrease in commissions paid to outside sales
representatives, partially offset by an increase in warranty repair expenses
and new expenses related to the Company's status of being publicly held. As a
percentage of net sales, SG&A expenses were unchanged at 21.1% in the fiscal
year ended May 31, 1998 and in the fiscal year ended May 31, 1997.

RESEARCH AND DEVELOPMENT. R&D expenses were unchanged at $4.5 million in
the fiscal year ended May 31, 1998 and in the fiscal year ended May 31, 1997.
An increase in employment related expenses was partially offset by a decrease
in professional consulting expenses. As a percentage of net sales, R&D
expenses increased to 11.1% in the fiscal year ended May 31, 1998 from 10.8%
in the fiscal year ended May 31, 1997, reflecting lower net sales.

RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA
increased to $900,000 in the fiscal year ended May 31, 1998 from $793,000 in
the fiscal year ended May 31, 1997, an increase of 13.5%. Payments by DARPA
depend on satisfaction of development milestones, and the level of payments
may vary significantly from fiscal year to fiscal year.

INTEREST INCOME (EXPENSE). Interest income, net of interest expense, was
$904,000 in the fiscal year ended May 31, 1998, as compared with interest
expense, net of interest income, of $577,000 in the fiscal year ended May 31,
1997. Interest income in the fiscal year ended May 31, 1998 was primarily due
to investment income from the proceeds obtained from the initial public
offering in August 1997. Interest expense in the fiscal year ended May 31,
1997 was primarily related to short-term debt which was subsequently repaid.
Interest expense was $144,000 in fiscal 1998 and $578,000 in fiscal 1997.

OTHER INCOME (EXPENSE), NET. Other expense, net decreased to $364,000 in
the fiscal year ended May 31, 1998 from $565,000 in the fiscal year ended May
31, 1997, a decrease of 35.6%. The decrease in other expense, net was
primarily due to the recognition of the Company's 25% interest in ESA
Electronics Pte Ltd., a Singapore corporation, in the fiscal year ended May
31, 1998.

INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) was an expense
of $2.3 million in the fiscal year ended May 31, 1998, compared with a benefit
of $773,000 in the fiscal year ended May 31, 1997. The Company recognizes
deferred tax assets and liabilities for the expected future consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. The Company's Japanese subsidiary experienced significant
cumulative losses since fiscal 1993, and thus generated certain net operating
losses available to offset future taxes payable. As a result of the
subsidiary's cumulative operating losses, a valuation allowance has been
established for the full amount of the subsidiary's net deferred tax assets.
The Company recorded tax benefits totaling $1.1 million in fiscal 1997 related
to recognition of its United States net deferred tax assets. The effective
tax rate for the fiscal year ended May 31, 1998 more closely approximates
normal operations, although it is higher than the statutory U.S. rate because
no tax benefit is recorded for losses in the Company's Japanese subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity has been generated from the
Company's August 1997 initial public offering, which resulted in net proceeds
to the Company of approximately $26.8 million. As of May 31, 1999, the
Company had $20.2 million in cash and short-term investments.

Net cash provided by operating activities was approximately $342,000 for
the fiscal year ended May 31, 1999, and net cash used in operating activities
was $664,000 for the fiscal year ended May 31, 1998. For the fiscal year
ended May 31, 1999, net cash provided by operating activities was due
primarily to decrease in accounts receivable of $3.8 million and decrease in
inventory of $2.7 million, partially offset by net loss of $2.3 million,
increase in accrued expenses and deferred revenue of $1.9 million and decrease
in accounts payable of $1.4 million. For the fiscal year ended May 31, 1998,
net cash used in operating activities was due primarily to decrease in
accounts payable of $1.9 million and increase in inventories of $1.6 million,
partially offset by net income of $2.4 million.

Net cash used in investing activities was approximately $1.4 million and
$16.8 million for the fiscal year ended May 31, 1999 and May 31, 1998,
respectively. Net cash used in investing activities for the fiscal year ended
May 31, 1999 was primarily due to purchase of long-term investments and
acquisition of property and equipment, partially offset by sale of short-term
investments. Net cash used in investing activities during the fiscal year
ended May 31, 1998 was primarily due to the short-term and long-term
investments made with proceeds from the Company's initial public offering in
August 1997.

Financing activities used cash of approximately $356,000 in the fiscal
year ended May 31, 1999 and provided cash of $22.9 million in the fiscal year
ended May 31, 1998. Net cash used in financing activities for the fiscal year
ended May 31, 1999 was primarily due to the Company's repurchase of 283,500 of
its outstanding common shares at an average price of $4.03, partially offset
by proceeds from exercise of stock options and increase in long-term debt of
the Company's subsidiary in Japan. Net cash provided by financing activities
for the fiscal year ended May 31, 1998 was primarily attributable to the
Company's initial public offering in August 1997.

As of May 31, 1999, the Company had working capital of $31.0 million,
compared with $36.9 million as of May 31, 1998. Working capital consists of
cash and cash equivalents, short-term investments, accounts receivable,
inventory and other current assets, less current liabilities. The decrease in
working capital was primarily due to decreases in accounts receivable,
inventory and short-term investments, partially offset by decreases in accrued
expenses and accounts payable.

The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital. As of May 31, 1999, the Company has repurchased 283,500
shares at an average price of $4.03.

From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.

The Company anticipates that the existing cash balance together with cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through fiscal 2000. After fiscal 2000,
depending on its rate of growth and profitability, the Company may require
additional equity or debt financing to meet its working capital requirements
or capital equipment needs. There can be no assurance that additional
financing will be available when required, or if available, that such
financing can be obtained on terms satisfactory to the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and hedging activities. SFAS No. 133 is effective for all fiscal
quarters beginning after June 15, 2000. The Company does not expect SFAS No.
133 to have a significant effect on its financial condition or results of
operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

This report on Form 10-K contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended. The Company's future results of operations could
vary significantly from the results anticipated by such forward-looking
statements as a result of various factors, including those set forth as
follows and elsewhere in this annual report on Form 10-K.

FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. During fiscal 1999 and 1998, quarterly net
sales have been as low as $3.1 million and as high as $11.7 million, and gross
margins for quarterly sales have fluctuated between 29.3% and 44.6%. The
Company's future operating results will depend upon a variety of factors,
including the timing of significant orders, the mix of products sold, changes
in pricing by the Company, its competitors, customers or suppliers, the length
of sales cycles for the Company's products, timing of new product
announcements and releases by the Company and its competitors, market
acceptance of new products and enhanced versions of the Company's products,
capital spending patterns by customers, timing of completion and approval of
DARPA development milestones, manufacturing inefficiencies associated with new
product introductions by the Company, the Company's ability to produce systems
and products in volume and meet customer requirements, product returns and
customer acceptance of product shipments, volatility in the Company's targeted
markets, political and economic

instability, natural disasters, regulatory changes, possible disruptions
caused by expanding existing facilities or moving into new facilities,
expenses associated with acquisitions and alliances, and various competitive
factors, including price-based competition and competition from vendors
employing other technologies. The Company's gross margins have varied and
will continue to vary based on a variety of factors, including the mix of
products sold, sales volume, and the amount of products sold under volume
purchase arrangements, which tend to have lower selling prices. Accordingly,
past performance may not be indicative of future performance. The Company
anticipates lower gross margins in the first quarter of fiscal 2000 than in
the last quarter of fiscal 1999, and expects to record a net loss in the first
quarter of fiscal 2000.

DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems which typically range in purchase price from
approximately $100,000 to over $1.0 million. As a result, the loss or
deferral of a limited number of system sales could have a material adverse
effect on the Company's net sales and operating results in a particular
period. All customer purchase orders are subject to cancellation or
rescheduling by the customer with limited penalties, and, therefore, backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period. From time to time, cancellations and reschedulings of
customer orders have occurred, and delays by the Company's suppliers in
providing components or subassemblies to the Company have caused delays in the
Company's shipments of its own products. There can be no assurance that the
Company will not be materially adversely affected by future cancellations and
reschedulings. A substantial portion of net sales typically are realized near
the end of each quarter. A delay or reduction in shipments near the end of a
particular quarter, due, for example, to unanticipated shipment reschedulings,
cancellations or deferrals by customers, customer credit issues, unexpected
manufacturing difficulties experienced by the Company, or delays in deliveries
by suppliers, could cause net sales in a particular quarter to fall
significantly below the Company's expectations. As the Company incurs
expenses in anticipation of future sales levels, the Company's results of
operations may be adversely affected if such sales levels are not achieved.
Requested shipment delays by certain customers have negatively impacted the
Company's net sales in fiscal 1999.

RECENT OPERATING LOSSES. The Company incurred an operating loss of $4.6
million in fiscal 1999. The Company also incurred operating losses of $2.1,
$4.2 and $2.4 million in fiscal 1995, 1994 and 1993, respectively. The
Company operated profitably from fiscal 1996 to 1998, due to increased net
sales that were substantially the result of sales of new products,
particularly sales of MTX systems to Siemens (the semiconductor group of
Siemens is now known as Infineon). During fiscal 1999, 1998 and 1997,
Infineon accounted for 21.9%, 47.0% and 55.7% of the Company's net sales,
respectively. Sales to Infineon, which include both the MTX and other
products, are made pursuant to individual purchase orders. There is no long-
term volume purchase commitment. In fiscal 1998, the Company began to feel
the industry slowdown due to uncertainties caused primarily by the financial
crisis in Asia and DRAM overcapacity and recorded an operating loss in fiscal
1999. The Company expects to record a net loss in the first quarter of fiscal
2000. There can be no assurance that the Company's net sales will soon
rebound or that the Company will soon return to profitability.

DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal element of the
Company's strategy is to capture an increasing share of the memory test
equipment market through sales of the MTX massively parallel test system. The
MTX is designed to perform both burn-in and many of the final test functions
currently performed by high-cost memory testers and the market for MTX systems
is still in the early stages of development. The Company's strategy depends,
in part, upon its ability to persuade potential customers that the MTX system
can successfully perform a significant portion of such final test functions
and that transferring such tests to MTX systems will reduce their overall
capital and test costs. The Company experienced a decline in shipments of MTX
products in fiscal 1999 compared with fiscal 1998. Although the Company
expects an increase in orders for MTX systems in the first half of fiscal
2000, there can be no assurance that the Company's strategy will be
successful. The failure of the MTX system to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and operating results.

Market acceptance of the MTX system is subject to a number of risks.
Through the end of fiscal 1999, several companies purchased evaluation units
of the MTX systems, but only Infineon purchased production quantities. Sales
to Infineon, which include both the MTX and other products, are made pursuant
to individual purchase orders. There is no long-term volume purchase
commitment. There can be no assurance that Infineon will continue to purchase
MTX systems for its production facilities. Since most potential customers
have successfully relied on memory testers for many years and their personnel
understand the use and maintenance of such systems, the Company anticipates
that they may be reluctant to change their procedures in order to transfer
test functions to the MTX system. Before a customer will transfer test
functions to the MTX, the test programs must be translated for use with the
MTX and lengthy correlation

tests must be performed. Correlation testing may take up to six months or
more. Furthermore, MTX system sales are expected to be primarily limited to
new facilities and to existing facilities being upgraded to accommodate new
product generations, such as the transition to Rambus or Double Data Rate
DRAMs. Construction of new facilities and upgrades of existing facilities
have in some cases been delayed or canceled during this semiconductor industry
downturn. Other companies have purchased MTX systems which are being used in
quality assurance and engineering applications, and the Company believes that
some of these companies are evaluating the MTX for use in production
applications. Market acceptance of the MTX system may also be affected by a
reluctance of IC manufacturers to rely on relatively small suppliers such as
the Company.

The Company's future sales and operating results are also partially
dependent on its sales of performance test boards for use with the MTX system.
Sales of PTBs by the Company and its licensees will depend upon the number of
MTX systems installed by customers.

DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF
DIEPAK CARRIER. Another element of the Company's strategy is to capture an
increasing share of the bare die burn-in and test product market through sales
of its DiePak carrier products. The Company developed the DiePak carrier to
enable burn-in and test of bare die in order to supply known good die ("KGD")
for use in applications such as multichip modules. The Company's DiePak
strategy depends upon increased industry acceptance of bare die as an
alternative to packaged die as well as acceptance of the Company's DiePak
products. There can be no assurance that the Company's strategy will be
successful. The market for carriers to produce KGD has not expanded as
rapidly as expected, as some customers are adopting chip-scale packages
("CSPs"), which are smaller than traditional packages, as their next packaging
strategy. Even though CSPs are relatively expensive, the Company believes
that end users are expressing a preference for CSPs because they believe that
CSPs are more compatible with their existing PC board assembly equipment.
This has delayed the growth of the market for KGD, and therefore for the
Company's DiePak carrier. The failure of the bare die market to expand or of
the DiePak carrier to achieve broad market acceptance would have a material
adverse effect on the Company's business, financial condition and operating
results.

The emergence of the bare die market and broad acceptance of the DiePak
carrier are subject to a number of risks. The Company believes that the
growth of the bare die market depends largely on the relative cost and
benefits to the manufacturers of PCs and other electronics products of using
bare die rather than alternative IC packaging methods. There can be no
assurance that electronics manufacturers will perceive that the benefits of
KGD justify its potentially higher cost, and acceptance of KGD for many
applications may therefore be limited. In addition, electronics manufacturers
must change their manufacturing processes in order to use KGD, but electronics
manufacturers typically have substantial investments in existing manufacturing
technology and have historically been slow in transitioning to new
technologies.

The adoption of the DiePak products by IC manufacturers and burn-in and
test services companies typically will involve a lengthy qualification. Such
qualification processes have delayed high volume sales of DiePak products by
the Company. Motorola is the only customer to have ordered DiePak products in
production quantities. Motorola accounted for approximately 54%, 87% and 48%
of the Company's net sales of DiePak products in fiscal 1999, 1998 and 1997,
respectively. Sales to Motorola, which include both DiePak products and other
products, are made pursuant to individual purchase orders. There is no long-
term volume purchase commitment. There can be no assurance that Motorola will
continue to purchase DiePak products for its production facility. There can
also be no assurance that the bare die market will emerge and grow as the
Company anticipates, that the DiePak carrier will achieve commercial
acceptance, or that the Company will not experience difficulties in ramping up
production to meet any increased demand for DiePak products that may develop.

CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers accounting for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five largest
customers accounted for approximately 62.7%, 75.2% and 69.2% of its net sales
in fiscal 1999, 1998 and 1997, respectively. During fiscal 1999, 1998 and
1997, Infineon (formerly the semiconductor group of Siemens) accounted for
21.9%, 47.0% and 55.7% of the Company's net sales, respectively. During
fiscal 1999, Texas Instruments and Motorola accounted for 18.1% and 11.9% of
the Company's net sales, respectively. During fiscal 1998, Motorola accounted
for 12.8% of net sales. No other customers represented more than 10% of the
Company's net sales for any of such periods. The Company expects that sales
of its products to a limited number of customers will continue to account for
a high percentage of net sales for the foreseeable future. In addition, sales
to particular customers may fluctuate significantly from quarter to quarter.
The loss of or reduction or delay in orders from a significant customer, or a
delay in collecting or failure to collect accounts

receivable from a significant customer could adversely affect the Company's
business, financial condition and operating results.

LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems. The
market for burn-in systems is mature and estimated to be less than $100
million per year. In general, process control improvements in the
semiconductor industry have tended to reduce burn-in times. In addition, as a
given IC product generation matures and yields increase, the required burn-in
time may be reduced or eliminated. Some burn-in system suppliers primarily
provide "monitored" burn-in systems optimized for DRAMs. The sale of
monitored burn-in products has reduced the size of the market segment
addressed by the Company's dynamic burn-in systems. IC manufacturers, the
Company's primary historical customer base, increasingly outsource test and
burn-in to independent test labs, who often build their own systems. There
can be no assurance that the market for burn-in systems will grow, and sales
of the Company's burn-in products could decline.

LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involve a significant commitment of capital. In
view of the significant investment or strategic issues that may be involved in
a decision to purchase MTX systems or DiePak carriers, the Company may
experience delays following initial qualification of the Company's systems as
a result of delays in a customer's approval process. Furthermore, the
approval process for MTX and DiePak carrier sales may require lengthy
qualification and correlation testing. For this and other reasons, the
Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort in securing a sale.
Lengthy sales cycles subject the Company to a number of significant risks,
including inventory obsolescence and fluctuations in operating results, over
which the Company has little or no control. The loss of individual orders due
to the lengthy sales and evaluation cycle, or delays in the sale of even a
limited number of systems could have a material adverse effect on the
Company's business, operating results and financial condition and, in
particular, could contribute to significant fluctuations in operating results
on a quarterly basis.

DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 72.7%,
70.5% and 92.5% of the Company's net sales for fiscal 1999, 1998 and 1997,
respectively, were attributable to sales to customers for delivery outside of
the United States. The Company maintains a sales, service, product
engineering and manufacturing organization in Japan, and a sales and service
organization in Germany. The Company expects that sales of products for
delivery outside of the United States will continue to represent a substantial
portion of its future revenues. The future performance of the Company will
depend, in significant part, upon its ability to continue to compete in
foreign markets which in turn will depend, in part, upon a continuation of
current trade relations between the United States and foreign countries in
which semiconductor manufacturers or assemblers have operations. A change
toward more protectionist trade legislation in either the United States or
such foreign countries, such as a change in the current tariff structures,
export compliance or other trade policies, could adversely affect the
Company's ability to sell its products in foreign markets. In addition, the
Company is subject to other risks associated with doing business
internationally, including longer receivable collection periods and greater
difficulty in accounts receivable collection, the burden of complying with a
variety of foreign laws, difficulty in staffing and managing global
operations, risks of civil disturbance or other events which may limit or
disrupt markets, international exchange restrictions, changing political
conditions and monetary policies of foreign governments.

A substantial portion of the Company's sales has been in Asia. Turmoil in
the Asian financial markets resulted, and may result in the future, in
dramatic currency devaluations, stock market declines, restriction of
available credit and general financial weakness. In addition, DRAM prices
have fallen dramatically and will likely do so again in the future. These
developments may affect the Company in several ways. Currency devaluations
may make dollar-denominated goods such as the Company's more expensive for
Asian clients. The Company believes that many international semiconductor
manufacturers limited capital spending (including the purchase of MTXs) in
fiscal 1999, and that the uncertainty of the DRAM market may cause some
manufacturers to further delay capital spending plans. These circumstances
may also affect the ability of the Company's customers to meet their payment
obligations, resulting in the cancellations or deferrals of existing orders
and the limitation of additional orders. In addition, Asian governments have
subsidized some portion of fab construction. Financial turmoil may reduce
these governments' willingness to continue such subsidies. Such developments
could have a material adverse affect on the Company's business, financial
condition and results of operations.

Because a substantial portion of the Company's net sales is from sales of
products for delivery outside the United States, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
Company's products compared to products sold by local companies in such
markets. Approximately 81.4%, 11.9% and 6.7% of the Company's net sales for
fiscal 1999 were denominated in U.S. Dollars, Japanese Yen and German Marks,
respectively. Although most sales to German customers are denominated in
dollars, substantially all sales to Japanese customers are denominated in
Japanese Yen. Since the price is determined at the time a purchase order is
accepted, the Company is exposed to the risks of fluctuations in the yen-
dollar exchange rate during the lengthy period from purchase order to ultimate
payment. This exchange rate risk is partially offset to the extent the
Company's Japanese subsidiary incurs yen-denominated expenses. To date, the
Company has not invested in instruments designed to hedge currency risks. In
addition, the Company's Japanese subsidiary typically carries debt or other
obligations due to the Company that may be denominated in yen or dollars.
Since the financial statements of the Japanese subsidiary are based in yen and
the financial statements of the Company are based in dollars, the Japanese
subsidiary and the Company recognize income gain or loss in any period in
which the value of the yen rises or falls in relation to the dollar. In
fiscal 1999, the Company recorded foreign currency gain of $339,000, and in
fiscal 1998 and 1997, the Company experienced foreign currency losses of
$385,000 and $393,000, respectively.

A substantial portion of the world's manufacturers of memory devices are
in Korea, Japan and Taiwan and growth in the Company's net sales depends in
large part upon its ability to penetrate the Korean and Japanese markets.
Both the Korean and Japanese markets are difficult for foreign companies to
penetrate. The Company has served the Japanese market through its Japanese
subsidiary, which has experienced limited success and incurred operating
losses in recent years. Sales into Korea have not been significant in recent
years. In fiscal 1999, the Company signed an agreement with a new Korean
distributor. The lack of local manufacturing may impede the Company's efforts
to develop the Korean market. Taiwan also represents an increasingly
important portion of the memory manufacturer market. The Company relies on an
independent distributor in Taiwan and does not have any direct operations in
Taiwan. There can be no assurances that the Company's efforts in Japan, Korea
or Taiwan will be successful or that the Company will be able to achieve and
sustain significant sales to, or be able to successfully compete in, the
Japanese, Korean or Taiwanese test and burn-in markets.

RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a timely
and cost-effective basis. The Company's success in developing new and
enhanced products depends upon a variety of factors, including product
selection, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. Because new
product development commitments must be made well in advance of sales, new
product decisions must anticipate both future demand and the technology that
will be available to supply that demand. Furthermore, introductions of new and
complex products typically involve a period in which design, engineering and
reliability issues are identified and addressed by the Company and its
suppliers. This process in the past has required and in the future is likely
to require the Company to incur unreimbursed engineering expenses, and from
time to time to experience warranty claims or product returns. There can be
no assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products that satisfy market demand. Any such
failure would materially adversely affect the Company's business, financial
condition and results of operations.

Because of the complexity of the Company's products, significant delays
can occur between a product's introduction and the commencement of volume
production of such product. The Company has experienced significant delays
from time to time in the introduction of, and technical and manufacturing
difficulties with, certain of its products and may experience delays and
technical and manufacturing difficulties in future introductions or volume
production of new products, and there can be no assurance that the Company
will not encounter such difficulties in the future. The Company's inability
to complete product development, products or to manufacture and ship products
in volume and in time to meet customer requirements would materially adversely
affect the Company's business, financial condition and results of operations.

As is common with new complex and software-intensive products, the Company
encountered reliability, design and manufacturing issues as it began volume
production and initial installations of certain products at customer sites.
The Company places a high priority on addressing these issues as they arise.
Certain of these issues in the past have been related to components and
subsystems supplied to the Company by third parties which have in some cases
limited the ability of the Company to address such issues promptly. When the
Company is in an early stage of a product's life cycle, there can be no
assurance that reliability, design and manufacturing issues will not be
discovered in the future or that

such issues, if they arise, can be resolved to the customers' satisfaction or
that the resolution of such problems will not cause the Company to incur
significant development costs or warranty expenses or to lose significant
sales opportunities.

Future improvements in semiconductor design and manufacturing technology
may reduce or eliminate the need for the Company's products. For example, the
introduction of viable wafer-level burn-in and test systems, improvements in
built-in self test ("BIST") technology, and improvements in conventional test
systems, such as reduced cost or increased throughput, may significantly
reduce or eliminate the market for one or more of the Company's products.

UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT. In
1994, the Company entered into a cost-sharing agreement with DARPA, a U.S.
government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The agreement
provides that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for government
purposes and (iii) DARPA can require the Company to license the inventions to
third parties on reasonable terms if the Company fails to adequately
commercialize the inventions. Payments by DARPA depend on satisfaction of
development milestones, and DARPA has the right to terminate project funding
at any time. The level of payments may vary significantly from quarter to
quarter. There can be no assurance that the Company will meet the development
milestones or that DARPA will continue funding the project. If DARPA funding
were discontinued and the Company continued the project, the Company's
operating results would be adversely affected. There also can be no assurance
that the development project will result in any marketable products. The
Company has completed certain development milestones and received DARPA
payment of $5.6 million through May 31, 1999. The remaining funding is
subject to milestones scheduled to be completed through December 1999,
although the Company expects that completion of certain milestones will be
delayed beyond that date.

INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company. The Company expects its competitors to continue to
improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
continuing consolidation in the semiconductor equipment industry, and
potential future consolidation, could adversely affect the ability of smaller
companies such as the Company to compete with larger, integrated competitors.
New product introductions by the Company's competitors or by new market
entrants could cause a decline in sales or loss of market acceptance of the
Company's existing products. Increased competitive pressure could also lead
to intensified price-based competition, resulting in lower prices which could
adversely affect the Company's business, financial condition and operating
results. The Company believes that to remain competitive it must invest
significant financial resources in new product development and expand its
customer service and support worldwide. There can be no assurance that the
Company will be able to compete successfully in the future.

Because the Company's MTX system performs burn-in and many of the
functional tests performed by traditional memory testers, the Company expects
that the MTX System will face intense competition from burn-in system
suppliers and traditional memory tester suppliers. The market for burn-in
systems is highly fragmented, with many domestic and international suppliers.
Some users, such as independent test labs, build their own burn-in systems,
and some other users, particularly large Japanese IC manufacturers, acquire
burn-in systems from captive or affiliated suppliers. Competing suppliers of
burn-in and functional test systems include Ando Corporation, Japan
Engineering Company and Reliability Incorporated. In addition, suppliers of
memory test equipment including Advantest Corporation and Teradyne, Inc. may
seek to offer competitive parallel test systems in the future.

The Company's MAX dynamic and ATX monitored and dynamic burn-in systems
increasingly have faced and are expected to continue to face severe
competition, especially from local, low cost manufacturers. Also, the MAX
dynamic burn-in system faces severe competition from manufacturers of
monitored burn-in systems that perform limited functional tests, including
tests designed to ensure the devices receive the specified voltages and
signals.

The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many small
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company's strategy is to provide higher
performance BIBs, and the Company generally does not compete to supply lower
cost, low performance BIBs. The Company has granted a royalty-bearing license
to one company to make PTBs for use with its MTX systems, in order to assure
customers of a second source of supply, and the Company may license others as
well. Sales of PTBs by licensees result in royalties to the Company but
reduce the Company's own sales of PTBs.

CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The Company's operating results depend
primarily upon the capital expenditures of semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. The
semiconductor and semiconductor equipment industries in general, and the
market for DRAMs and other memories in particular, historically have been
highly volatile and have experienced periodic downturns and slowdowns, which
have had a severe negative effect on the semiconductor industry's demand for
semiconductor capital equipment, including test and burn-in systems
manufactured and marketed by the Company. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1998 and 1999. In addition, the purchasing patterns of the Company's
customers are also highly cyclical because most customers purchase the
Company's products for use in new production facilities or for upgrading
existing test lines for the introduction of next generation products.
Construction of new facilities and upgrades of existing facilities have in
some cases been delayed or canceled during this recent semiconductor industry
downturn. A large portion of the Company's net sales are attributable to a
few customers and therefore a reduction in purchases by one or more customers
could materially adversely affect the Company's financial results. There can
be no assurance that the semiconductor industry will grow in the future at the
same rates it has grown historically. Any downturn or slowdown in the
semiconductor industry would have a material adverse effect on the Company's
business, financial condition and operating results. In addition, the need to
maintain investment in research and development and to maintain customer
service and support will limit the Company's ability to reduce its expenses in
response to any such downturn or slowdown period.

The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers
as compared to other high technology industry sectors. Manufacturing
companies that are the customers of semiconductor equipment companies
frequently revise, postpone and cancel capital facility expansion plans. In
such cases, semiconductor equipment companies may experience a significant
rate of cancellations and reschedulings of purchase orders, as was the case in
the industry in late 1995, early 1996, and 1998. There can be no assurance
that the Company will not be materially adversely affected by future
cancellations and reschedulings.

YEAR 2000. The Year 2000 issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
of the Company's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.

The Company has recognized the Year 2000 problem and has taken steps to
mitigate the situation. The Company's in-house information technology system
consists primarily of hardware and software purchased from outside parties.
The Company has completed vendor-provided upgrades of vendor-developed
software. Although the upgrades are claimed by the vendors to be Year 2000
compliant, the Company is testing the hardware and software for Year 2000
compliance and will install vendor-provided software patches if necessary.
The Company is also testing the internally developed software and hardware
which is included in the products sold to customers. The Company expects such
assessments and modifications to existing software and conversion to new
software will be completed by October 31, 1999. If, however, such
modifications and conversions are not made, or are not completed timely, the
Year 2000 issue could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company has had limited communications with its suppliers to determine
the extent to which the Company is vulnerable to those third parties' failure
to remediate their own Year 2000 issue. The failure of one or more of these
third parties to be Year 2000 compliant could result in a material adverse
effect on the Company's business, operating results and financial position.
The Company is making inquiries to certain of the key third party suppliers to
assess their Year 2000 readiness, and expects that this process will be on-
going through the end of 1999. However, there can be no assurance that the
systems or subsystems of other companies on which the Company's systems rely
will be timely converted, or that a failure to convert by another company, or
a conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company.

The Company expects that costs to address the Year 2000 issue, directly or
indirectly, will total approximately $150,000, the majority of which was spent
in the fiscal 1998 and 1999, with the remainder being spent during fiscal
2000. Costs include salary and related expenses, hardware and software costs,
consulting and miscellaneous expenses. To date, the Company has incurred
expenses of approximately $100,000 related to the assessment of and
preliminary efforts in dealing with the Year 2000 issue.

A most reasonably likely worst case Year 2000 scenario would be a
temporary interruption in production or shipping resulting from unanticipated
problems encountered in the information systems of the Company, or of any of
the significant third parties with whom the Company does business. The
pervasiveness of the Year 2000 issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could be
processed manually while the information system and other systems are repaired
and that such interruptions would have a minor effect on the Company's
operations.

The costs of the planned Year 2000 modifications, and the dates by which
the Company expects to complete them, are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. There can be, however, no assurance
that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.

DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX and ATX systems
contain several components, including environmental chambers, power supplies
and certain ICs, which are currently supplied by only one or a limited number
of suppliers. The DiePak products include an interconnect substrate which has
primarily been supplied by Nitto Denko Corporation. Nitto Denko is currently
manufacturing DiePak substrates, but it has notified the Company of its
intention to stop manufacturing these substrates. The Company is currently
qualifying an alternate supplier for the DiePak substrate. The Company's
reliance on subcontractors and single source suppliers involves a number of
significant risks, including the loss of control over the manufacturing
process, the potential absence of adequate capacity and reduced control over
delivery schedules, manufacturing yields, quality and costs. In the event
that any significant subcontractor or single source supplier was to become
unable or unwilling to continue to manufacture subassemblies, components or
parts in required volumes, the Company would have to identify and qualify
acceptable replacements. The process of qualifying subcontractors and
suppliers could be lengthy, and no assurance can be given that any additional
sources would be available to the Company on a timely basis. Any delay,
interruption or termination of a supplier relationship could have a material
adverse effect on the Company's business, financial condition and operating
results.

POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been, and may continue to be, extremely volatile. The
Company believes that factors such as announcements of developments related to
the Company's business, fluctuations in the Company's operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide

economy, announcement of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with customers and suppliers could
cause the price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for
small capitalization and high technology stocks in particular, has experienced
extreme price fluctuations which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect
the market price of the Company's Common Stock.

MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain on
the Company's administrative, operational and financial resources. Such
expansion will result in a continuing increase in the responsibility placed
upon management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If the Company is
unable to manage the expansion of its operations effectively, the Company's
business, financial condition and operating results will be materially and
adversely affected.

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its President
and Chief Executive Officer, as well as other executive officers and key
employees. The Company does not maintain key person life insurance for its
benefit on any of its personnel, and none of the Company's employees is
subject to a noncompetition agreement with the Company. The loss of the
services of any of its executive officers or a group of key employees could
have a material adverse effect on the Company's business, financial condition
and operating results. The Company's future success will depend in
significant part upon its ability to attract and retain highly skilled
technical, management, sales and marketing personnel. There is a limited
number of personnel with the requisite skills to serve in these positions, and
it has become increasingly difficult for the Company to hire such personnel.
Competition for such personnel in the semiconductor equipment industry is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The Company's inability to attract
and retain the executive management and other key personnel it requires could
have a material adverse effect on the Company's business, financial condition
and operating results.

INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability
to compete successfully is dependent in part upon its ability to protect its
proprietary technology and information. Although the Company attempts to
protect its proprietary technology through patents, copyrights, trade secrets
and other measures, there can be no assurance that these measures will be
adequate or that competitors will not be able to develop similar technology
independently. Further, there can be no assurance that claims allowed on any
patent issued to the Company will be sufficiently broad to protect the
Company's technology, that any patent will issue from any pending application
or that foreign intellectual property laws will protect the Company's
intellectual property. Litigation may be necessary to enforce or determine
the validity and scope of the Company's proprietary rights, and there can be
no assurance that the Company's intellectual property rights, if challenged,
will be upheld as valid. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of
the outcome of the litigation. In addition, there can be no assurance that
any of the patents issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide competitive
advantages to the Company.

ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future

regulations could result in substantial fines being imposed on the Company,
suspension of production, alteration of its manufacturing processes or
cessation of operations. Such regulations could require the Company to
acquire expensive remediation equipment or to incur substantial expenses to
comply with environmental regulations. Any failure by the Company to control
the use, disposal or storage of, or adequately restrict the discharge of,
hazardous or toxic substances could subject the Company to significant
liabilities.

Item 7a. Quantitative and Qualitative Disclosures about Market Risks

The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company has no holdings of derivative financial or
commodity instruments at May 31, 1999.

The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To somewhat reduce these
risks, the Company invests excess cash in a managed portfolio of corporate and
government bond instruments with maturities of 18 months or less. The Company
does not use any financial instruments for speculative or trading purposes.
The Company has long-term debt that carries fixed interest rates.
Fluctuations in interest rates would not have a material effect on the
Company's financial position, results of operations and cash flows.

A majority of the Company's revenue and capital spending is transacted in
U.S. dollars. The Company, however, enters into transactions in other
currencies, primarily Japanese yen. Substantially all sales to Japanese
customers are denominated in Japanese Yen. Since the price is determined at
the time a purchase order is accepted, the Company is exposed to the risks of
fluctuations in the yen-dollar exchange rate during the lengthy period from
purchase order to ultimate payment. This exchange rate risk is partially
offset to the extent that the Company's Japanese subsidiary incurs yen-
denominated expenses. To date, the Company has not invested in instruments
designed to hedge currency risks. In addition, the Company's Japanese
subsidiary typically carries debt or other obligations due to the Company that
may be denominated in yen or dollars. Since the Japanese subsidiary's
financial statements are based in yen and the Company's financial statements
are based in dollars, the Japanese subsidiary and the Company recognize
foreign exchange gain or loss in any period in which the value of the yen
rises or falls in relation to the dollar. A 10% decrease in the value of the
yen as compared with the dollar would potentially result in an additional net
loss of approximately $350,000.

Item 8. Financial Statements and Supplementary Data

AEHR TEST SYSTEMS AND SUBSIDIARIES

Index to Financial Statements

Report of Independent Accountants .................................. 27

Consolidated Balance Sheets at May 31, 1999 and 1998 ............... 28

Consolidated Statements of Operations for the years
ended May 31, 1999, 1998 and 1997 ................................ 29

Consolidated Statements of Shareholders' Equity for the years
ended May 31, 1999, 1998 and 1997 ................................ 30

Consolidated Statements of Cash Flows for the years ended
May 31, 1999, 1998 and 1997 ...................................... 31

Notes to Consolidated Financial Statements ......................... 32

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Aehr Test Systems:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Aehr Test Systems at May 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the
period ended May 31, 1999, in conformity with generally accepted accounting
principles. 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 audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
July 2, 1999, except Note 13 as to which the date is August 3, 1999

AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

May 31,
-------------------------
1999 1998
---------- ----------

ASSETS

Current assets:
Cash and cash equivalents .......................... $ 5,336 $ 6,748
Short-term investments ............................. 14,847 16,579
Accounts receivable, net of allowance for doubtful
accounts of $125 and $260 at May 31, 1999 and
1998, respectively ............................... 3,533 7,182
Inventories ........................................ 9,221 11,942
Deferred income taxes............................... 1,543 1,157
Prepaid expenses and other ......................... 654 250
---------- ----------
Total current assets ........................... 35,134 43,858

Property and equipment, net .......................... 1,936 1,541
Long-term investments ................................ 3,235 904
Other assets, net .................................... 882 802
---------- ----------
Total assets ................................... $41,187 $47,105
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current portion of long-term bank debt ............. $ 152 $ 86
Accounts payable ................................... 1,005 2,084
Accrued expenses ................................... 2,440 4,492
Deferred revenue ................................... 521 311
---------- ----------
Total current liabilities ...................... 4,118 6,973

Long-term bank debt, net of current portion .......... 391 113
Deferred lease commitment ............................ -- 55
---------- ----------
Total liabilities .............................. 4,509 7,141
---------- ----------
Commitments (Note 7).

Shareholders' equity:
Preferred stock, $.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none
Common stock, $.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 6,756 shares and 6,917
shares at May 31, 1999 and 1998, respectively... 68 69
Additional paid-in capital ......................... 34,806 35,467
Retained earnings (accumulated deficit)............. (55) 2,275
Accumulated other comprehensive income ............. 1,859 2,153
---------- ----------
Total shareholders' equity ..................... 36,678 39,964
---------- ----------
Total liabilities and shareholders' equity ..... $41,187 $47,105
========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.

AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ended May 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------

Net sales..................................... $18,146 $40,805 $42,020
Cost of sales................................. 12,201 24,359 25,715
---------- ---------- ----------
Gross profit.................................. 5,945 16,446 16,305
---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 6,892 8,618 8,878
Research and development.................... 4,918 4,529 4,536
Research and development cost
reimbursement--DARPA ..................... (1,233) (900) (793)
---------- ---------- ----------
Total operating expenses.................. 10,577 12,247 12,621
---------- ---------- ----------
Income (loss) from operations................. (4,632) 4,199 3,684
Interest income (expense)..................... 1,184 904 (577)
Other income (expense), net................... 441 (364) (565)
---------- ---------- ----------
Income (loss) before income taxes ............ (3,007) 4,739 2,542

Income tax expense (benefit).................. (677) 2,334 (773)
---------- ---------- ----------
Net income (loss)............................. $(2,330) $2,405 $3,315
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
(expense) ................................ (233) 81 (25)
Unrealized holding losses arising during
period ................................... (61) -- --
---------- ---------- ----------
Comprehensive income (loss) .................. $(2,624) $2,486 $3,290
========== ========== ==========

Net income (loss) per share (basic)........... $ (0.34) $ 0.38 $ 0.77
Net income (loss) per share (diluted)......... $ (0.34) $ 0.36 $ 0.74

Shares used in per share calculation
Basic....................................... 6,854 6,327 4,297
Diluted..................................... 6,854 6,761 4,500

The accompanying notes are an integral part of these consolidated financial
statements.

AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)

Retained
Common Stock Additional Earnings Unrealized Cumulative
----------------- Paid-in (Accumulated Investment Translation
Shares Amount Capital Deficit) Loss Adjustment Total
------- ------- ------- ------- ------- ------- -------

Balances, June 1, 1996.............. 4,298 $43 $ 8,094 $(3,445) $ -- $2,097 $ 6,789
Repurchase of common stock........ (2) -- (9) -- -- -- (9)
Net income........................ -- -- -- 3,315 -- -- 3,315
Translation adjustment............ -- -- -- -- -- (25) (25)
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1997.............. 4,296 43 8,085 (130) -- 2,072 10,070
Issuance of common stock in initial
public offering, net of
issuance costs of $1,068 ....... 2,500 25 26,807 -- -- -- 26,832
Issuance of common stock
under employee plans ........... 121 1 576 -- -- -- 577
Repurchase of common stock........ -- -- (1) -- -- -- (1)
Net income........................ -- -- -- 2,405 -- -- 2,405
Translation adjustment............ -- -- -- -- -- 81 81
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1998.............. 6,917 69 35,467 2,275 -- 2,153 39,964

Issuance of common stock
under employee plans ........... 123 2 481 -- -- -- 483
Repurchase of common stock........ (284) (3) (1,142) -- -- -- (1,145)
Net loss ......................... -- -- -- (2,330) -- -- (2,330)
Net unrealized loss on
investments .................... -- -- -- -- (61) -- (61)
Translation adjustment............ -- -- -- -- -- (233) (233)
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1999 6,756 $68 $34,806 $ (55) $(61) $1,920 $36,678
======= ======= ======= ======= ======= ======= =======

The accompanying notes are an integral part of these consolidated financial
statements.

AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

Year Ended May 31,
---------------------------------
1999 1998 1997
--------- --------- ---------

Cash flows from operating activities:
Net income (loss)............................. $(2,330) $2,405 $3,315
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............. (136) 131 34
Loss (gain) on disposition of
property and equipment.................... (4) 11 9
Depreciation and amortization............... 453 479 633
Deferred income taxes....................... (456) (102) (1,055)
Changes in operating assets and liabilities:
Accounts receivable....................... 3,820 36 2,608
Inventories............................... 2,740 (1,627) (2,854)
Accounts payable.......................... (1,431) (1,871) (795)
Accrued expenses and deferred revenue..... (1,857) 143 1,180
Deferred lease commitment................. (55) (165) (167)
Other current assets...................... (402) (104) 118
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. 342 (664) 3,026
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-term
investments............................. 1,732 (15,323) 188
Increase in long-term investments........... (2,392) (904) --
Additions to property and equipment......... (755) (315) (647)
(Increase) decrease in other assets......... 9 (213) 246
--------- --------- ---------
Net cash used in
investing activities.................. (1,406) (16,755) (213)
--------- --------- ---------
Cash flows from financing activities:
Decrease in notes payable--banks............ -- (4,535) (1,784)
Borrowings under long-term debt............. 453 96 141
Long-term debt and capital lease
principal payments........................ (147) (111) (488)
Proceeds from issuance of common stock
and exercise of stock options............. 483 27,409 --
Repurchase of common stock.................. (1,145) (1) (9)
--------- --------- ---------
Net cash provided by (used in)
financing activities.................. (356) 22,858 (2,140)
--------- --------- ---------

Effect of exchange rates on cash................ 8 133 (32)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents...................... (1,412) 5,572 641

Cash and cash equivalents, beginning of period.. 6,748 1,176 535
--------- --------- ---------
Cash and cash equivalents, end of period........ $5,336 $6,748 $1,176
========= ========= =========

Supplemental cash flow information:
Cash paid during the year for:
Interest ................................. $17 $148 $522
Income taxes ............................. 152 2,281 155

The accompanying notes are an integral part of these consolidated financial
statements.

AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS:

Aehr Test Systems ("Company") was incorporated in California in June 1977
and primarily designs, engineers and manufactures test and burn-in equipment
used in the semiconductor industry. The Company's principal products are the
MTX massively parallel test system, the MAX and ATX burn-in systems, test
fixtures and the DiePak carrier.

CONSOLIDATION:

The financial statements include the accounts of the Company, its wholly
owned foreign sales corporation ("FSC") and both its wholly owned and majority
owned foreign subsidiaries. Intercompany accounts and transactions have been
eliminated. The Company's 25% interest in a Singapore company is accounted
for under the equity method.

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:

Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars from Japanese Yen and German Marks using the
exchange rate in effect at the balance sheet date. Additionally, their
revenues and expenses are translated using exchange rates approximating
average rates prevailing during the fiscal year. Translation adjustments that
arise from translating their financial statements from their local currencies
to U.S. dollars are accumulated and reflected as a separate component of
shareholders' equity and comprehensive income (loss).

Transaction gains and losses that arise from exchange rate changes
denominated in currencies other than the local currency are included in the
statements of operations as incurred.

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CASH EQUIVALENTS AND INVESTMENTS:

Cash equivalents consist of money market instruments, commercial paper and
other highly liquid investments purchased with an original maturity of three
months or less. All investments are classified as available-for-sale.
Investments in available-for-sale securities are reported at fair value with
unrealized gains and losses, net of tax, if any, included as a component of
shareholders' equity.

CONCENTRATION OF CREDIT RISK:

The Company sells its products primarily to semiconductor manufacturers in
North America, the Far East, and Europe. As of May 31, 1999, approximately
48%, 18% and 34% of accounts receivable are from customers located in the
United States, the Far East and Europe, respectively. As of May 31, 1998,
approximately 46%, 35% and 19% of accounts receivable are from customers
located in the United States, the Far East and Europe, respectively. Two
customers accounted for 21% and 13% of accounts receivable at May 31, 1999,
and three customers accounted for 34%, 16% and 14% of accounts receivable at
May 31, 1998. Three customers accounted for 22%, 18% and 12% of net sales in
fiscal 1999, respectively. Two customers accounted for 47% and 13% of net
sales in fiscal 1998, respectively. One customer accounted for 56% of net
sales in fiscal 1997. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company also
maintains allowances for potential credit losses and such losses have been
within management's expectations. The Company uses letter of credit terms for
some of its international customers.

Primarily all of the Company's cash, cash equivalents and short-term cash
deposits are deposited with major banks in the United States and Japan. The
Company invests its excess cash in money market funds and short-term cash
deposits. The money market funds and short-term cash deposits bear the risk
associated with each fund. The money market funds have variable interest
rates, and the short-term cash deposits have fixed rates. The Company has not
experienced any losses on its money market funds or short-term cash deposits.

INVENTORIES:

Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.

PROPERTY AND EQUIPMENT:

Property and equipment are stated at cost. Leasehold improvements are
amortized over the lesser of their estimated useful lives or the term of the
related lease. Furniture, fixtures, machinery and equipment are depreciated
on a straight-line basis over their estimated useful lives. The ranges of
estimated useful lives for furniture, fixtures, machinery and equipment are as
follows:

Leasehold improvements................................ life of the lease

Furniture and fixtures................................ 2 to 15 years

Machinery and equipment............................... 4 to 11 years

Test equipment........................................ 4 to 11 years

GOODWILL:

Cost in excess of the fair value of net assets of acquired companies of
$956,000 is being amortized on a straight-line basis over 24.5 years and is
included in other assets, net of accumulated amortization of $538,000 and
$490,000 at May 31, 1999 and 1998, respectively.

REVENUE RECOGNITION:

Revenue is recognized upon shipment of product and a provision for the
estimated future cost of warranty is recorded. Actual warranty costs incurred
have not materially differed from those provided.

PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:

Costs incurred in the research and development of new products or systems
are charged to operations as incurred.

Costs incurred in the development of software programs for the Company's
products are charged to operations as incurred until technological feasibility
of the software has been established. Generally, technological feasibility is
established when the software module performs its primary functions described
in its original specifications, contains features required for it to be usable
in a production environment, is completely documented and the related hardware
portion of the product is complete. After technological feasibility is
established, any additional costs are capitalized. Capitalized costs are
amortized over the estimated life of the related software product using the
greater of the units of sales or straight-line methods over ten years.
Capitalized cost, net of accumulated amortization, of approximately $57,000
was included in other assets at May 31, 1997. System software development
costs were fully amortized at May 31, 1998, and no new systems software
development costs were capitalized in fiscal 1999.

During 1994, the Company entered into a cost-sharing research agreement
with the Defense Advanced Research Projects Agency ("DARPA"), a U.S.
government agency, under which DARPA will provide co-funding up to a maximum
amount of $6.5 million during fiscal 1994 through December 1999 for the
development of a new product that will allow for burn-in at the wafer level.
Payments from DARPA will be received upon DARPA's approval of the achievement
by the Company of milestones as outlined in the contract. The Company
recognizes such reimbursements as a reduction to research and development
expenses in an amount equal to actual reimbursable project costs incurred. At
May 31, 1999 and May 31, 1998, no outstanding payments were due from DARPA.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximate fair value due
to their short maturities. Based on borrowing rates currently available to
the Company for loans with similar terms, the carrying value of notes payable
approximates fair value.

The Company's investments are composed primarily of government and
corporate fixed income securities, certificates of deposit and commercial
paper. While it is the Company's general intent to hold such securities until
maturity, management will occasionally sell particular securities for cash
flow purposes. Therefore, the Company's investments are classified as
available-for-sale and are carried at fair value. Through May 31, 1999, no
material losses had been experienced on such investments.

Unrealized gains and losses, net of losses, net of tax, are computed on
the basis of specific identification and are included in shareholders' equity.
Realized gains, realized losses, and declines in value, judged to be other-
than-temporary, are included in other income. The cost of securities sold is
based on the specific identification method and interest earned is included in
other income.

CARRYING VALUE OF LONG-TERM ASSETS:

The Company writes off the carrying value of long-term assets to the
extent that projected net operating income is not sufficient to recover the
carrying value of these assets over their remaining useful life.

INCOME TAXES:

Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.

STOCK-BASED COMPENSATION:

The Company accounts for its stock based compensation in accordance with
the provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and presents disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation."

EARNINGS PER SHARE ("EPS") DISCLOSURES:

The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," and all prior
periods have been restated accordingly. Basic EPS is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed giving
effect to all dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the incremental
common shares issuable upon exercise of stock options for all periods.

In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):

Year Ended May 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------

Numerator: Net income (loss) ............... $(2,330) $2,405 $3,315
---------- ---------- ----------
Denominator for basic income per share:
Weighted-average shares outstanding ...... 6,854 6,327 4,297
---------- ---------- ----------
Shares used in basic per share calculation.. 6,854 6,327 4,297

Effect of dilutive securities:
Employee stock options.................. -- 434 203
---------- ---------- ----------
Denominator for diluted income (loss)
per share............................... 6,854 6,761 4,500
---------- ---------- ----------

Basic income (loss) per share............... $(0.34) $0.38 $0.77
========= ========= =========
Diluted income (loss) per share............. $(0.34) $0.36 $0.74
========= ========= =========

Stock options to purchase 122,000 shares of common stock were outstanding
in fiscal 1999 on a weighted average basis, but were not included in the
computation of diluted loss per share because the inclusion of such shares
would be anti-dilutive.

RECENT ACCOUNTING PRONOUNCEMENTS:

2. INVENTORIES:

Inventories are comprised of the following (in thousands):

May 31,
-------------------------
1999 1998
------------ ------------

Raw materials and subassemblies......... $4,931 $5,688
Work in process......................... 3,876 5,173
Finished goods.......................... 414 1,081
------------ ------------
$9,221 $11,942
============ ============

3. PROPERTY AND EQUIPMENT:

Property and equipment comprise (in thousands):

May 31,
-------------------------
1999 1998
------------ ------------

Leasehold improvements.................. $441 $393
Furniture and fixtures.................. 3,203 2,996
Machinery and equipment................. 3,163 2,569
Test equipment.......................... 2,155 1,944
------------ ------------
8,962 7,902
Less accumulated depreciation
and amortization...................... (7,026) (6,361)
------------ ------------
$1,936 $1,541
============ ============

4. NOTES PAYABLE--BANKS:

The Company's majority owned Japanese subsidiary has overdraft facilities
with a bank up to a limit of $216,000 against which certain time deposits and
accounts receivable are pledged as collateral for the facilities. At May 31,
1999 and 1998, the Company had no borrowing under these overdraft facilities.

5. LONG-TERM BANK DEBT:

Long-term bank debt comprises (in thousands):

May 31,
------------------------
1999 1998
------------ -----------

Various notes payable to Japanese banks, denominated
in Japanese Yen, bearing interest at 1.3% to 4.0%
per annum. These notes are payable in monthly
principal installments of $1,000 to $7,000 plus
accrued interest, maturing through November 2003
and are collateralized by certain time deposits
and accounts receivable............................ $543 $199

Less current portion................................. (152) (86)
------------ -----------
$391 $113
============ ===========

The long-term debt agreements contain certain cross-default covenants
under which outstanding borrowings would become payable on demand if the
Company were to be in default of any other debt agreement and any lender were
to accelerate the other debt. The Company is not in violation of any
covenants at May 31, 1999.

Principal payments under long-term bank debt obligations for each of the
next five fiscal years as of May 31, 1999 are as follows (in thousands):

2000................................. $152
2001................................. 127
2002................................. 125
2003................................. 98
2004................................. 41
------------
$543
============

6. ACCRUED EXPENSES:

Accrued expenses comprise (in thousands):

May 31,
-------------------------
1999 1998
------------ ------------

Payroll related......................... $ 804 $ 866
Commissions and bonuses................. 300 903
Warranty................................ 303 511
Deferred rent, current.................. 55 166
Other................................... 978 2,046
------------ ------------
$2,440 $4,492
============ ============

7. COMMITMENTS:

The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a noncancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in October 1991 and expires in December 1999. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.

Minimum annual rentals payable under operating leases in each of the next
five fiscal years and thereafter are as follows (in thousands):

2000.................................... $955
2001.................................... 228
2002.................................... 227
2003.................................... 214
2004 and thereafter..................... 35

Rent expense for the years ended May 31, 1999, 1998 and 1997 was
approximately $1,029,000, $1,067,000 and $1,226,000, respectively.

At May 31, 1999, the Company has a $67,000 certificate of deposit held by
a financial institution representing a security deposit for its United States
manufacturing office and facilities lease.

8. CAPITAL STOCK:

PREFERRED STOCK:

The Board of Directors is authorized to determine the rights of the
preferred shareholders.

STOCK OPTIONS:

The Company has reserved 1,136,716 shares of common stock for issuance to
employees and consultants under its two stock option plans. Both plans
provide that qualified options be granted at an exercise price equal to the
fair market value at the date of grant, as determined by the Board of
Directors (85% of fair market value in the case of nonstatutory options and
purchase rights and 110% of fair market value in certain circumstances).
Options generally expire five years from date of grant. Most options become
exercisable in increments over a four-year period from the date of grant.
Options to purchase approximately 568,418 shares were exercisable at May 31,
1999.

Activity under the Company's stock option plans was as follows (in
thousands, except per share data):

Outstanding Options
--------------------------------------
Number
Available of
Shares Shares Price per Share Total
--------- -------- -------------------- --------

Balances, June 1, 1996........ 2 732 $3.25 -- $6.00 $2,819

Additional shares reserved.. 650 -- -- --
Options granted............. (70) 70 $4.25 -- $6.00 397
Options terminated.......... 43 (43) $3.25 -- $6.00 (167)
1986 Plan expiration........ (43) -- -- --
--------- -------- --------
Balances, May 31, 1997........ 582 759 $3.25 -- $6.00 3,049

Options granted............. (151) 151 $6.19 -- $17.00 1,429
Options terminated.......... 17 (17) $3.25 -- $7.50 (85)
Options exercised........... -- (77) $3.25 -- $6.00 (287)
1986 Plan expiration........ (8) -- -- --
--------- -------- --------
Balances, May 31, 1998........ 440 816 $3.25 -- $17.00 4,106

Options granted............. (257) 257 $4.25 -- $6.63 1,488
Options terminated.......... 103 (103) $3.25 -- $7.50 (462)
Options exercised........... -- (49) $3.25 -- $4.00 (172)
1986 Plan expiration........ (71) -- --
--------- -------- --------
Balances, May 31, 1999........ 215 921 $3.25 -- $17.00 $4,960
========= ======== ========

The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for such plans
in accordance with APB No. 25 and related Interpretations.

Year Ended May 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(amounts in thousands, except per share data)

Net income (loss) -- as reported.... $(2,330) $2,405 $3,315
Net income (loss) -- pro forma...... $(2,783) $2,240 $3,215
Net income (loss) per share -- as reported:
Basic............................. $(0.34) $0.38 $0.77
Diluted........................... $(0.34) $0.36 $0.74
Net income (loss) per share -- pro forma:
Basic............................. $(0.41) $0.35 $0.75
Diluted........................... $(0.41) $0.33 $0.71

The above pro forma effects on income (loss) may not be representative of
the effects on net income (loss) for future years as option grants typically
vest over several years and additional options are generally granted each
year.

The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants:

Year Ended May 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------

Risk-free Interest Rates............. 4.40% 6.47% 6.47%
Expected Life........................ 5 years 5 years 5 years
Volatility........................... 0.70 0.94 --
Dividend Yield....................... -- -- --

The pro forma weighted average expected life was calculated based on the
exercise behavior. The pro forma weighted average fair value of those options
granted in 1999 and 1998 was $5.73 and $9.37, respectively.

The following table summarizes information with respect to stock options
at May 31, 1999:

Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices May 31, 1999 Life (Years) Price May 31, 1999 Price
- -------------------- ------------ ----------- ---------- ------------ ----------

$3.2500 53,000 0.20 $3.2500 53,000 $3.2500
$4.0000 364,184 1.52 $4.0000 329,817 $4.0000
$4.2500 29,000 3.75 $4.2500 15,535 $4.2500
$4.4000 70,000 1.46 $4.4000 63,958 $4.4000
$5.3750 100,000 4.81 $5.3750 4,166 $5.3750
$6.0000 48,500 2.80 $6.0000 26,319 $6.0000
$6.1250 86,000 4.03 $6.1250 19,693 $6.1250
$6.1875 13,750 3.90 $6.1875 3,720 $6.1875
$6.6250 22,750 4.66 $6.6250 1,891 $6.6250
$6.6880 38,250 3.55 $6.6880 13,417 $6.6880
$6.7375 20,000 4.03 $6.7375 4,583 $6.7375
$7.5000 27,000 3.05 $7.5000 12,932 $7.5000
$8.2500 5,000 3.05 $8.2500 2,395 $8.2500
$13.3130 20,000 3.44 $13.3130 7,500 $13.3130
$17.0000 24,000 3.38 $17.0000 9,492 $17.0000
------------ ------------
$3.2500 - 17.0000 921,434 2.50 $5.3828 568,418 $4.7043
============ ============

9. EMPLOYEE BENEFIT PLANS

EMPLOYEE STOCK BONUS PLAN:

The Company has a noncontributory, trusteed employee stock bonus plan for
full-time employees who have completed three consecutive months of service and
for part-time employees who have completed one year of service and have
attained an age of 21. The Company can contribute either shares of the
Company's stock or cash to the plan. The contribution is determined annually
by the Company and cannot exceed 15% of the annual aggregate salaries of those
employees eligible for participation in the plan. Individuals' account
balances vest at a rate of 25% per year commencing upon completion of three
years of service. Nonvested balances, which are forfeited, are allocated to
the remaining employees in the plan. Contributions made to the plan during
fiscal 1999, 1998 and 1997 were $60,000, $150,000 and $200,000, respectively.

401(K) PLAN:

The Company maintains a 401(k) profit-sharing plan for its full-time
employees who have completed three consecutive months of service and for part-
time employees who have completed one year of service and have attained an age
of 21. Each participant in the plan may elect to contribute from 1% to 20% of
their annual salary to the plan, subject to certain limitations. The Company,
at its discretion, may make an annual contribution to the plan. The Company
did not make any contributions to the plan during fiscal 1999, 1998 and 1997.

EMPLOYEE STOCK PURCHASE PLAN:

The Company's Board of Directors adopted the 1997 Employee Stock Purchase
Plan in June 1997. A total of 300,000 shares of Common Stock have been
reserved for issuance under the plan. The plan has consecutive, overlapping,
twenty-four month offering periods. The offering periods generally begin on
the first trading day on or after April 1 and October 1 each year, except that
the first such offering period commences with the effectiveness of the
Company's initial public offering and ends on the last trading day on or
before March 31, 1999. Shares are purchased through employee payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company's Common Stock at either the first day of an offering
period or the last day of such offering period. If a participant's rights to
purchase stock under all employee stock purchase plans of the Company accrue
at a rate which exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under the 1997
Employee Stock Purchase Plan. To date, 68,713 shares have been issued under
the plan.

10. INCOME TAXES:

Domestic and foreign components of pretax income (loss) are as follows (in
thousands):

Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------

Domestic.......................... $(1,865) $6,526 $3,672
Foreign........................... (1,142) (1,787) (1,130)
------------ ------------ ------------
$(3,007) $4,739 $2,542
============ ============ ============

The provision (benefit) for income taxes consists of the following (in
thousands):

Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------

Federal income taxes:
Current......................... $(294) $2,182 $ 150
Deferred........................ (263) (124) (910)
State income taxes:
Current......................... 33 266 15
Deferred........................ (193) 22 (145)
Foreign income taxes:
Current......................... 40 (12) 117
Deferred........................ -- -- --
------------ ------------ ------------
$(677) $2,334 $(773)
============ ============ ============

The components of the net deferred tax asset (liability) are as follows
(in thousands):

May 31,
-------------------------
1999 1998
------------ ------------

Noncurrent assets:
Net operating losses..................... $2,285 $1,783
Credit carryforwards..................... 126 --
Depreciation and amortization............ (114) (103)
------------ ------------
2,297 1,680
Less valuation allowance................... (2,227) (1,680)
------------ ------------
70 --
------------ ------------
Current assets:
Inventory and other revenues............. 1,585 1,201
Accrued liabilities...................... 851 913
------------ ------------
2,436 2,114
Less valuation allowance................... (893) (957)
------------ ------------
1,543 1,157
------------ ------------
Net deferred tax asset..................... $1,613 $1,157
============ ============

The Company's effective tax rate differs from the U.S. federal statutory
tax rate, as follows:

Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------

Maximum statutory rate.. (34.0)% 34.0% 34.0%
Net operating loss utilized....... -- -- (34.0)
Foreign taxes..................... 0.3 -- 4.6
State taxes, net of federal tax
effect.......................... (4.6) 6.9 0.6
Other............................. 2.8 (0.7) 5.9
Foreign earnings not currently
benefitted ..................... 13.0 7.2 --
Foreign Sales Corporation -- (4.7) --
Change in valuation allowances.... -- 6.6 (41.5)
------------ ------------ ------------
Effective tax rate................ (22.5)% 49.3% (30.4)%
============ ============ ============

Foreign net operating loss carryforwards of approximately $4.8 million are
available to reduce future foreign taxable income and expire in 2003 if not
utilized. A valuation allowance has been provided for the deferred tax assets
of the Japanese subsidiary as management does not believe it is more likely
than not the tax assets will be realized, due to the subsidiary's cumulative
losses.

11. OTHER INCOME (EXPENSE), NET:

Other income (expense), net comprises the following (in thousands):

Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------

Foreign exchange gain (loss)...... $339 $(385) $(393)
Other, net........................ 102 21 (172)
------------ ------------ ------------
$441 $(364) $(565)
============ ============ ============

12. SEGMENT INFORMATION:

FOREIGN OPERATIONS:

The Company develops, manufactures and sells systems to semiconductor
manufacturers and operates in one operating segment. The following presents
information about the Company's operations in different geographic areas (in
thousands):

United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------

1997:
Net sales...................... $35,404 $8,718 $3,986 $(6,088) $42,020
Portion of U.S. net sales
from export sales............ 27,102 -- -- -- 27,102
Income (loss) from operations.. 3,972 (668) (32) 412 3,684
Identifiable assets............ 22,983 5,093 910 (4,597) 24,389
Long-lived assets.............. 933 661 97 -- 1,691

1998:
Net sales...................... $37,748 $3,703 $2,926 $(3,572) $40,805
Portion of U.S. net sales
from export sales............ 25,724 -- -- -- 25,724
Income (loss) from operations.. 5,511 (1,206) (53) (53) 4,199
Identifiable assets............ 50,396 2,173 1,500 (6,964) 47,105
Long-lived assets.............. 976 496 69 -- 1,541

1999:
Net sales...................... $15,233 $2,185 $3,059 $(2,331) $18,146
Portion of U.S. net sales
from export sales............ 9,531 -- -- -- 9,531
Income (loss) from operations.. (3,213) (1,484) 90 (25) (4,632)
Identifiable assets............ 45,582 1,995 1,732 (8,122) 41,187
Long-lived assets.............. 1,340 499 97 -- 1,936

The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.

13. SUBSEQUENT EVENT:

On August 3, 1999 the Company entered into a lease agreement related to the
relocation of its headquarters from Mountain View, California to a 51,289
square foot facility in Fremont, California after the current lease expires
in December 1999. The operating lease is for an initial period of ten
years and minimum payments due under the lease total approximately
$7,436,000.

Quarterly Results (unaudited)

The following table (presented in thousands, except per share data)
sets forth selected statements of operations data for each of the four
quarters of the fiscal years ended May 31, 1999 and May 31, 1998. The
unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring entries)
necessary for a fair presentation of the information for the quarters
presented. The operating results for any quarter are not necessarily
indicative of results for any future period.

Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
1997 1997 1998 1998
--------- --------- --------- ---------

Net sales......................... $11,665 $11,748 $11,567 $5,825
Gross profit...................... 4,604 4,582 4,660 2,600
Net income........................ $ 614 $ 908 $ 831 $ 52
Net income per share (basic)...... $ 0.13 $ 0.13 $ 0.12 $ 0.01
Net income per share (diluted).... $ 0.12 $ 0.12 $ 0.12 $ 0.01

Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
1998 1998 1999 1999
--------- --------- --------- ---------

Net sales......................... $5,430 $5,186 $ 4,414 $ 3,116
Gross profit...................... 2,144 1,531 1,294 976
Net loss.......................... $ (359) $ (492) $ (707) $ (772)
Net loss per share (basic)........ $(0.05) $(0.07) $ (0.10) $ (0.11)
Net loss per share (diluted)...... $(0.05) $(0.07) $ (0.10) $ (0.11)

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

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal 1 --
Election of Directors" in the Proxy Statement. The information required by
this item relating to executive officers is incorporated by reference to the
information under the caption "Management -- Executive Officers and Directors"
at the end of Part I of this report on Form 10-K.

Item 11. Executive Compensation

The information required by this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" of the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners, Directors
and Management" of the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" of the Proxy
Statement.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) The following documents are filed as part of this Report:

1. Financial Statements

Report of Independent Accountants

Consolidated Balance Sheets at May 31, 1999 and 1998

Consolidated Statements of Operations for the years ended May 31, 1999,
1998 and 1997

Consolidated Statements of Shareholders' Equity for the years ended May 31,
1999, 1998 and 1997

Consolidated Statements of Cash Flows for the years ended May 31, 1999,
1998 and 1997

Notes to Consolidated Financial Statements

2. Financial Statement Schedule

The following consolidated financial statement schedule is filed as part of
this report and should be read in conjunction with the consolidated financial
statements:

Schedule

II Valuation and Qualifying Accounts

All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the consolidated
financial statements or notes thereto.

Report of Independent Accountants on Financial Statement Schedule
- -----------------------------------------------------------------

To the Board of Directors and Shareholders
Aehr Test Systems
Mountain View, California

Our report on the consolidated financial statements of Aehr Test Systems
is included on page 27 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedule listed on Item 14 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information required
to be included therein.

PricewaterhouseCoopers LLP

San Jose, California
July 2, 1999

SCHEDULE II

AEHR TEST SYSTEMS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions of year
---------- ---------- ---------- ----------
Allowance for doubtful
accounts receivable:

May 31, 1999 $260 $22 $157 $125
========== ========== ========== ==========

May 31, 1998 $270 $131 $141 $260
========== ========== ========== ==========

May 31, 1997 $241 $29 $ -- $270
========== ========== ========== ==========

(b) Reports on Form 8-K.

None

3. Exhibits

The following exhibits are filed as part of or incorporated by reference into
this Report:

Exhibit
No. Description
- ------- ---------------------------------------------------------------

3.1+ Restated Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1++ Form of Common Stock certificate.
10.1+ Amended 1986 Incentive Stock Plan and form of agreement thereunder.
10.2++ 1996 Stock Option Plan (as amended and restated) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
10.3++ 1997 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4++ Form of Indemnification Agreement entered into between Registrant and
its directors and executive officers.
10.5+ Capital Stock Purchase Agreement dated September 11, 1979 between
Registrant and certain holders of Common Stock.
10.6+ Capital Stock Investment Agreement dated April 12, 1984 between
Registrant and certain holders of Common Stock.
10.7+ Amendment dated September 17, 1985 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain holders
of Common Stock.
10.8+ Amendment dated February 26, 1990 to Capital Stock Purchase Agreement
dated April 12, 1984 between Registrant and certain holders of Common
Stock.
10.9+ Stock Purchase Agreement dated September 18, 1985 between Registrant
and certain holders of Common Stock.
10.10+ Common Stock Purchase Agreement dated February 26, 1990 between
Registrant and certain holders of Common Stock.
10.11+ Lease dated May 14, 1991 for facilities located at 1667 Plymouth
Street, Mountain View, California.
10.12 Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
11.1++ Computations of Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 48).
27.1 Financial Data Schedule.

- ------------------------

+ Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997
(File No. 333-28987)

++ Incorporated by reference to the same-numbered exhibit previously filed
with Amendment No.1 to the Company's Registration Statement on Form S-1 filed
July 17, 1997 (File No. 333-28987).

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 on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 26, 1999
AEHR TEST SYSTEMS

By: /s/ RHEA J. POSEDEL
----------------------------------------
Rhea J. Posedel
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rhea J. Posedel and Gary L. Larson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date
- -------------------------- ----------------------------------- -------------
/s/ RHEA J. POSEDEL President, Chief Executive August 26, 1999
- --------------------------- Officer and Chairman of
Rhea J. Posedel the Board of Directors
(Principal Executive Officer)

/s/ GARY L. LARSON Vice President of Finance August 26, 1999
- --------------------------- and Chief Financial Officer
Gary L. Larson (Principal Financial and
Accounting Officer)

/s/ WILLIAM W. R. ELDER Director August 26, 1999
- ---------------------------
William W. R. Elder

/s/ MARIO M. ROSATI Director
- --------------------------- August 26, 1999
Mario M. Rosati

/s/ DAVID TORRESDAL Director
- ---------------------------
David Torresdal August 26, 1999

/s/ MUKESH PATEL Director
- ---------------------------
Mukesh Patel August 26, 1999