The following discussion of our financial condition and results of operations should be read in conjunction with the selected historical consolidated financial data and consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.

General

Since the late 1980s, we have derived virtually all of our revenue from the sale of suspension assemblies to a small number of customers. We currently supply a variety of suspension assemblies to all manufacturers of disk drives and head-gimbal assemblers for all sizes of disk drives. Suspension assemblies are a critical component of disk drives, and our results of operations are highly dependent on the disk drive industry. The disk drive industry is intensely competitive, and demand for disk drive components fluctuates. Our results of operations are affected from time to time by disk drive industry demand changes, adjustments in inventory levels throughout the disk drive supply chain, technological changes that impact suspension assembly demand, shifts in our market position and our customers' market position, changes in supply chain alignment by a customer, our customers' production yields and our own product transitions, production yields and production capacity utilization.

Though the overall market for suspension assemblies grew in 2010 and 2011, our net sales decreased significantly in those years because of market share losses. Our shipments of suspension assemblies declined 7% in 2010 and 11% in 2011.

In 2011, improvements in our TSA+ product yield and output, together with a faster than expected ramp of our assembly operation in Thailand, provided an opportunity to further lower our operating costs through a consolidation and restructuring plan. With the transition from our legacy TSA component manufacturing process to our more automated TSA+ process, we needed fewer employees to meet customers' volume requirements. Additionally, progress at our Thailand assembly operation enabled us to accelerate the transition of assembly manufacturing to that location and consolidate our Hutchinson, Minnesota components operations into our operations in Eau Claire, Wisconsin.

Early in 2012, severe flooding in Thailand required us to suspend our assembly operations at our Thailand manufacturing facility in the second week of October 2011. In addition to the negative impact on our operations, the flooding in Thailand temporarily constrained the overall production capacity of the hard disk drive supply chain in the first half of the year. In the second half of the year, overall disk drive production capacity recovered from the flooding; however, demand for disk drives weakened in the world market. These factors were the primary causes of a 14% decrease in our suspension assembly shipments in 2012.

By the end of 2012, we resumed production at our Thailand manufacturing facility and began shipping products for customer qualification. We had approximately half of our pre-flood capacity installed by the end of 2012 and expect to fully return to pre-flood capacity levels by the middle of 2013. By the end of our third quarter of 2013, we expect to have about one-half of our total assembly output coming from our Thailand operation. Near the end of 2013, we expect to have full capacity for the Thailand site installed and shortly thereafter, we should begin realizing the full cost benefits for the operation.

As part of our continued focus on overall cost reduction, we identified approximately 65 positions to be eliminated in the U.S. subsequent to the end of 2012. We estimate that our 2013 first quarter results will include a charge of approximately $1,000,000 for severance costs related to this workforce reduction. We are also further consolidating our manufacturing operations at our Eau Claire, Wisconsin and Hutchinson, Minnesota sites. We expect these consolidations will result in approximately $3,000,000 of accelerated depreciation in 2013 and may result in asset impairment write-offs in the range of $3,000,000 to $6,000,000 in 2013. We are making changes in our overall cost structure with a goal of having a business model that is cash-neutral or better, as we get further into 2013, at shipment volumes of 8 million per week. As volumes grow to more than 8 million per week, we believe we'll be able to generate positive free cash flow.

As we progress through 2013, we expect our financial results to benefit from higher shipment volume and improved fixed cost leverage, improvements in our TSA+ efficiency and output, increased adoption of DSA suspensions, the cost advantages we will realize as we increase output from our Thailand assembly operation and our continued focus on cost reduction.

Debt Refinancing

As a result of the debt refinancing that we completed during our 2012 third quarter, as discussed in "Liquidity and Capital Resources" below, the principal amount of our outstanding debt with a first put date in 2013 was reduced from $76,243,000 to $11,886,000. The debt refinancing resulted in the retirement of $64,357,000 aggregate principal amount of our 3.25% Notes and $26,666,000 aggregate principal amount of our 8.50% Convertible Notes and the issuance of $38,931,000 aggregate principal amount of 8.50% Secured Notes and warrants to purchase 3,869,000 shares of our common stock. Accordingly, our financial position was improved by lengthening the average maturities of our debt and our overall debt balance was reduced from $161,413,000 to $149,321,000 while maintaining our cash levels.

Thailand Flooding

Early in 2012, severe flooding in Thailand required us to suspend our assembly operations at our Thailand manufacturing facility in the second week of October 2011. We have leveraged our U.S. assembly operations to offset the temporary loss of capacity in Thailand. This resulted in our retaining approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits were included in our 2011 severance and benefits charges. This resulted in a reduction of $895,000 in our severance and benefits expense during our first quarter of 2012.

During our fourth quarter of 2011, which ended before the flooding, approximately one-third of our sales originated out of our Thailand assembly facility and our Thailand operations had an assembly capacity of four to five million parts per week. After review of the flood mitigation plans of the Thai government and those of the industrial park where our plant is located, we are proceeding with plans to restore our Thailand manufacturing facility to pre-flood output levels. The industrial park has completed construction of a flood wall and we have restored our manufacturing facility and qualified its clean room. We resumed production at that facility and began shipping products for customer qualification during the third quarter of 2012. We had approximately half of our pre-flood capacity installed by the end of 2012 and expect to fully return to pre-flood capacity levels by the middle of 2013. Near the end of 2013, we expect to have full capacity for the Thailand site installed and shortly thereafter, we should begin realizing the full cost benefits for our Thailand operation.

In 2012, as a result of the flooding in Thailand we recorded flood-related costs of $20,360,000 and, in total, we spent approximately $27,000,000 for incremental costs, capital expenditures for site restoration and equipment replacement, recovery expenses, and inventory replenishment. These costs were partially offset by $25,000,000 in insurance proceeds. We estimate we will spend an additional $5,000,000 in 2013 to restore our Thailand manufacturing operation to pre-flood capacity levels and to cover the incremental costs of manufacturing in the United States. These amounts do not include lost profits from the lower demand due to constraints in the overall capacity in the disk drive supply chain as a result of the flooding.

Our flood insurance policy in effect at the time of the October 2011 Thailand flood had a one-year term and has expired. We have evaluated flood-related insurance available to us, assessing our current flood risk compared to the cost of flood insurance. Our current flood coverage under a Thailand Government program is approximately $20,000,000 in addition to our current insurance flood coverage of approximately $1,000,000 for our Thailand facility.

Our available assembly capacity and vertically integrated components operations in the U.S. are enabling us to meet current levels of customer demand and should provide us with the flexibility to respond to increases in demand as we continue to restore our Thailand manufacturing operation by the end of 2013.

General Business

The following table sets forth our quarterly suspension assembly shipment
quantities for our Disk Drive Components Division in millions for the periods
indicated:

                                        2011 by Quarter                                  2012 by Quarter
                          First       Second       Third       Fourth       First      Second       Third       Fourth
Suspension assembly
shipment quantities          107          102         118          127          89          97         100          105

The flooding in Thailand temporarily constrained the overall production capacity of the hard disk drive supply chain in 2012. Additionally, some hard disk drive manufacturers temporarily reduced the average capacity size of their disk drives to maximize their use of the components that have been in short supply, and therefore, maximize the number of disk drives that they were able to ship. This may have temporarily reduced the number of suspensions per disk drive. These factors caused a material decrease in our suspension assembly demand. In our first quarter of 2012, shipments decreased 38 million or 30% compared to the fourth quarter of 2011 due to the flood-related capacity constraints at our customers. Our second quarter of 2012 shipments increased sequentially in all segments, with the largest percentage increase in shipments for enterprise applications. We estimate that we maintained our overall suspension assembly market share in both the first and second quarters of 2012, compared to the preceding quarter, by leveraging our vertically integrated U.S. operations to meet customers' needs. Our third quarter of 2012 shipments increased slightly compared with the preceding quarter but demand for our suspension assemblies declined by more than 15% in the final five weeks of the quarter compared with the quarter's first eight weeks, primarily due to weakened disk drive demand. Our 14-week fiscal fourth quarter of 2012 shipments totaled 105 million, down 2% on a weekly shipment basis compared with the 13-week fiscal third quarter of 2012. Decreased shipments of suspensions for enterprise applications were partially offset by an increase in shipments of suspensions for mobile applications. Industry sources estimate that disk drive shipments in the quarter ended September 2012 declined by 11% compared with the preceding quarter. Increased allocations on our existing programs and participation on new program ramps helped offset the near-term market weakness. We expect our first quarter of 2013 suspension assembly shipments will be about 100 to 105 million, an increase of 2% to 7% on a weekly basis compared with the 14-week fiscal 2012 fourth quarter. Hard disk drive shipments in the first quarter of 2013 are expected to be about flat with the preceding quarter.

We shipped 259 million TSA+ suspension assemblies during 2012, up from 238 million in 2011 and 116 million in 2010. TSA+ suspensions accounted for 85% of our fourth quarter of 2012 shipments. Subtractive TSA suspensions continue to be phased out in favor of our more capable and lower cost additive TSA+ suspensions. We are also purchasing additive flexures to fill other customer requirements. As the shift in our product mix from subtractive TSA suspensions to additive TSA+ suspensions continues, and we make further improvements in our TSA+ process efficiency and capacity utilization, we expect to realize additional cost reductions.

Our average selling price was $0.60 in both 2012 and 2011, and $0.66 in 2010. Suspension assembly pricing fluctuates from quarter to quarter and is likely to remain competitive, though normal pricing pressures have recently been offset primarily due to the mix of product sold.

Our gross profits have fluctuated and will continue to fluctuate based upon a variety of factors, key among them being changes in demand for our suspension assemblies. Our customers often prefer a multiple source supply strategy and, therefore, may allocate their demand among suppliers. We plan our production and inventory based primarily on forecasts of customer demand. Certain agreements with our customers also provide that we maintain minimum finished goods inventory levels for them. Both customer demand and the resulting forecasts often fluctuate substantially. These factors, among others, create an environment where scheduled production and capacity utilization can vary significantly from week to week, leading to variability in gross profits and difficulty in estimating our position in the marketplace.

In 2012, gross profit was $3,521,000, or 1% of net sales, compared to a gross profit of $10,351,000, or 4% of net sales, for 2011. The lower shipment volume during 2012 and resulting impact on our ability to leverage our fixed costs prevented us from meeting our expectations for gross profit. We estimate cost of goods sold in 2012 also included approximately $11,000,000 in incremental costs, while we have relied on our U.S. assembly operations for the majority of our production. We estimate that these costs will decrease as our production in Thailand ramps. Near the end of 2013, we expect to have full capacity for the Thailand site installed and shortly thereafter, we should begin realizing the full cost benefits for the operation.

We expect gross profit to improve in 2013 as our shipment volume increases and as we ramp our Thailand assembly operations. Improvement in our gross profits and operating profits will depend, in part, on the successful management of our corporate infrastructure and our suspension assembly production capacity. Our business is capital intensive and requires a high level of fixed costs. Our profits are sensitive to our level of fixed costs, as well as changes in volume, capacity utilization and product mix. In the future, we may need to adjust our overall employment level due to fluctuating demand. Our overall employment level was 2,546 at the end of 2010, 2,317 at the end of 2011 and 2,060 at the end of 2012.

Our shipments of dual-stage actuated, or DSA, suspension assemblies is increasing. We continue to work with multiple customers on DSA programs. DSA suspensions accounted for 5% of our fourth quarter of 2012 suspension assembly shipments, up from 1% in the third quarter of 2012. We expect DSA suspension assemblies will become an increasing portion of our shipments by the end of 2013. DSA suspensions carry a higher selling price but are more costly to manufacture.

The impact of the flood-related disruption to our business is delaying the full realization of the benefits that our 2011 restructuring and consolidation plan were expected to bring. Nevertheless, we remain on a path that we expect will enable us to become the industry's lowest cost producer of suspension assemblies, which we believe is integral to winning preferred supplier positions on customers' new disk drive programs and further improving our financial performance.

Our BioMeasurement Division is engaged in the development, production and commercialization of products for the medical device market. Lower than expected sales of the InSpectra StO2 systems and spending constraints in healthcare markets world-wide led us to make operating changes within the BioMeasurement Division. We have substantially reduced costs to narrow the division's operating losses. The division's losses from operations were $4,958,000 for 2012, $9,161,000 for 2011, and $23,959,000 for 2010. The BioMeasurement Division's loss for 2010 included $2,294,000 of asset impairments in this division. Subsequent to the end of 2012, we made additional reductions in the BioMeasurement Division's headcount in order to further reduce costs.

Disk Drive Market Trends

Our suspension assemblies are components in hard disk drives used in computers and a variety of consumer electronics and enterprise storage products. We believe that the continued growth of digital content world-wide requires increasingly higher storage capacity in order to store, aggregate, host, distribute, manage and backup content, which we believe will continue to result in increased demand for disk drives.

Non-compute applications, such as digital video recorders ("DVRs"), gaming devices, digital cameras and Internet-based storage of consumer data are driving the broad, global growth of digital content through:

· creation and sharing of all types of digital content, such as high-resolution photos, high definition video and movies, and music by consumers and data by enterprises;

· collection and distribution of digital content through services and other company offerings such as YouTube by Google, Inc.;

· network infrastructure, including broadband, cable and satellite, which is enabling the access, hosting and distribution of digital content;

· consumption of digital content through DVRs, handheld devices and gaming consoles; and

· protection of content through storage backup devices and services.

The demand for disk drives and, therefore, suspension assemblies can be volatile as experienced since calendar 2009 due to market and world economic conditions. In a weak economy, consumer and business spending tends to decline and demand for computer systems and other consumer electronics and enterprise storage products tends to decrease. Demand for suspension assemblies, therefore, may be adversely impacted as a result of a weaker economy.

In the long-term, however, we expect that the growth in digital content and the expanding use of enterprise computing and storage, desktop and mobile computers, increasingly complex software as well as the data intensive non-compute market will increase demand for disk drives and, therefore, suspension assemblies.

We also believe demand for disk drives will continue to be subject, as it has in the past, to rapid or unforeseen changes resulting from, among other things, changes in disk drive inventory levels, technological advances, responses to competitive price changes and unpredicted high or low market acceptance of new drive models and the end devices in which disk drives are used.

As in past years, disk drives continue to be the primary storage device of choice for applications requiring shorter access times and higher capacities because of their speed and low cost per unit of stored data. The cost of storing data on disk drives continues to decrease primarily due to increasing data density, thereby increasing storage capacity in disk drives or reducing the number of components, including suspension assemblies, required in a disk drive. The continual pursuit of increased data density and lower storage costs is leading to suspension assemblies with flexures that have finer electrical conductors, greater lead counts and increased complexity such as interleaved or stacked traces or DSA suspension designs, and to the adoption of value-added features for suspension assemblies, such as formed and polished headlifts, larger dampers with through-hole features and a variety of limiter configurations.

The development of next-generation read/write technology and the introduction of new types or configurations of read/write heads configurations and sizes, and the continuing improvement in data density and the use of disk drives in consumer electronics and enterprise storage applications will require even finer electrical conductors on the suspension assembly. Next-generation disk drives also may require additional electrical conductors. These changes may temporarily increase our development spending and reduce our manufacturing yields and efficiencies. We are investing in developing the process capabilities and related capital equipment required to meet new industry specifications in 2013 and beyond.

The advent of new disk drive technologies may initially decrease our customers' yields with the result that we may experience temporary elevations of demand for some types of suspension assemblies. As programs mature, higher customer yields decrease the demand for suspension assemblies. In addition, disk drive manufacturers are increasingly seeking lower cost designs and suspension assembly pricing is highly competitive. While we are generally able to increase our selling price for suspension assemblies when they are introduced, our selling prices decrease as our products mature.

2012 Operations to 2011 Operations

The following table sets forth our consolidated statements of operations as a
percentage of net sales for each period presented.

                                                         Percentage of Net Sales
                                                      2012           2011       2010
Net sales                                                100 %         100 %      100 %
Cost of sales                                             99            96         91
Gross profit                                               1             4          9
Research and development expenses                          7             5          6
Selling, general and administrative expenses              10            15         16
Severance and other expenses                               1             3          1
Debt refinancing costs                                     1             -          -
Flood-related costs, (net of insurance recoveries)        (2 )           -          -
Loss from operations                                     (16 )         (19 )      (14 )
Gain on extinguishment of debt                             2             3          *
Other income, net                                          1             1          2
Interest expense                                          (7 )          (5 )       (5 )
Gain (loss) on short- and long-term investments            *             *          *
Loss before income taxes                                 (20 )         (20 )      (17 )
Provision (benefit) for income taxes                       *             *          *
Net loss                                                 (20 )%        (20 )%     (17 )%


_____________

Net sales for 2012 were $248,589,000, compared to $278,090,000 for 2011, a decrease of $29,501,000. Suspension assembly sales decreased $36,447,000, primarily as a result of a 14% decrease in suspension assembly unit shipments. Our average selling price remained at $0.60 in both 2012 and 2011. The decrease in unit shipments was primarily a result of the flood-related capacity constraints at our customers' Thailand facilities. Suspension assembly component sales were $4,051,000 in 2012, primarily as a result of the flood-related capacity constraints in the disk drive industry creating demand for our suspension assembly components. We had no suspension assembly component sales in 2011. Net sales in our BioMeasurement Division were $1,472,000 in 2012, compared to $2,352,000 in 2011.

Gross profit for 2012 was $3,521,000, compared to $10,351,000 for 2011, a decrease of $6,830,000. Gross profit was 1% of net sales in 2012, compared to 4% in 2011. The lower gross profit in 2012 was primarily the result of reduced sales, which reduced our ability to cover our fixed costs, as discussed above, partially offset by decreased spending as a result of our 2011 consolidation and restructuring plan.

Research and development expenses for 2012 were $16,474,000, compared to $14,592,000 for 2011, an increase of $1,882,000. The increase was primarily related to higher labor expenses as a result of increased spending on TSA+ process and capacity improvements and new process technology. Research and development expenses specific to our BioMeasurement Division were $660,000 in 2012 and $1,295,000 in 2011. Research and development expenses were 7% of net sales in 2012 and 5% in 2011.

Selling, general and administrative expenses for 2012 were $28,599,000, compared to $40,844,000 for 2011, a decrease of $12,245,000. The lower selling, general and administrative expenses were primarily due to cost savings from our 2011 restructuring actions. Selling, general and administrative expenses as were 11% of net sales in 2012 and 15% in 2011. Selling, general and administrative expenses specific to our BioMeasurement Division were $3,829,000 in 2012 and $8,089,000 in 2011.

During the first quarter of 2012, severance and other expenses were reduced $711,000. We reversed $895,000 of previously accrued severance and benefits expenses, partially offset by $184,000 of other expenses incurred related to our site consolidation plans. As a result of leveraging our U.S. assembly operations to offset the temporary loss of manufacturing capacity in Thailand, we retained approximately 120 employees in our Hutchinson, Minnesota manufacturing facility that we previously expected to terminate and whose anticipated severance and benefits were included in our 2011 severance and benefits expenses.

During the second quarter of 2011, we announced a manufacturing consolidation and restructuring plan that included eliminating approximately 800 positions from our U.S. workforce. The workforce reduction and manufacturing consolidation resulted in a charge for severance and other expenses of $6,745,000, of which $692,000 was related to our BioMeasurement Division.

Debt refinancing costs for 2012 were $4,127,000. Because the terms of the 8.50% Secured Notes issued March 30, 2012 in exchange for 3.25% Notes were not substantially different, debt modification accounting was applied in accordance with Financial Accounting Standards Board (FASB) guidance. The debt refinancing costs associated with the debt transactions were expensed as incurred.

As a result of the flooding in Thailand, during 2012, we recorded $4,640,000 of insurance recoveries, net of flood-related costs, which included $25,000,000 of flood insurance recoveries, partially offset by $20,360,000 of asset impairments, inventory write-downs, and Thailand operating and site restoration costs, as discussed above.

Loss from operations for 2012 included a $4,958,000 loss from operations for our BioMeasurement Division compared to a $9,161,000 loss for 2011. The BioMeasurement Division operating loss in 2012 was reduced by restructuring actions, partially offset by $692,000 of severance costs.

The gain on short- and long-term investments for 2012 was $567,000, compared to a gain of $978,000 for 2011. The gain in 2012 and 2011 was due to payments we received under a settlement agreement. Auction rate securities ("ARS") previously held by us were subsequently sold by the settlement parties at a price that was higher than the price identified in the settlement agreement.

In March 2012, we issued $78,931,000 aggregate principal amount of 8.50% Secured Notes. We issued $38,931,000 aggregate principal amount of 8.50% Secured Notes pursuant to an effective registration statement relating to an offer to purchase for cash or exchange for new securities any and all of our outstanding 3.25% Notes (the "3.25% Tender/Exchange Offer"). We issued the remaining $40,000,000 aggregate principal amount of 8.50% Secured Notes in a private placement that included the issuance of warrants to purchase 3,869,000 shares of our common . . .