UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		Annual report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

Commission file number 0-49651

SUNTRON CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		86-1038668
(State of Incorporation)		(I.R.S. Employer Identification No.)
2401 West Grandview Road, Phoenix, Arizona		85023
(Address of Principal Executive Offices)		(Zip Code)

(602) 789-6600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		Nasdaq SmallCap Market

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     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 þ No o

     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 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.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer as defined in Exchange Act Rule 12b-2.

Large Accelerated Filer o      Accelerated Filer o      Non-Accelerated Filer þ

     Indicate by check mark whether the registrant is a shell company as defined in Exchange Act Rule 12b-2. Yes o No þ

     The aggregate market value of the outstanding common equity held by non-affiliates of the registrant, computed as of June 30, 2006, was $4.0 million. This amount is based on 2,770,000 shares held by non-affiliates. For purposes of this computation, all current officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

     As of February 28, 2007, there were outstanding 27,577,282 shares of the registrant’s Common Stock, $0.01 par value.

Documents Incorporated by Reference

The Company’s Proxy Statement for its 2007 Annual Meeting of Stockholders is incorporated by reference in Part III of this Form 10-K.

 

 

SUNTRON CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

PART I
1. Business			3
1A. Risk Factors			5
1B. Unresolved Staff Comments			12
2. Properties			12
3. Legal Proceedings			13
4. Submission of Matters to a Vote of Security Holders			13
PART II
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			14
6. Selected Financial Data			16
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
7A. Quantitative and Qualitative Disclosures about Market Risk			31
8. Financial Statements and Supplementary Data			31
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			32
9A. Controls and Procedures			32
9B. Other Information			32
PART III
10. Directors, Executive Officers and Corporate Governance			33
11. Executive Compensation			33
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			33
13. Certain Relationships and Related Transactions			33
14. Principal Accountant Fees and Services			33
PART IV
15. Exhibits and Financial Statement Schedules			34
Signatures			36
Index to Consolidated Financial Statements and Schedule			F-1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Statement Regarding Forward-Looking Statements

          This report on Form 10-K contains forward-looking statements regarding future events, including our future financial and operational performance. Forward-looking statements include statements regarding markets for our products; trends in net sales, gross profits, and estimated expense levels; liquidity, anticipated cash needs and borrowing availability; and any statement that contains the words “anticipate,” “believe,” “plan,” “estimate,” “expect,” “seek,” and other similar expressions. The forward-looking statements included in this report reflect our current expectations and beliefs, and we do not undertake publicly to update or revise these statements, even if experience or future changes make it clear that any projected results expressed in this report, annual or quarterly reports to stockholders, press releases, or company statements will not be realized. In addition, the inclusion of any statement in this report does not constitute an admission by us that the events or circumstances described in such statement are material. Furthermore, we wish to caution and advise readers that these statements are based on assumptions that may not materialize and may involve risks and uncertainties, many of which are beyond our control, that could cause actual events or performance to differ materially from those contained or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, risks related to the realization of anticipated revenue and profitability; the ability to meet cost estimates and achieve the expected benefits associated with recent restructuring activities; trends affecting our growth; and the business and economic risks described herein under Item 1A, “Risk Factors.”

PART I

ITEM 1. BUSINESS

Overview

          Suntron Corporation delivers complete manufacturing services and solutions to support the entire life cycle of products in the aerospace and defense, industrial, semiconductor capital equipment, networking and telecommunications, and medical equipment market sectors of the electronic manufacturing services (“EMS”) industry. We provide design and engineering services, quick-turn prototype, materials management, cable and harness assembly, printed circuit board assembly and testing, electronic interconnect assemblies, subassemblies, and full systems integration (known as box-build), after-market repair and warranty services. Our competitive strengths include our ability to manufacture highly complex products in short cycle times with smaller lot sizes (referred to as “low volume, high mix and complex system integration”). Our strategy targets capturing turnkey work by providing customers with support throughout the entire manufacturing process, starting with prototype design for manufacturability and progressing through material procurement, supply chain management, final assembly, and testing, to reduce our customers’ costs and improve their time to market. We believe our success in the marketplace is dependent upon our ability to provide unique solutions tailored to match each of our customer’s specific requirements, while meeting the highest quality standards in the industry.

Our Services

          Design and Engineering Services. We provide product development, design, and test engineering services to our customers. Our design for manufacturability and design for testability reviews allow our engineering group to collaborate with our customers early in the design process to reduce variation, cost, and complexity in new designs. Following completion of the initial design, we also offer design services to assist our customers in taking their product to market. Our support teams work closely with our customers through all stages of product planning and production. Our computer systems feature a computer-aided design capability that allows our engineers to collaborate online with our customer’s engineers when developing and changing product designs.

          Prototype Manufacturing Services. We provide quick-turn prototype manufacturing services that provide customers with 24 hour to 10-day turnaround times. Our prototype manufacturing operations, located in Manchester, New Hampshire and Phoenix, Arizona provide full turnkey, as well as consigned material, solutions to support our customers with new product introduction activities. These services permit our customers to be more competitive by reducing the amount of time required to bring new products to market.

          Materials and Supply Chain Management Services. We consult with our customers and their suppliers early in the component selection process. This early supplier involvement helps ensure an efficient supply stream that focuses not only on cost but also on availability of components and the component life cycle. When material obsolescence affects our customers’ designs, we can provide recommendations on alternative components through our component-engineering group. We have developed innovative material planning relationships with a select group of original equipment manufacturers, or OEMs, in the aerospace and defense, industrial, semiconductor capital equipment, networking and telecommunications, and medical equipment industries. These relationships are supported by sophisticated in-house product design and technical support capabilities. In addition, certain of our customers have extranet access to their product data in order to monitor printed circuit board production quality, board and box-build assembly methods, and product throughput in a real-time environment. Extranet data integrity is maintained by secured access and tailored for the customer’s unique needs. We further complement our offerings by providing full logistics support that allows the final assembly to be shipped directly to the customer’s end user. This supply chain management ability differentiates us as a resource in enhancing customers’ cost-efficiency and time-to-market.

          Manufacturing and Assembly Services. We provide high-mix manufacturing services for a variety of highly complex electronic products. Our manufacturing methodology is central to supporting high-mix manufacturing. While typical high-volume manufacturing companies use high-volume runs to recover costs incurred in the initial set-up for the manufacturing process, our high-mix manufacturing technique focuses on parallel processing and set-up reductions in order to reduce initial set-up costs.

          Testing Services. We offer in-circuit functional testing and environmental “stress” testing that includes temperature and motion/shock/electronic cycle testing. These tests verify that components have been properly placed and electrical continuity exists at the proper places on the circuit board. Functional testing is performed on the in-circuit testers or separate test adapters and verifies that the board or system is in compliance with customer specifications. Environmental tests determine how the product will function at various temperatures and seeks to identify and remove any latent defects that might appear later in the product life cycle.

          Quality Control Services. Our quality control standards provide another means of serving the needs of our customers, because OEMs often rely on suppliers to assure quality control for subassemblies rather than providing such quality control themselves. We believe that our adherence to strict quality control standards and our investment in state-of-the-art production facilities and equipment have attracted and retained important customers that have established extremely rigid product quality standards.

          After-market Repair Services. We provide after-market warranty and repair services for electronic products, including products that may not have been originally manufactured by us, in support of customer product warranty, repair, and upgrade programs.

Customers

          Suntron focuses on serving OEMs in industries that have high-mix requirements. For 2006, Honeywell International, Inc. (“Honeywell”) represented approximately 16% of our net sales, and four other customers comprised an aggregate of 36% of our net sales. See Item 1A, “Risk Factors — We are dependent upon a small number of customers for a large portion of our net sales, and a decline in sales to major customers could harm our results of operations.” The following table presents Suntron’s net sales by market sector for the years ended December 31, 2004, 2005 and 2006:

		2004				2005				2006
Industrial			25	%			29	%			40	%
Semiconductor capital equipment			39	%			22	%			31	%
Aerospace and defense			24	%			30	%			20	%
Networking and telecommunications			9	%			15	%			5	%
Medical equipment			3	%			4	%			4	%
Total			100	%			100	%			100	%

Sales and Marketing

          Our sales force develops close working relationships with customers beginning early in the design phase and throughout all stages of production. We focus our marketing efforts on developing long-term relationships with our customers’ key personnel.

          We continue to focus our sales and marketing efforts on the following market sectors: (1) industrial, (2) semiconductor capital equipment, (3) aerospace and defense, (4) networking and telecommunications, and (5) medical equipment. This approach facilitates sales personnel specialization within related product groupings and permits sales representatives to develop a high degree of technical expertise.

          Our sales strategy is to target (1) technology companies with minimal manufacturing capabilities that require “one-stop shopping” service in rapidly evolving sectors and (2) OEMs in our target markets that require the outsourcing services in which we specialize. Our ability to provide complete manufacturing services and solutions that support the entire life cycle of complex products, coupled with our unique focus on the underserved high-mix needs of our customers, differentiates us from other EMS providers.

          We supplement the efforts of our sales force in the marketing of our services with various marketing communication activities.

Backlog

     Although we obtain firm purchase orders from our customers, OEM customers typically do not place firm orders for delivery of products more than 30 to 90 days in advance. We do not believe that the backlog of

expected product sales covered by firm purchase orders is a meaningful measure of future sales because customers may reschedule or cancel orders.

Suppliers

          We use numerous suppliers of electronic components and other materials for our operations. From time to time, some components we use have been subject to shortages, and suppliers have been forced to allocate available quantities among their customers. See Item 1A — “Risk Factors — We are dependent on limited and sole source suppliers for electronic components and may experience component shortages, which could cause us to delay shipments to customers.” We attempt to mitigate the risks of component shortages by working with customers to delay delivery schedules or by working with suppliers to provide the needed components using just-in-time inventory programs.

Competition

     The EMS industry is extremely competitive and includes hundreds of companies. The contract manufacturing services we provide are available from many independent sources. Many of our competitors are more established in the industry and have substantially greater financial, manufacturing, or marketing resources than we do. Certain of our competitors have broader geographic presence than we do, including manufacturing facilities in Asia, Europe, and South America. We believe that the principal competitive factors in our targeted market are quality, reliability, ability to meet delivery schedules, price, technological sophistication, and geographic location. We also face competition from current and potential customers, which are continually evaluating the relative merits of internal manufacturing versus contract manufacturing for various products.

Governmental Regulation

          Our operations are subject to certain federal, state, and local regulatory requirements relating to environmental, waste management, and health and safety matters, and there can be no assurance that significant costs and liabilities will not be incurred in complying with those regulations or that past or future operations will not result in exposure to injury or claims of injury by employees or the public. To meet various legal requirements, we have modified our circuit board cleaning processes to utilize only aqueous (water-based) methods.

          Some risk of liabilities related to these matters is inherent in our business, as with many similar businesses. Our management team believes that our business is operated in compliance with applicable environmental, waste management, and health and safety regulations, the violation of which could have a material adverse effect on our business, financial condition, and results of operations. In the event of violation, these regulations provide for civil and criminal fines, injunctions, and other sanctions and, in certain instances, allow third parties to sue to enforce compliance. In addition, new, modified, or more stringent requirements or enforcement policies could be adopted that may adversely affect our business.

          We periodically generate and temporarily handle limited amounts of materials that are considered hazardous waste under applicable law. We engage independent contractors for the off-site disposal of these materials. See Item 1A — “Risk Factors — Our failure to comply with the requirements of environmental laws could result in fines and revocation of permits necessary to our manufacturing processes.”

Employees

          As of February 28, 2007, we had approximately 1,240 full-time equivalent employees. As of the same date, we also engaged the full-time services of approximately 270 temporary laborers through employment agencies. None of our employees are subject to a collective bargaining agreement. Our management team believes that the relationship with our employees is good.

Availability of Reports Filed with the Securities and Exchange Commission

          Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, registration statements, and amendments to those reports are available without charge on our website, http://www.suntroncorp.com/investor/index.html#, as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available without charge by (1) telephonic request by calling 1-

888-520-3382, (2) email request to ir@suntroncorp.com, or (3) a written request to Suntron Corporation Investor Relations, 2401 West Grandview Road, Phoenix, Arizona 85023.

ITEM 1A. RISK FACTORS

          An investment in our common stock involves a high degree of risk. When evaluating an investment in our common stock, the factors described below should be carefully considered. If any of the events described below occur, our business, financial condition, and results of operations could deteriorate, the trading price of our common stock could fall, and you could lose all or part of the money you paid for our common stock. In addition, the following factors could cause our actual results to differ materially from those projected in our forward-looking statements, whether made in this Form 10-K, our annual or quarterly reports to stockholders, future press releases, other SEC filings, or orally, whether in presentations, responses to questions, or otherwise. See “Statement Regarding Forward-Looking Statements.”

Our level of indebtedness could adversely affect our financial viability, and the restrictions imposed by the terms of our debt instruments may severely limit our ability to plan for or respond to changes in our business.

          As of December 31, 2006, we had outstanding bank debt of approximately $19.8 million, outstanding letters of credit of $2.0 million, and subordinated debt payable to an affiliate of our majority stockholder of $11.4 million. In addition, subject to the restrictions under our debt agreements, we may incur significant additional indebtedness from time to time to finance working capital requirements, capital expenditures, business acquisitions, or for other purposes. In connection with our bank debt, we have entered into a Fixed Charge Coverage Maintenance Agreement that would require us to borrow additional amounts from an affiliate of our majority stockholder if necessary to maintain compliance with the financial covenants in our credit agreement. We would be required to accept these loans which bear interest at an annual rate as high as 18.0%, even if we did not believe the funding was necessary to finance our business activities. We currently expect that the affiliate of our majority stockholder will be required to make loans pursuant to the FCC maintenance agreement of between $1.2 million and $2.0 million during the second quarter of 2007 (to achieve compliance with the FCC covenant for the first quarter of 2007). We currently do not expect that additional loans will be required to achieve compliance with the FCC covenant for the second through fourth quarters of 2007.

     Significant levels of debt could have negative consequences. For example, it could:

	•		require us to dedicate a substantial portion of our cash flow from operations to service interest and principal repayment requirements, limiting the availability of cash for other purposes;
	•		increase our vulnerability to adverse general economic conditions by making it more difficult to borrow additional funds to maintain our operations if our revenues decrease;
	•		limit our ability to attract new customers if we do not have sufficient liquidity to meet working capital needs; and
	•		hinder our flexibility in planning for, or reacting to, changes in our business and industry if we are unable to borrow additional funds to upgrade our equipment or facilities.

We may need additional capital in the future and it may not be available on acceptable terms, or at all.

     We may need to raise additional funds for the following purposes:

	•		to fund working capital requirements for future growth that we may experience;
	•		to fund severance, lease exit, and other costs associated with restructuring efforts;
	•		to enhance or expand the range of services we offer, including required capital equipment needs;
	•		to increase our promotional and marketing activities; or
	•		to respond to competitive pressures or perceived opportunities, such as investment, acquisition, and international expansion activities.

If such funds are not available when required or on acceptable terms, our business and financial results could deteriorate.

We experience significant volatility in our net sales, which leads to significant operating inefficiencies and the potential for significant charges.

          Over the past five fiscal years, our quarterly net sales have fluctuated from a low of $69.3 million in the fourth quarter of 2006 to a high of $197.9 million in the second quarter of 2001. During periods of rapidly declining net sales, we generally take actions to eliminate variable and fixed costs, which often results in significant restructuring charges. When our net sales decline significantly, it is difficult to operate our plants profitably because it is not possible to eliminate most of our fixed costs. If we believe that the decline in sales is unlikely to be followed by a rapid recovery, we may determine that there are significant benefits to reducing our cost structure by closing plants and transferring existing business to other plants that are also operating below optimal capacity levels. However, there can be no assurance that customers impacted by a restructuring will agree to transition their business to another Suntron location. In order to realize the long-term benefits of these actions, we usually incur substantial charges for impairment of assets, lease exit costs, and the payment of severance and retention benefits to affected employees. In addition to the up-front costs associated with these actions, the transition of inventory and manufacturing services to a different facility can result in: (1) quality and delivery issues that may have an adverse impact in retaining customers that are affected by the plant closure and (2) ramp-up costs and manufacturing inefficiencies that could impact our gross profit levels. Our results of operations could also be materially and adversely affected by our inability to timely sell or sublet closed facilities on expected terms, or otherwise achieve the expected benefits of our restructuring activities.

          During periods of rapidly increasing net sales, we often experience inefficiencies related to hiring and training workers, as well as incremental costs incurred to expedite the purchase and delivery of raw materials and overtime costs related to our workforce. Periods of rapid growth tend to stress our resources and we may not have sufficient capacity to meet our customers’ delivery requirements. Significant increases in net sales are typically accompanied by corresponding increases in inventories and receivables that may be financed with borrowings under our revolving credit agreement.

We are dependent upon the highly competitive electronics industry, and excess capacity or decreased demand for products produced by this industry could result in increased price competition as well as a decrease in our gross margins and unit volume sales.

          Our business is heavily dependent on the EMS industry, which is extremely competitive and includes hundreds of companies. The contract manufacturing services we provide are available from many independent sources, and we compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Plexus Corp.; Sanmina-SCI Corporation; SMTC Corporation; Solectron Corporation; Sypris Electronics, LLC; and others. Many of such competitors are more established in the industry and have greater financial, manufacturing, or marketing resources than we do. We may be operating at a cost disadvantage as compared to our competitors that have greater direct buying power from component suppliers, distributors, and raw material suppliers and have lower cost structures. In addition, many of our competitors have a broader geographic presence, including manufacturing facilities in Asia, Europe, and South America.

          We believe that the principal competitive factors in our targeted market are quality, reliability, the ability to meet delivery schedules, price, technological sophistication, and geographic location. We also face competition from our current and potential customers, who are continually evaluating the relative merits of internal manufacturing versus contract manufacturing for various products. As stated above, the price of our services is often one of many factors that may be considered by prospective customers in awarding new business. We believe existing and prospective customers are placing greater emphasis on contract manufacturers that can offer manufacturing services in low cost regions of the world, such as certain countries in Asia. Accordingly, in situations where the price of our services is a primary driver in prospective customers’ decision to award new business, we currently believe we may have a competitive disadvantage in these circumstances.

          Our net sales are generated from the industrial, semiconductor capital equipment, aerospace and defense, networking and telecommunications, and medical sectors of the EMS industry, which is characterized by intense competition and significant fluctuations in product demand. Furthermore, these sectors are subject to economic cycles and have experienced in the past, and are likely to experience in the future, recessionary economic cycles. A recession or any other event leading to excess capacity or a downturn in these sectors of the

6

EMS industry typically results in intensified price competition as well as a decrease in our unit volume sales and our gross margins.

We are dependent upon a small number of customers for a large portion of our net sales, and a decline in sales to major customers could harm our results of operations.

          A small number of customers are responsible for a significant portion of our net sales. For the year ended December 31, 2005, Honeywell accounted for 25% our net sales. For the year ended December 31, 2006, Honeywell accounted for 16% of our net sales and a semiconductor capital equipment sector customer accounted for 11% of our net sales.

          Our customer concentration could increase or decrease depending on future customer requirements, which will depend in large part on business conditions in the market sectors in which our customers participate. The loss of one or more major customers or a decline in sales to our major customers could significantly harm our business and results of operations. If we are not able to expand our customer base, we will continue to depend upon a small number of customers for a significant percentage of our sales. There can be no assurance that current customers will not terminate their manufacturing arrangements with us or significantly change, reduce, or delay the amount of manufacturing services ordered from us.

          In addition, we generate significant accounts receivable in connection with providing manufacturing services to our customers. From time to time we agree to accept orders from smaller, less creditworthy customers. While losses due to credit risk have not been a significant factor in the past, this trend may not continue in the future as we continue to diversify our major customer concentration with orders from smaller customers. If delinquencies related to our receivables increase in the future, this could adversely affect our borrowing capacity because accounts that are aged more than 90 days from the invoice date are ineligible for the borrowing base calculation under our revolving credit agreement. Finally, if one or more of our significant customers were to become insolvent or were otherwise unable to pay for our services, our results of operations could deteriorate substantially.

Our customers may cancel their orders, change production quantities, or delay production.

          EMS providers must provide increasingly rapid product turnaround for their customers. We generally do not obtain firm, long-term purchase commitments from our customers, and we expect to continue to experience reduced lead-times for customer orders. Customers may cancel their orders, change production quantities, or delay production for a number of reasons. Cancellations, reductions, or delays by a significant customer or by a group of customers could seriously harm our results of operations. When customer orders are changed or cancelled, we may be forced to hold excess inventories and incur carrying costs as a result of delays, cancellations, or reductions in orders or poor forecasting by our key customers.

          In addition, we make significant decisions, including determining the levels of business that we seek and accept, production schedules, component procurement commitments, personnel needs, and other resource requirements based on estimates of customer production requirements. The short-term nature of our customers’ commitments to us, combined with the possibility of rapid changes in demand for their products, reduces our ability to accurately estimate future customer orders. In addition, because many of our costs and operating expenses are relatively fixed, a reduction in customer demand generally harms our operating results.

If we are unable to respond to rapid technological change and process development, we may not be able to compete effectively.

          The market for our products and services is characterized by rapidly changing technology and continual implementation of new production processes. The future success of our business will depend in large part upon our ability to maintain and enhance our technological capabilities, to develop and market products that meet changing customer needs, and to successfully anticipate or respond to technological changes on a cost-effective and timely basis. We expect that the investment necessary to maintain our technological position will increase as customers make demands for products and services requiring more advanced technology on a quicker turnaround basis.

          In addition, the EMS industry could encounter competition from new or revised manufacturing and production technologies that render existing manufacturing and production technology less competitive or obsolete. We may not be able to respond effectively to the technological requirements of the changing market. Recent new environmental requirements implemented by the European Community (“EC”) and China require the use of lead-free chemicals to manufacture electronic sub-assembles. New production technology and equipment is required to manufacture products that conform to these new specifications. While we have implemented a dual process capability (leaded and lead-free) at all sites, additional changes in the environmental laws may impact our future production capabilities. If we need new technologies and equipment to remain competitive, the development, acquisition and implementation of those technologies may require us to make significant capital investments.

Operating in foreign countries exposes us to increased risks that could adversely affect our results of operations.

          We have had operations in Mexico since 1999 and we intend to expand in the future into other foreign countries. Because of the scope of our international operations, we are subject to the following risks, which could adversely impact our results of operations:

	•		economic or political instability;
	•		transportation delays and interruptions;
	•		increased employee turnover and labor unrest;
	•		incompatibility of systems and equipment used in foreign operations;
	•		foreign currency exposure;
	•		difficulties in staffing and managing foreign personnel and diverse cultures; and
	•		less developed infrastructures.

          In addition, changes in policies by the United States or foreign governments could negatively affect our operating results due to increased duties, increased regulatory requirements, higher taxation, currency conversion limitations, restrictions on the transfer of funds, the imposition of or increase in tariffs, and limitations on imports or exports. Also, we could be adversely affected if our host countries revise their policies away from encouraging foreign investment or foreign trade, including tax holidays.

If we are unsuccessful in managing future opportunities for growth, our results of operations could be harmed.

          Our future results of operations will be affected by our ability to successfully manage opportunities for growth. Rapid growth is likely to place a significant strain on our managerial, operational, financial, and other resources. If we experience extended periods of rapid growth, it may require us to implement additional management information systems, to further develop our operating, administrative, financial, and accounting systems and controls and to maintain close coordination among our accounting, finance, sales and marketing, and customer service and support departments. In addition, we may be required to retain additional personnel to adequately support our growth. If we cannot effectively manage periods of rapid growth in our operations, we may not be able to continue to grow, or we may grow at a slower pace. Any failure to successfully manage growth and to develop financial controls and accounting and operating systems or to add and retain personnel that adequately support growth could harm our business and financial results.

Our results of operations are affected by a variety of factors, which could cause our results of operations to fail to meet expectations.

          We have experienced large variations in our quarterly results of operations, and we may continue to experience significant fluctuations from quarter to quarter. Our results of operations are affected by a number of factors, including:

	•		timing of orders from and shipments to major customers;
	•		mix of products ordered by major customers;
	•		volume of orders as related to our capacity at individual locations;
	•		pricing and other competitive pressures;
	•		component shortages, which could cause us to be unable to meet customer

			delivery schedules;
	•		our ability to minimize excess and obsolete inventory exposure;
	•		our ability to manage the risks associated with uncollectible accounts receivable;
	•		our ability to manage effectively inventory and fixed asset levels;
	•		Changing environmental laws affecting component chemistry and process changes needed to meet these new requirements; and
	•		timing and level of goodwill and other long-lived asset impairments.

We are dependent on limited and sole source suppliers for electronic components and may experience component shortages, which could cause us to delay shipments to customers.

          We are dependent on certain suppliers, including limited and sole source suppliers, to provide critical electronic components and other materials for our operations. At various times, there have been shortages of some of the electronic components we use, and suppliers of some components have lacked sufficient capacity to meet the demand for these components. For example, from time to time, some components we use, including semiconductors, capacitors, and resistors, have been subject to shortages, and suppliers have been forced to allocate available quantities among their customers. Such shortages have disrupted our operations in the past, which resulted in late shipments of products to our customers. Our inability to obtain any needed components during future periods of allocations could cause delays in shipments to our customers. The inability to make scheduled shipments could in turn cause us to experience a shortfall in revenue. Component shortages may also increase our cost of goods sold due to premium charges we may pay to purchase components in short supply. Accordingly, even though component shortages have not had a lasting negative impact on our business, component shortages could harm our results of operations for a particular fiscal period due to the resulting revenue shortfall or cost increases and could also damage customer relationships over a longer-term period.

We depend on our key personnel and may have difficulty attracting and retaining skilled employees.

          Our future success will depend to a significant degree upon the continued contributions of our key management, marketing, technical, financial, accounting, and operational personnel. The loss of the services of one or more key employees could have a material adverse effect on our results of operations. We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial and technical resources. Competition for such personnel is intense. There can be no assurance that we will be successful in attracting and retaining such personnel. In addition, recent and potential future facility shutdowns and workforce reductions may have a negative impact on employee recruiting and retention.

Our manufacturing processes depend on the collective EMS industry experience of our employees. If these employees were to leave and take this knowledge with them, our manufacturing processes may suffer and we may not be able to compete effectively.

          We do not have any patent or trade secret protection for our manufacturing processes and generally we do not enter into non-compete agreements with our employees. We rely on the collective experience of our employees to ensure that we continuously evaluate and adopt new technologies in our industry. Although we are not dependent on any one employee or a small number of employees, if a significant number of employees involved in our business were to leave our employment and we are not able to replace these people with new employees with comparable experience, our results of operations may deteriorate. As a result, we may not be able to continue to compete effectively.

Our failure to comply with the requirements of environmental laws could result in fines and revocation of permits necessary to our manufacturing processes.

          Our operations are regulated under a number of federal, state, and foreign environmental and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of such materials. These laws and regulations include the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; and the Comprehensive Environmental Response, Compensation, and Liability Act; as well as analogous state and foreign laws. Compliance with these environmental laws is a major consideration for us because our manufacturing processes use and generate materials classified as hazardous, such as ammoniacal etching solutions, copper, and nickel. In addition, because we use hazardous materials and generate hazardous wastes in our manufacturing processes,

9

we may be subject to potential financial liability for costs associated with the investigation and remediation of our own sites or sites at which we have arranged for the disposal of hazardous wastes, if such sites become contaminated. Even if we fully comply with applicable environmental laws and are not directly at fault for the contamination, we may still be liable. The wastes we generate include spent ammoniacal etching solutions, solder stripping solutions, and hydrochloric acid solutions containing palladium; waste water that contains heavy metals, acids, cleaners, and conditioners; and filter cake from equipment used for on-site waste treatment. We have not incurred significant costs related to compliance with environmental laws and regulations, and we believe that our operations comply with all applicable environmental laws. However, any material violations of environmental laws could subject us to revocation of our effluent discharge and other environmental permits. Any such revocations could require us to cease or limit production at one or more of our facilities. Even if we ultimately prevail, environmental lawsuits against us could be time consuming and costly to defend.

          Environmental laws could also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violation. We operate in environmentally sensitive locations and are subject to potentially conflicting and changing regulatory agendas of political, business, and environmental groups. Changes or restrictions on discharge limits; emissions levels; or material storage, handling, or disposal might require a high level of unplanned capital investment or relocation. It is possible that environmental compliance costs and penalties from new or existing regulations may harm our business, financial condition, and results of operations.

We may be subject to risks associated with acquisitions, and these risks could harm our results of operations.

          We completed two business combinations in 2002 and one each in 2003 and 2004, and we anticipate that we will seek to identify and acquire additional suitable businesses in the EMS industry. The long-term success of business combinations depends upon our ability to unite the business strategies, human resources, and information technology systems of previously separate companies. The difficulties of combining operations include the necessity of coordinating geographically separated organizations and integrating personnel with diverse business backgrounds. Combining management resources could result in changes affecting all employees and operations. Differences in management approach and corporate culture may strain employee relations.

          Future business combinations could cause certain customers to either seek alternative sources of product supply or service, or delay or change orders for products due to uncertainty over the integration of the two companies or the strategic position of the combined company. As a result, we may experience some customer attrition.

          Acquisitions of companies and businesses and expansion of operations involve certain risks, including the following:

	•		the business fails to achieve anticipated revenue and profit expectations;
	•		the potential inability to successfully integrate acquired operations and businesses or to realize anticipated synergies, economies of scale, or other value;
	•		diversion of management’s attention;
	•		difficulties in scaling up production and coordinating management of operations at new sites;
	•		the possible need to restructure, modify, or terminate customer relationships of the acquired business;
	•		loss of key employees of acquired operations; and
	•		the potential liabilities of the acquired businesses.

          Accordingly, we may experience problems in integrating the operations associated with any future acquisition. We therefore cannot provide assurance that any future acquisition will result in a positive contribution to our results of operations. In particular, the successful combination with any businesses we acquire will require substantial effort from each company, including the integration and coordination of sales and marketing efforts. The diversion of the attention of management and any difficulties encountered in the transition process, including the interruption of, or a loss of momentum in, the activities of any business acquired, problems associated with integration of management information and reporting systems, and delays in

10

implementation of consolidation plans, could harm our ability to realize the anticipated benefits of any future acquisition. In addition, future acquisitions may result in dilutive issuances of equity securities, the incurrence of additional debt, significant inventory write-offs, and the creation of goodwill or other intangible assets that could ultimately result in increased impairment or amortization expense.

Failure to maintain an effective system of internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could inhibit our ability to accurately report our financial results and have a material adverse impact on our business and stock price.

          Effective internal controls are necessary for us to provide reliable financial reports. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. We have commenced documentation of our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting. Effective December 31, 2007, we will be required to provide a report that contains an assessment by management of the effectiveness of our internal control over financial reporting. Effective December 31, 2008, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the upcoming deadlines imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404. Failure to achieve and maintain effective internal control over financial reporting could have a material adverse effect on our stock price.

Our stock is traded on the Nasdaq SmallCap Market and if we are unable to sustain compliance with their listing requirements this could adversely impact our ability to use the capital markets to raise additional capital and our stockholders may be unable to efficiently sell their shares of our common stock.

          Our stock is currently being traded on the Nasdaq SmallCap Market. There can be no assurance that we will continue to meet the listing requirements of the Nasdaq SmallCap market, including the requirement to maintain a minimum bid price of $1.00 per share. If we are unable to sustain compliance with their listing requirements, this could adversely impact our ability to use the capital markets to raise additional capital and our stockholders may be unable to efficiently sell their shares of our common stock.

Our stock price may be volatile, and our stock is thinly traded, which could cause investors to lose all or part of their investments in our common stock.

          The stock market may experience volatility that has often been unrelated to the operating performance of any particular company or companies. If market sector or industry-based fluctuations continue, our stock price could decline regardless of our actual operating performance, and investors could lose a substantial part of their investments. Moreover, if an active public market for our stock is not sustained in the future, it may be difficult to resell our stock.

          Since March 2002 when Suntron shares began trading, the average number of shares of our common stock that traded on the Nasdaq National and SmallCap markets has been approximately 8,000 shares per day compared to approximately 27,577,000 issued and outstanding shares as of December 31, 2006. When trading volumes are this low, a relatively small buy or sell order can result in a large percentage change in the trading price of our common stock, which may be unrelated to changes in our stock price that are associated with our operating performance.

          The market price of our common stock will likely fluctuate in response to a number of factors, including the following:

	•		announcements about the financial performance and prospects of the industries and customers we serve;
	•		announcements about the financial performance of our competitors in the EMS industry;
	•		the timing of announcements by us or our competitors of significant contracts or acquisitions;
	•		failure to meet the performance estimates of securities analysts;
	•		changes in estimates of our results of operations by securities analysts; and
	•		general stock market conditions.

Our major stockholder controls us and our stock price could be influenced by actions taken by this stockholder. Additionally, this stockholder could prevent a change of control or other business combination, or could effect a “short form” merger without the approval of other stockholders.

          Thayer-Blum owns approximately 90% of our common stock, and five of our ten directors are representatives of Thayer-Blum. In addition, we recently borrowed $10.0 million from an affiliate of Thayer-Blum. The interests of Thayer-Blum may not always coincide with those of our other stockholders, particularly if Thayer-Blum decides to sell its controlling interest. In addition, Thayer-Blum will have sufficient voting power (without the approval of Suntron’s other stockholders) to elect the entire Board of Directors of Suntron and, in general, to determine the outcome of various matters submitted to stockholders for approval, including fundamental corporate transactions. Thayer-Blum could cause us to take actions that we would not consider absent Thayer-Blum’s influence, or could delay, deter, or prevent a change of control or other business combination that might otherwise be beneficial to our other stockholders.

          In addition, Thayer-Blum could contribute its Suntron stock to a subsidiary corporation that, as a 90% stockholder, then would have the ability under Delaware law to merge with or into Suntron without the approval of the other Suntron stockholders. In the event of such a “short-form” merger, Suntron stockholders would have the right to assert appraisal/dissenters’ rights to receive cash in the amount of the fair market value of their shares in lieu of the consideration they would have otherwise received from the transaction.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     Not applicable.

ITEM 2. PROPERTIES

          The following table describes locations where our material operations are conducted as of February 28, 2007.

Year Acquired/

Approximate Size

Owned/

Location

Opened

(Square Feet)

Leased

Primary Use

Sugar Land, Texas (1)

2000

248,000

Leased

Manufacturing

Phoenix, Arizona

1999

99,000

Leased

Manufacturing/ Headquarters

Newberg, Oregon

1998

65,000

Leased

Manufacturing

Tijuana, Mexico

2005

78,000

Leased

Manufacturing

Manchester, New Hampshire

1998

23,000

Leased

Manufacturing

Lawrence, Massachusetts (2)

2001

73,000

Leased

Manufacturing

          We lease a 45,000 square foot facility in Phoenix, Arizona that is not shown in the table above since we exited it in February 2004. This lease expires in July 2007. We also lease a 49,000 square foot facility in Olathe, Kansas that is not shown in the table above since we exited it in December 2006. This lease expires in May 2007. We believe our facilities are in good condition and that our current capacity is sufficient to handle our anticipated needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

          Suntron Corporation and Suntron GCO, L.P. v. Applied Materials, Inc. In December 2004, we filed a complaint in the 268th Judicial District Court of Fort Bend County, Texas (the “Texas Complaint”) against Applied Materials, Inc. (“Applied Materials”). On February 25, 2005, we amended the Texas Complaint. The Texas Complaint sets forth our claim for reimbursement for expenses relating to raw materials, inventory and other business losses.

          Applied Materials, Inc. v. Suntron Corporation On January 14, 2005, Applied Materials filed a Complaint for Declaratory Relief in the Superior Court of the State of California, County of Santa Clara (the “California Complaint”). The California Complaint seeks to establish that the dispute between the parties be resolved in California and that Applied Materials is not liable for the damages sought in the Texas Complaint.

          In November 2006, we entered into an agreement with Applied Materials to resolve our dispute and the parties agreed to dismiss their respective lawsuits in Texas and California. Applied Materials agreed to pay us a confidential sum and to acquire certain inventory that was subject to the dispute. The parties mutually released one another of all claims. The inventory was sold for approximately its net carrying value, which resulted in a nominal impact to our operating income for the fourth quarter of 2006. Each party agreed to pay its own fees and costs associated with the litigation.

          There are no other legal proceedings to which we are a party or to which any of our properties are subject, that we expect to have a material adverse effect on our company.

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

          On December 15, 2006, the Company held its annual meeting of stockholders to vote on the election of three directors, each for a term of three years. Our stockholders voted in favor of the election of three directors, with the following votes cast:

Name		For				Withhold
Ivor J. Evans			27,155,130				187,458
Douglas P. McCormick			27,154,152				188,436
Marc T. Schölvinck			27,121,494				221,094

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Our Common Stock

          From March 2002 until September 2005, our common stock was listed on the Nasdaq National Market under the symbol “SUNN”. Since September 2005, our common stock has been listed on the Nasdaq SmallCap Market under the same symbol “SUNN”. The following table sets forth the low and high closing sale prices for our common stock for each of the fiscal quarters in 2005 and 2006:

Fiscal Quarter Ended		Low				High
April 3, 2005		$	1.96			$	3.33
July 3, 2005		$	1.00			$	2.10
October 2, 2005		$	1.04			$	1.69
December 31, 2005		$	1.05			$	1.35
April 2, 2006		$	1.16			$	2.90
July 2, 2006		$	1.44			$	2.42
October 1, 2006		$	1.11			$	1.79
December 31, 2006		$	1.01			$	1.63

          As of February 28, 2007, there were approximately 631 holders of record of our common stock. The closing sale price of our common stock on the Nasdaq SmallCap Market on February 28, 2007 was $1.21 per share.

Performance Graph

          Our common stock has been listed on the Nasdaq National Market since March 1, 2002. Accordingly, the following graph compares, for the period from March 1, 2002 to December 31, 2002 and for each of the four years in the period ended December 31, 2006, the cumulative total stockholder return on our common stock against the cumulative total return of:

	•		the Nasdaq Composite Index; and
	•		a peer group consisting of us and six other publicly traded electronic manufacturing services companies that we have selected.

          The graph assumes $100 was invested in our common stock on March 1, 2002, the date on which our common stock became listed on the Nasdaq National Market and an investment in each of the peer group and the Nasdaq Composite Index, and the reinvestment of all dividends. The companies included in the peer group are Benchmark Electronics, Inc. (NYSE: BHE), IEC Electronics Corp. (Nasdaq NM: IECE), Jabil Circuit, Inc. (NYSE: JBL), Plexus Corp. (Nasdaq NM: PLXS), Sanmina-SCI Corporation (Nasdaq NM: SANM), and Solectron Corporation (NYSE: SLR).

COMPARISON OF 58 MONTH CUMULATIVE TOTAL RETURN*
Among Suntron Corporation, The NASDAQ Composite Index
And A Peer Group

          Dividends

          Our senior credit facility and our subordinated debt agreement prohibit the payment of dividends. Suntron has not declared or paid any dividends, and we do not anticipate paying any cash dividends in the foreseeable future. We presently intend to retain any future earnings to finance expansion of our business, and to reduce indebtedness.

ITEM 6. SELECTED FINANCIAL DATA

          The selected financial data presented below as of and for each of the years in the five-year period ended December 31, 2006 are derived from our audited consolidated financial statements (including financial statements of our predecessors, EFTC Corporation and K*TEC Electronics Holding Corporation). The consolidated financial statements as of December 31, 2005 and 2006, and for each of the years in the three-year period ended December 31, 2006, and the report of independent registered public accounting firm thereon, are included elsewhere in this Annual Report on Form 10-K.

		Year Ended December 31,
		2002				2003				2004				2005				2006
		(In thousands, except per share amounts)
Statement of Operations Data:
Net sales		$	370,797			$	313,231			$	475,388			$	328,730			$	320,786
Cost of goods sold			398,767				321,599				449,516				311,894				302,673
Gross profit (loss)			(27,970	)			(8,368	)			25,872				16,836				18,113
Operating Expenses:
Selling, general, and administrative expenses			27,234				22,648				24,361				22,758				22,815
Severance, retention, and lease exit costs			169				124				1,085				869				619
Reorganization transaction costs			312				—				—				—				—
Related party management and consulting fees			835				750				750				750				750
Impairment of long-lived assets			21				—				—				—				—
Operating loss			(56,541	)			(31,890	)			(324	)			(7,541	)			(6,071	)
Interest expense			(2,568	)			(2,696	)			(3,982	)			(4,703	)			(5,936	)
Reduction in interest due to settlement of dispute			1,029				—				—				—				—
Gain (loss) on sale of assets, net			(166	)			50				(11	)			695				25
Other, net			835				248				(140	)			207				103
Loss before income taxes and cumulative effect of change in accounting principle			(57,411	)			(34,288	)			(4,457	)			(11,342	)			(11,879	)
Income tax benefit			276				—				—				—				—
Loss before cumulative effect of change in accounting principle			(57,135	)			(34,288	)			(4,457	)			(11,342	)			(11,879	)
Cumulative effect of change in accounting principle			(69,015	)			—				—				—				—
Net loss		$	(126,150	)		$	(34,288	)		$	(4,457	)		$	(11,342	)		$	(11,879	)
Net loss per share — Basic and Diluted:
Loss before cumulative effect of change in accounting principle		$	(2.08	)		$	(1.25	)		$	(0.16	)		$	(0.41	)		$	(0.43	)
Cumulative effect of change in accounting principle			(2.52	)			—				—				—				—
Net loss per share — Basic and Diluted		$	(4.60	)		$	(1.25	)		$	(0.16	)		$	(0.41	)		$	(0.43	)
Weighted average shares outstanding - Basic and Diluted			27,409				27,409				27,413				27,415				27,525

		Year Ended December 31,
		2002				2003				2004				2005				2006
		(In thousands)
Other Operating Data:
Computation of EBITDA (a)(b)
Loss before cumulative effect of change in accounting principle		$	(57,135	)		$	(34,288	)		$	(4,457	)		$	(11,342	)		$	(11,879	)
Income tax benefit			(276	)			—				—				—				—
Interest expense			2,568				2,696				3,982				4,703				5,936
Reduction in interest under settlement			(1,029	)			—				—				—				—
Depreciation and amortization expense			21,987				22,133				11,199				7,809				4,597
EBITDA (a)(b)		$	(33,885	)		$	(9,459	)		$	10,724			$	1,170			$	(1,346	)
Cash Flow Data:
Cash provided by (used in):
Operating activities		$	22,779			$	(19,768	)		$	(22,774	)		$	16,500			$	1,089
Investing activities			(7,779	)			(2,805	)			(4,521	)			(59	)			16,342
Financing activities			(27,551	)			20,978				27,283				(16,396	)			(17,444	)

		December 31,
		2002				2003				2004				2005				2006
		(In thousands)
Balance Sheet Data:
Total assets		$	172,216			$	154,646			$	180,109			$	155,349			$	116,913
Total debt			10,856				34,011				59,128				47,000				31,113
Total stockholders’ equity			104,011				69,949				65,814				54,568				43,552
Total invested capital (c)			114,867				103,960				124,942				101,568				74,665
Liquidity Data:
Working capital (d)		$	50,372			$	49,378			$	17,153			$	33,869			$	37,773

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

          The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes, and the other financial information included in this report. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those results anticipated in these forward-looking statements as a result of certain factors, including those set forth in Part 1, Item 1A, “Risk Factors” and elsewhere in this report.

Overview

          Our net sales for the year ended December 31, 2006 totaled $320.8 million compared to $328.7 million for the year ended December 31, 2005. Even though our net sales declined in 2006, our gross profit improved by $1.3 million to $18.1 million for 2006. Similarly, our operating loss improved from $7.5 million for 2005 to $6.1 million for 2006. Significant restructuring activities took place over the past two years which resulted in restructuring costs of $2.1 million for 2005 and $3.5 million for 2006.

          Since the first quarter of 2006, we completed the following actions resulting in a significant reduction in our existing debt and we believe we made significant progress in our ongoing efforts to “right-size” our business and reduce fixed costs:

	•		On March 30, 2006, we sold our building and land in Sugar Land, Texas, which generated net proceeds of approximately $16.7 million that we used to repay outstanding debt. On April 11, 2006, the sale of an adjacent land parcel was completed, which generated additional net proceeds of approximately $1.4 million. We leased back approximately half of the building under a seven-year lease to continue our manufacturing operations at that location. In addition to the benefit from eliminating future interest cost due to the repayment of debt, we also eliminated fixed overhead costs for real estate taxes, insurance and utilities related to the portion of the building that was not leased back.
	•		On March 30, 2006, we entered into a new three-year senior credit facility with US Bank that permits borrowings of up to $50.0 million which matures in March 2009. As of December 31, 2006, the principal balance outstanding was approximately $19.8 million and we had unused borrowing availability of approximately $18.4 million.
	•		On March 30, 2006, we borrowed $10.0 million of subordinated debt from an affiliate of our majority stockholder. In addition, the affiliate agreed to make additional subordinated loans of up to $5.0 million if our operating performance results in a failure to comply with the fixed charge coverage (“FCC”) ratio covenant in our new credit facility. The outstanding principal balance bears interest at an effective rate of 16.9% with interest payable in kind, which results in accrued interest being added to the principal balance each quarter. This debt matures in May 2009 and if additional subordinated loans are required to comply with the FCC ratio, the interest rate will not exceed 18.0%.
	•		During 2006, we further improved plant capacity utilization and the elimination of fixed overhead costs through the closure of business units in Lawrence, Massachusetts and Olathe, Kansas. On March 29, 2007, we amended our lease in Lawrence, Massachusetts whereby future rental payments of approximately $2.1 million were eliminated in exchange for a cash payment of approximately $1.1 million.
	•		In November 2006, we executed an agreement with Applied Materials that resulted in the termination of litigation that was initiated in 2004. In 2005 and 2006, we incurred substantial costs related to this litigation and the settlement resulted in the elimination of these costs beginning in December 2006.
	•		In February 2007, we sold our business unit located in Garner, Iowa for a selling price of approximately $4.8 million, resulting in a gain on sale of approximately $0.5 million.

          We believe the financing and consolidation actions taken in 2006 will provide us with adequate liquidity and a more efficient cost structure to carry out our planned activities for 2007. In addition, we are continuing to explore opportunities to further improve the utilization of our assets and we are evaluating other actions that will reduce costs and drive sustainable improvement in our future financial performance. Though our primary focus for 2006 was on the right-sizing of our U.S. manufacturing footprint, our sales efforts continue to result in new customer wins. The nature of our low volume/high mix model requires a longer ramp-

18

up of production and, therefore, any significant sales from new customers added in 2006 should begin to be realized during 2007. As we execute our business plan for 2007, our focus will be on profitable growth and working capital management, while maintaining quality customer service.

          Following is an overview of the information included under each section of Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Caption		Overview
Information About Our Business		Under this section we provide information to help understand our industry conditions and information unique to our business and customer relationships.
Critical Accounting Policies and Estimates		This section provides details about some of the critical estimates and accounting policies that must be applied in the preparation of our financial statements. It is important to understand the nature of key uncertainties and estimates that may not be apparent solely from reading our financial statements and the related footnotes.
Overview of Statement of Operations		This section includes a description of the types of transactions that are included in each significant category included in our statement of operations.
Results of Operations		This section includes a discussion and analysis of our operating results for 2005 compared to 2006. This section also contains a similar discussion and analysis of our operating results for 2004 compared to 2005.
Liquidity and Capital Resources		There are several sub-captions under this section, including a discussion of our cash flows for 2006 and other liquidity measures that we consider important to our business. Under the sub-caption for “Contractual Obligations”, we discuss on- and off-balance-sheet obligations and the expected impact on our liquidity. Under the sub-caption for “Capital Resources”, we have included a discussion of our debt agreements, including details about interest rates charged, calculation of the borrowing base and unused availability, compliance with the financial covenant in our debt agreement, and the impact of recent actions to sell assets and enter into new debt agreements.

Information About Our Business

          Suntron delivers complete manufacturing services and solutions to support the entire life cycle of complex products in the industrial, semiconductor capital equipment, aerospace and defense, networking and telecommunications, and medical equipment market sectors of the electronic manufacturing services (“EMS”) industry. We provide design and engineering services, quick-turn prototype, materials management, cable and harness assembly, printed circuit board assembly and testing, electronic interconnect assemblies, subassemblies, and full systems integration (known as box-build), after-market repair and warranty services. We believe our competitive niche, “low volume, high mix and complex system integration”, is a direct result of our ability to provide unique solutions tailored to match each of our customer’s specific requirements, while meeting the highest quality standards in the industry.

          Our largest single expenditure is for the purchase of electronic components and our expertise in electronics manufacturing techniques is critical to our ability to provide competitive, quality services. However, in order to fully comprehend our business, it is also important to understand that our customers are engaged in aerospace and defense, industrial, semiconductor capital equipment, networking and telecommunications, medical equipment products, and many other industries. While our ability to compete with other companies in the EMS industry is important to our long-term success, short-term fluctuations in the demand for our manufacturing services are primarily affected by the economic conditions in the end-market sectors served by our customers. Since more than half of our customers are currently concentrated in three market sectors (aerospace and defense, industrial, and semiconductor capital equipment), the quarterly fluctuations in our net sales can be extremely volatile when these sectors are experiencing either rapid growth or contraction.

     Many of our customers are OEMs that have designed their own products. Our customers request proposals that include key terms such as quality, delivery, and the price to purchase the materials and perform the manufacturing services to make one or more components or assemblies. Generally, the component or assembly that we manufacture is delivered to the customer where it is then integrated into their final product. We determine prices for new business with our customers by obtaining raw material quotes from our suppliers and then estimating the amount of labor and overhead that will be required to make the products.

     Before we begin a customer relationship, we typically enter into arrangements that are intended to protect us in case a customer cancels an order after we purchase the raw materials to fill that order. In these circumstances, the customer is generally required to purchase the materials or reimburse us if we incur a loss from liquidating the raw materials.

     The EMS industry is extremely dynamic and our customers make frequent changes to their orders. The magnitude and frequency of these changes make it difficult to predict revenues beyond the next quarter, and even relatively short-term forecasts may prove inaccurate depending on changes in economic, political, and military factors, as well as unexpected customer requests to delay shipments near the end of our fiscal quarters. These changes in customer orders also cause substantial difficulties in managing inventories, which often leads to excess inventories and the need to recognize losses on inventories. However, from time to time, we may also have difficulties obtaining certain electronic components that are in short supply. In addition, our inventories consist of over 150,000 different parts and many of these parts have limited alternative uses or markets beyond the products that we manufacture for our customers. When we liquidate excess materials through an inventory broker or auction, we often realize less than the original cost of the materials, and in some cases we determine that there is no market for the excess materials.

     The most common reasons we incur losses related to inventories are due to purchasing more materials than are necessary to meet a customer’s requirements or failing to act promptly to minimize losses once the customer communicates a cancellation. Occasionally, it is not clear what action caused an inventory loss and there is a shared responsibility whereby our customers agree to negotiate a settlement with us. In some cases, our customers may deny responsibility for excess inventories despite the existence of persuasive evidence that the customer was at fault; in these cases we must weigh all alternatives to resolve the dispute, including the possibility of litigation or arbitration. Accordingly, management continually evaluates inventory on-hand, forecasted demand, contractual protections, and net realizable values in order to determine whether an adjustment to the carrying amount of inventory is necessary. When the relationship with a customer terminates, we tend to be more vulnerable to inventory losses because the customer may be reluctant to accept responsibility for the remaining inventory if a product is at the end of its life cycle. We can also incur inventory losses if a customer becomes insolvent and the materials do not have alternative uses or markets into which we can sell them.

Critical Accounting Policies and Estimates

     The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, property, plant and equipment, intangible assets, income taxes, warranty obligations, restructuring-related obligations, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We cannot assure you that actual results will not differ from those estimates. We believe the following critical accounting policies affect our most significant judgments and estimates used in the preparation of our consolidated financial statements.

     Revenue Recognition. We recognize revenue from manufacturing services and product sales upon shipment and transfer of title of the manufactured product, whereby our customers assume the risks and rewards of ownership of the product. Occasionally, we enter into arrangements where services are bundled and

completed in multiple stages. In these cases, we follow the guidance in Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, to determine the amount of revenue allocable to each deliverable.

     Generally, there are no formal customer acceptance requirements or further obligations related to manufacturing services after shipment; however, if such requirements or obligations exist, then revenue is recognized at the point when the requirements are completed and the obligations fulfilled. If uncertainties exist about whether the customer has assumed the risks and rewards of ownership or if continuing performance obligations exist, we expand our written communications with the customer to ensure that our understanding of the arrangement is consistent with that of the customer before revenue is recognized. Revenue from design, engineering, and other services is recognized as the services are performed.

     Write-Downs for Obsolete and Slow-Moving Inventories. Our judgments about excess and obsolete inventories are especially difficult because (i) hundreds of different components may be associated with a single product we manufacture for a customer, (ii) we make numerous products for most of our customers, (iii) our customers are engaged in diverse industries, (iv) a significant amount of the parts we purchase are unique to a particular customer’s orders and there are limited alternative markets if that customer’s order is canceled, and (v) our customers experience dynamic business environments affected by a wide variety of economic, political, and regulatory factors. This complex environment results in positive and negative events that can change daily and which affect judgments about future demand for our manufacturing services and the amounts we can realize when it is not possible to liquidate inventories through production of finished products.

     We frequently review customer demand to determine if we have excess raw materials that will not be consumed in production. In determining demand we consider firm purchase orders and forecasts of demand submitted by our customers. If we determine that excess inventories exist and that the customer is not contractually obligated for the excess inventories, we make judgments about whether unforecasted demand for those materials is likely to occur or the amount we would likely realize in the sale of this material through a broker or auction. If we determine that future demand from the customer is unlikely, we write down our inventories to the extent that the cost of the inventory exceeds the estimated market value. If we record a write-down to reduce the cost of inventories to market, such write-down is not subsequently reversed.

     If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required in future periods. Likewise, if we underestimate contractual recoveries from customers or future demand, recognition of additional gross profit may be reported as the related goods are sold. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or the outcome of customer negotiations with respect to the enforcement of contractual provisions could have a significant impact on the value of our inventory and our reported operating results.

     Allowance for Doubtful Accounts Receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments, as well as to provide for adjustments related to pricing and quantity differences. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required. When our customers experience difficulty in paying us, we estimate how much of our receivable will not be collected. These judgments are often difficult because the customer may not divulge complete and accurate information. Even if we are fully aware of the customer’s financial condition it can be difficult to estimate the expected recovery and there is often a wide range of potential outcomes. Sometimes we collect receivables that we reserved for in prior periods and these recoveries are reflected as a credit to operations in the periods in which the recovery occurs. Over the past few years, we have diversified our concentration of business with our major customers and have added smaller customers that generally have higher credit risk. Accordingly, we may experience higher bad debt losses in the future.

     Restructuring Activities and Asset Impairments. When we undertake restructuring activities and decide to close a plant that we occupy under a non-cancelable operating lease, we are required to estimate how

long it will take to locate a new tenant to sublease the facility and to estimate the rate that we are likely to receive when a tenant is located. Accordingly, we will incur additional lease exit charges in future periods if our estimates of the rate or timing of sublease payments turns out to be less favorable than our current expectations. We also consider the estimated cost of building improvements, brokerage commissions, and any other costs we believe will be incurred in connection with the subleasing process. The precise outcome of most of these factors is difficult to predict. We review our estimates at least quarterly, including consultation with our commercial real estate advisors to assess changes in market conditions, feedback from parties that have expressed interest, and other information that we believe is relevant to most accurately reflect the expected outcome of obtaining a subtenant to lease the facility.

     When we undergo changes in our business, including the closure or relocation of facilities, we often have equipment and other long-lived assets that are no longer needed in continuing operations. When this occurs, we are required to estimate future cash flows and if such undiscounted cash flows are less than the carrying value of the assets (or asset group, as applicable), we recognize impairment charges to reduce the carrying value to estimated fair value. The determination of future cash flows and fair value tend to be highly subjective estimates. When assets are held for sale and the actual market conditions deteriorate, or are less favorable than those projected by management, additional impairment charges may be required in subsequent periods.

     For a detailed discussion on the application of these and other accounting policies, see Note 1 in our audited consolidated financial statements for the year ended December 31, 2006, beginning on page F-9 of this Annual Report on Form 10-K.

Overview of Statement of Operations

     Net sales are recognized when title is transferred to our customers, which generally occurs upon shipment from our facilities. Net sales from design, engineering, and other services are less than 10% of our total net sales and are generally recognized as the services are performed. Sales are recorded net of customer discounts and credits taken or expected to be taken.

     Cost of goods sold includes materials, labor, and overhead expenses incurred in the manufacture of our products. Cost of goods sold also includes charges related to manufacturing operations for lease exit costs, severance and retention costs, impairment of long-lived assets, and obsolete and slow moving inventories. Many factors affect our gross profit, including fixed costs associated with plant and equipment capacity utilization, manufacturing efficiencies, changes in product mix, and production volume.

     Selling, general, and administrative expenses primarily include the salaries for executive, finance, accounting, and human resources personnel; salaries and commissions paid to our internal sales force and external sales representatives and marketing costs; insurance expense; depreciation expense related to assets not used in manufacturing activities; bad debt charges and recoveries; professional fees for auditing and legal assistance; and general corporate expenses.

     Severance, retention, and lease exit costs primarily relate to costs associated with the closure of administrative facilities and reductions in our administrative workforce. Severance, retention, and lease exit costs that relate to manufacturing activities are included in cost of goods sold.

     Related party management and consulting fees consist of fees paid to affiliates of our majority stockholder. The services provided under these arrangements consist of management fees related to corporate development activities and consulting services for strategic and operational matters

     Interest expense relates to our senior credit facility, subordinated debt payable to an affiliate of our majority stockholder, and other debt obligations. Interest expense also includes the amortization of debt issuance costs and unused commitment fees that are charged for the portion of our credit facility that is not used from time to time.

     Gain (loss) on sale of assets results from the sale of property, plant, and equipment for net proceeds that are more (less) than the net carrying value of such assets.

Results of Operations

          Our results of operations are affected by several factors, primarily the level and timing of customer orders (especially orders from our major customers). The level and timing of orders placed by a customer vary due to the customer’s attempts to balance its inventory, changes in the customer’s manufacturing strategy, and variations in demand for its products due to, among other things, product life cycles, competitive conditions, and general economic conditions. In the past, changes in orders from customers have had a significant effect on our results of operations. The following table sets forth certain operating data as a percentage of net sales for the years ended December 31, 2004, 2005, and 2006.

		2004				2005				2006
Net sales			100.0	%			100.0	%			100.0	%
Cost of goods sold			94.6	%			94.9	%			94.4	%
Gross profit			5.4	%			5.1	%			5.6	%
Operating expenses:
Selling, general, and administrative expenses			5.1	%			6.9	%			7.1	%
Severance, retention, and lease exit costs			0.2	%			0.3	%			0.2	%
Related party management and consulting fees			0.2	%			0.2	%			0.2	%
Operating loss			(0.1	)%			(2.3	)%			(1.9	)%

Comparison of Years Ended December 31, 2005 and 2006

          Net Sales. Net sales decreased $7.9 million, or 2.4%, from $328.7 million for 2005 to $320.8 million for 2006. The decrease in net sales for 2006 was primarily attributable to decreases of $32.5 million in our net sales to customers in the networking and telecommunication sector and $32.1 million in net sales to customers in the aerospace and defense sector, which were partially offset by increases of $34.0 million in net sales to customers in the industrial sector, and $24.9 million in net sales tcustomers in the semiconductor capital equipment sector.

          Net sales for 2005 and 2006 include approximately $11.7 million and $16.4 million, respectively, of excess inventories that were sold back to customers pursuant to provisions of our customer agreements.

          Net sales to customers in our industrial sector increased from 29% of net sales for 2005 to 40% for 2006. Net sales to customers in our semiconductor capital equipment sector increased from 22% of net sales for 2005 to 31% for 2006. Net sales to customers in our aerospace and defense sector decreased from 30% of net sales for 2005 to 20% for 2006. Net sales for our top five customers totaled 52% for both 2005 and 2006. Honeywell, a major customer in our aerospace and defense sector, accounted for 25% of our net sales for 2005 and 16% for 2006.

          In 2007, one of our top five customers, in the industrial market sector, has transitioned from a turnkey model (where we procure the required material components) to a consignment model (where the customer procures substantially all of the required material components). Therefore, we expect 2007 net sales for this customer will no longer include the cost associated with the procured material.

     Gross Profit. Our gross profit increased $1.3 million from $16.8 in 2005 to $18.1 million in 2006. Similarly, gross profit as a percentage of net sales increased from 5.1% in 2005 to 5.6% in 2006. The increase in gross profit in 2006 is primarily attributable to the realization of the benefits from restructuring and cost-cutting actions initiated in 2005 and 2006.

          We incurred restructuring costs of $2.9 million in 2006 related to manufacturing activities, including (i) $1.1 million for severance and retention costs primarily related to the consolidation of our Northeast and Midwest manufacturing business units, (ii) $0.7 million for impairment of leasehold improvements related to our Northeast business unit, (iii) $0.8 million for expenses associated with the

23

relocation of inventory and equipment to different facilities, employee relocation and training, and (iv) $0.2 million for lease exit costs associated with the closure of our Midwest manufacturing business unit in Olathe, Kansas. In 2005, we incurred restructuring costs of $1.2 million, consisting of $1.0 million for severance costs related to reductions in the manufacturing workforce and the termination of an executive officer, and $0.2 million for lease exit costs associated with the early termination of our Austin warehouse lease. Early in 2007, we expect to continue to ramp production for certain customers that transitioned from our Olathe, Kansas facility that was closed during the fourth quarter of 2006. We may experience production inefficiencies related to hiring and training that could result in reduced profitability at the affected manufacturing locations in 2007.

          During 2006 a significant amount of equipment became fully depreciated, although many of these assets continue to be in service. On March 30, 2006, we completed the sale of our building located in Sugar Land, Texas. Accordingly, depreciation expense for 2006 declined by approximately $3.1 million compared to 2005. However, the 2006 decrease in depreciation expense was partially offset by rent charges of approximately $1.2 million related to the leaseback of the Sugar Land facility.

     Inventory write-downs decreased $2.8 million from $5.9 million, or 1.8% of net sales, in 2005 to $3.1 million, or 1.0% of net sales, in 2006. In both 2005 and 2006, write-downs of excess inventories were related to a variety of customers for which we do not expect to realize the carrying value through production or other means of liquidation

          Selling, General, and Administrative Expenses. Selling, general, and administrative expenses (“SG & A”) were $22.8 million in both 2005 and 2006. However, SG & A as a percentage of net sales increased from 6.9% in 2005 to 7.1% in 2006. For 2006, our legal fees increased by $1.7 million compared to 2005, primarily due to the escalation in litigation against Applied Materials which ultimately resulted in a settlement in November 2006. For 2006, stock-based compensation increased by $0.8 million compared to 2005 due to the adoption of FAS 123R which required the fair value of stock options to be charged to expense beginning in January 2006. These increased expenses in 2006 compared to 2005 were offset by decreases in salaries and benefits of $1.0 million, a decrease in facilities and information technology costs of $0.5 million, and a decrease in general corporate expenses of $1.0 million.

          In December 2004, we initiated litigation in Fort Bend County, Texas, seeking monetary damages against Applied Materials for expenses relating to raw materials, inventory, and other business losses. On January 14, 2005, Applied Materials filed a Complaint for Declaratory Relief in the Superior Court of the State of California. In November 2006, Applied Materials and the Company resolved their disputes and agreed to dismiss their respective lawsuits in Texas and California. Applied Materials agreed to pay us a confidential sum and to acquire certain inventory that was subject to the dispute. The parties mutually released one another of all claims. The inventory was sold for approximately its net carrying value, which resulted in a nominal impact to our operating income for the fourth quarter of 2006. Each party agreed to pay their own fees and costs associated with the litigation. Additionally, we will avoid the ongoing expense that would have been necessary to continue the litigation, which amounted to approximately $3.1 million for 2006.

          Severance, Retention, and Lease Exit Costs. Severance, retention, and lease exit costs amounted to $0.9 million and $0.6 million for 2005 and 2006, respectively. In 2005 and 2006, we incurred lease exit charges of $0.3 million and $0.2 million, respectively, due to revised assumptions about subleasing our former Phoenix, Arizona headquarters location. In 2006, we also incurred severance, retention, and relocation costs of approximately $0.4 million primarily related to the consolidation of our Northeast and Midwest business units and other reductions in our administrative workforce. In 2005, we incurred severance costs of $0.5 million associated with the termination of an executive officer and other reductions in our administrative workforce.

          Interest Expense. Interest expense increased approximately $1.2 million, from $4.7 million in 2005 to $5.9 million in 2006, primarily due to a charge of approximately $1.4 million to eliminate the unamortized debt issuance costs associated with the early termination of our previous credit agreement. The increase in interest expense was also attributable to higher interest rates, which was partially offset by a decrease in our weighted average borrowings. Our weighted average interest rate increased from 7.0% in 2005 to 10.9% in 2006, primarily reflecting increases in short term interest rates and the 16.8% effective interest rate associated with our $10.0 million subordinated loan from an affiliate of the Company’s majority stockholder. Our weighted average borrowings decreased from $54.9 million for 2005 to $35.2 million for 2006.

          Gain (Loss) on Sale of Assets. During 2005, we recognized a gain on sale of assets of $0.7 million, primarily related to the sale of a 7.5 acre parcel of land and certain equipment used for plastic injection molding and sheet metal fabrication. The 7.5 acre parcel of land was sold for $0.8 million and a $0.2 million gain was recognized. The plastic injection molding equipment was sold for $0.2 million and resulted in a gain on the sale of $0.2 million; and the sheet metal fabrication equipment was sold for $1.8 million and resulted in a gain on the sale of $0.2 million.

Comparison of Years Ended December 31, 2004 and 2005

          Net Sales. Net sales decreased $146.7 million, or 30.9%, from $475.4 million for 2004 to $328.7 million for 2005. The decrease in 2005 net sales was primarily attributable to a decrease of $119.5 million in our net sales to Applied Materials, formerly a major customer engaged in the semiconductor capital equipment market sector. The decrease in net sales for 2005 was also due to a $23.2 million reduction in net sales to customers in the industrial market sector.

          Net sales for 2004 and 2005 include approximately $9.2 million and $11.7 million, respectively, of excess inventories that were sold back to customers pursuant to provisions of our customer agreements.

          Net sales to customers in our aerospace and defense sector increased from 24% of net sales for 2004 to 30% for 2005. Net sales to customers in our industrial sector increased from 25% of net sales for 2004 to 29% for 2005. Net sales to customers in our semiconductor capital equipment sector decreased from 39% of net sales for 2004 to 22% for 2006. Net sales for our top five customers totaled 63% for 2004 and 52% for 2005. For 2004, Honeywell and Applied Materials accounted for 21% and 25%, respectively, of our net sales. For 2005, Honeywell accounted for 25% of our net sales.

     Gross Profit. Our gross profit was $16.8 million for 2005, a decrease of $9.1 million from $25.9 million in 2004. Gross profit as a percentage of net sales decreased from 5.4% in 2004 to 5.1% in 2005. The decrease in gross profit in 2005 was primarily attributable to the reduction in net sales discussed above combined with our inability to reduce fixed overhead costs in proportion to the decline in net sales. However, we eliminated fixed overhead costs throughout 2005 which contributed to an improvement in our gross profit percentage from 0.5% for the first quarter of 2005 to 8.3% for the fourth quarter of 2005.

          In response to lower sales forecasts compared to the prior year, management took significant restructuring and cost-cutting actions in 2005 to reduce operating costs. In 2005, we incurred restructuring costs of $1.2 million, consisting of $1.0 million for severance costs related to reductions in the manufacturing workforce and the termination of an executive officer, and $0.2 million for lease exit costs associated with the early termination of our Austin warehouse lease. This warehouse was dedicated to our business with Applied Materials and was no longer necessary to support operations after our business relationship terminated. For 2004, restructuring costs related to our manufacturing activities were $0.3 million.

          During 2005 a significant amount of equipment became fully depreciated, although many of these assets are still in service. Accordingly, depreciation expense related to manufacturing activities declined by approximately $3.3 million in 2005 compared to 2004.

          Inventory write-downs increased $2.2 million from $3.7 million, or 0.8% of net sales, in 2004 to $5.9 million, or 1.8% of net sales, in 2005. The increase in inventory write-downs in 2005 was attributable to several unrelated factors including the renegotiation of a major customer agreement that increases our responsibility for excess and obsolete inventories in exchange for higher selling prices, and higher excess inventory losses related to customers that are either experiencing financial difficulties or have terminated our business relationship. In both 2004 and 2005, write-downs of excess inventories are related to a variety of customers for which we do not expect to realize the carrying value through production or other means of liquidation.

          Selling, General, and Administrative Expenses. Selling, general, and administrative expenses (“SG & A”) were $22.8 million in 2005, a decrease of $1.6 million, or 6.6%, from $24.4 million in 2004. The decrease in SG&A was primarily attributable to decreases in salaries and benefits of $3.4 million, partially offset by an increase in bad debt expense of $0.7 million and an increase in legal and professional fees of $1.2 million, primarily related to our lawsuit against Applied Materials.

          Severance, Retention, and Lease Exit Costs. Severance, retention, and lease exit costs amounted to $0.9 million for 2005, primarily due to severance costs of $0.5 million associated with the termination of an executive officer and other reductions in the administrative workforce. In 2005, we also incurred a lease exit charge of $0.3 million primarily due to a delay in the expected date to obtain a subtenant for our former Phoenix headquarters location. Severance, retention, and lease exit costs amounted to $1.1 million for 2004, primarily due to a lease exit charge of $0.6 million due to completion of the move of our corporate headquarters into an existing leased facility in Phoenix. In 2004, we also incurred severance costs of approximately $0.4 million, primarily due to the termination of executive officers.

          Interest Expense. Interest expense increased approximately $0.7 million, or 18.1%, from $4.0 million in 2004 to $4.7 million in 2005. The increase in interest expense in 2005 was primarily attributable to higher interest rates, partially offset by a decrease in our weighted average borrowings. Our weighted average borrowings decreased from $55.4 million for 2004 to $54.9 million for 2005. Our weighted average interest rate increased from 5.2% for 2004 to 7.0% for 2005.

          Gain (Loss) on Sale of Assets. During 2005, we recognized a gain on sale of assets of $0.7 million, primarily related to the sale of a 7.5 acre parcel of land and certain equipment used for plastic injection molding and sheet metal fabrication. The 7.5 acre parcel of land was sold for $0.8 million and a $0.2 million gain was recognized. The plastic injection molding equipment was sold for $0.2 million and resulted in a gain on the sale of $0.2 million; and the sheet metal fabrication equipment was sold for $1.8 million and resulted in a gain on the sale of $0.2 million.

          Unrealized Loss on Marketable Securities. During the third quarter of 2004, a former customer emerged from bankruptcy protection and we received marketable equity securities that were traded on the Nasdaq SmallCap market in exchange for our fully reserved receivable. These securities were classified as “trading securities” which results in the recognition of unrealized gains and losses in our statements of operations. The trading value of these securities declined from $0.8 million when the bankruptcy plan was confirmed in July 2004 to $0.4 million by the end of 2004, which resulted in an unrealized loss of $0.4 million for 2004. In March 2005, we sold these securities and recorded cash proceeds of $0.3 million and an additional unrealized loss of $0.1 million.

Liquidity and Capital Resources

          Cash Flows from Operating Activities. Net cash provided by operating activities in 2006 was $1.1 million, compared with net cash provided by operating activities of $16.5 million in 2005. The difference between our net loss of $11.9 million in 2006 and $1.1 million of net cash provided by operating activities was primarily attributable to a decrease in trade receivables of $10.6 million, a decrease in inventories of $5.9 million, $4.6 million of depreciation and amortization, and $2.1 million of amortization of debt issuance costs, offset by a decrease in accounts payable of $8.8 million and a decrease in accrued compensation and benefits of $1.4 million. During 2005, operating activities provided $16.5 million of cash, primarily due to lower inventories associated with a significant decrease in our net sales compared to the fourth quarter of 2004 due to the loss of business with Applied Materials.

          Over the past two years, cash flows from operating activities have been negatively impacted by costs associated with restructuring activities and our lawsuit against Applied Materials, which amounted to an aggregate of approximately $3.8 million for 2005 and $6.1 million for 2006.

          Days sales outstanding (based on net sales for the year and net trade receivables outstanding at the end of the year) improved to 46 days for 2006, compared to 57 days for 2005.

          Inventories decreased 9.6% to $56.0 million at December 31, 2006, compared to $62.0 million at December 31, 2005. For 2006, inventory turns (cost of goods sold excluding restructuring charges of $2.9 million for 2006 and $1.2 million for 2005, divided by year-end inventories) improved to 5.4 times per year compared to 5.0 times per year for 2005. The termination of our business relationship with Applied Materials was primarily responsible for the low inventory turns for 2005, since we only sold a nominal portion of the inventories that were subject to litigation until the November 2006 settlement.

          Cash Flows from Investing Activities. Net cash provided by investing activities for 2006 was $16.3 million compared with net cash used in investing activities of less than $0.1 million for 2005. Investing cash flows for 2006 included $18.1 million of net proceeds received from the sale of our building and land in Sugar Land, Texas. In arriving at the net cash proceeds, the net selling price of $19.6 million was reduced by a $1.5 million cash deposit and $0.1 million for accrued property taxes that were retained by the purchaser. We leased back approximately 50% of the building for a period of seven years. The gain on the sale of $1.0 million was deferred and is being treated as a reduction of rent expense over the seven-year term of the lease agreement. Cash inflows for investing activities in 2006 also included $0.6 million of proceeds from the sale and leaseback of certain manufacturing equipment. Our cash inflows for investing activities were partially offset by capital expenditures of $2.3 million, primarily for manufacturing equipment.

          The cash deposit of $1.5 million discussed above was withheld from the building sale proceeds to secure the Company’s obligations under the seven-year operating lease. This lease also required the issuance of letters of credit for $1.5 million and $0.5 million. The $1.5 million cash deposit is required to be refunded and the letters of credit are required to be canceled upon expiration of the primary lease term. However, if we achieve any one of three quarterly financial tests beginning in the second quarter of 2007, the cash deposit is refundable at the rate of $0.2 million each quarter that one of the tests is achieved until the cash deposit (plus interest) is fully refunded. At such time, the $1.5 million letter of credit shall be reduced by $0.2 million for each succeeding quarter that one of the financial tests is achieved.

          Investing cash flows for 2005 totaled $3.4 million of cash outflows, consisting of the payment of $1.4 million of contingent consideration related to the 2004 earn-out associated with the acquisition of Trilogic Systems and capital expenditures of $2.0 million, primarily for manufacturing equipment and leasehold improvements for our facility in Mexico. Our cash outflows for investing activities were offset by $3.4 million of proceeds received from the sale of a 7.5 acre parcel of land, the sale of equipment used for plastic injection molding and sheet metal fabrication and the sale-leaseback of certain manufacturing equipment.

          Cash Flows from Financing Activities. Net cash used in financing activities for 2006 was $17.4 million, compared with net cash used in financing activities of $16.4 million for 2005. Financing cash flows for 2006 reflect the net repayment of debt of $16.2 million, payment of $1.0 million of debt issuance costs associated with the new senior credit agreement with US Bank and the subordinated loan from an affiliate of our majority stockholder, and a decrease in outstanding checks in excess of cash balances of $0.2 million.

          Financing cash flows for 2005 reflect the net repayment of debt of $12.6 million, payment of $0.6 million of debt issuance costs, and a decrease in outstanding checks in excess of cash balances of $3.3 million.

          Contractual Obligations. The following table summarizes our contractual obligations as of December 31, 2006:

		Debt				Operating				Purchase
		Agreements(1)				Leases (2)				Obligations (3)				Other (4)				Total
		(Dollars in Table are in Millions)
Year ending December 31:
2007		$	21.8			$	5.1			$	35.5			$	0.3			$	62.7
2008			—				3.8				—				0.2				4.0
2009			11.4				3.3				—				—				14.7
2010			—				2.9				—				—				2.9
2011			—				2.3				—				—				2.3
After 2011			—				2.3				—				—				2.3
		$	33.2			$	19.7			$	35.5			$	0.5			$	88.9

     Effective internal controls are necessary for us to provide reliable financial reports. We have commenced documentation of our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting. Effective December 31, 2007, we will be required to provide a report that contains an assessment by management of the effectiveness of our internal control over financial reporting. Effective December 31, 2008, our independent registered public accounting firm will be required to attest to and report on the effectiveness of our internal control over financial reporting. In order to become fully compliant with the requirements of Section 404, we estimate that we will need to incur between $2.0 million and $3.0 million for professional and other fees in 2007 compared to a nominal amount of such costs that were incurred in 2005 and 2006.

          Capital Resources. Our working capital at December 31, 2006 totaled $37.8 million compared to $33.9 million at December 31, 2005. As discussed in detail below, during 2006 we completed several major transactions to reduce our indebtedness, improve borrowing availability, reduce fixed overhead costs and improve plant capacity utilization.

Sale of Sugar Land Real Estate. In January 2006, we obtained approval from our board of directors and lenders to enter into two separate agreements to sell our building and adjoining land in Sugar Land, Texas. We were able to structure the sale of the building with a concurrent agreement to leaseback approximately 50% of the building, which permitted our current business operations in Sugar Land to continue without interruption. The sale of the building was completed on March 30, 2006 and resulted in a net selling price of $18.2 million. The transaction for the sale of an adjacent land parcel closed on April 11, 2006, for an additional net selling price of $1.4 million. These transactions resulted in a gain of approximately $1.0 million.

Concurrent with the building sale, we leased back approximately 50% of the building for a period of seven years. The annual rental payments under this lease are approximately $1.5 million. The gain on the sale was deferred and is being accounted for as a reduction of rent expense over the seven-year term of the lease agreement. A cash deposit of $1.5 million was withheld from the building sale proceeds to secure our obligations under the lease. The lease also required the issuance of letters of credit for $1.5 million and $0.5 million. The $1.5 million cash deposit is required to be refunded and the letters of credit are required to be canceled upon expiration of the primary lease term. However, if we achieve any one of three quarterly financial tests beginning in the second quarter of 2007, the cash deposit is refundable at the rate of $0.2 million each quarter that one of the tests is achieved until the cash deposit (plus interest) is fully refunded. At such time that the cash deposit is fully refunded, the $1.5 million letter of credit shall be reduced by $0.2 million for each succeeding quarter that one of the financial tests is achieved.

Revolving Credit Agreement. At December 31, 2005, we had a $75.0 million revolving credit facility that was scheduled to expire in July 2008. On March 30, 2006, we entered into a three-year senior credit

agreement with US Bank National Association (“US Bank”). The US Bank credit agreement provides for a $50.0 million commitment under a revolving credit facility that matures in March 2009. We have the option to terminate the credit agreement before the maturity date with a prepayment penalty of 1.0% of the commitment amount if the prepayment occurs before November 30, 2008. Under the terms of the US Bank credit agreement, we can initially elect to incur interest at a rate equal to either (a) the Prime Rate plus 0.50% or (b) the LIBOR Rate plus 3.00%. These rates can be reduced in the future by up to 0.50% for Prime Rate borrowings and 0.75% for LIBOR Rate borrowings depending on our adjusted fixed charge coverage (“FCC”) ratio, as defined in the credit agreement. As of December 31, 2006, the interest rate for Prime Rate borrowings was 8.75% and the effective rate for LIBOR Rate borrowings was 8.36%. In addition, we are obligated to pay a commitment fee of 0.25% per annum for the unused portion of the credit agreement. Due to the early termination of the previous credit agreement, we recognized a charge to interest expense of approximately $1.4 million to write-off the remaining unamortized debt issuance costs in the first quarter of 2006.

Substantially all of our assets are pledged as collateral for outstanding borrowings under the US Bank senior credit agreement. The credit agreement also limits or prohibits the Company from paying dividends, incurring additional debt, selling significant assets, acquiring other businesses, or merging with other entities without the consent of the lenders. The credit agreement requires compliance with certain financial and non-financial covenants, including a rolling four-quarter adjusted FCC ratio.

Similar to our previous credit agreement, the US Bank credit agreement includes a lockbox arrangement that requires us to direct our customers to remit payments to restricted bank accounts, whereby all available funds are used to pay down the outstanding principal balance under the amended credit agreement. Accordingly, the entire outstanding principal balance under our previous and current credit agreements is classified as a current liability in our consolidated balance sheets.

Total borrowings under the US Bank credit agreement are subject to limitation based on a percentage of eligible accounts receivable and inventories. Accordingly, our borrowing availability generally decreases as our net receivables and inventories decline. As of December 31, 2006, the borrowing base calculation permitted total borrowings of $40.2 million. After deducting the outstanding principal balance of $19.8 million and outstanding letters of credit of $2.0 million, we had borrowing availability of $18.4 million as of December 31, 2006.

Second Lien Financing. On March 30, 2006, we also entered into a $10.0 million subordinated Note Purchase Agreement (the “Second Lien Note”) with an affiliate of our majority stockholder. The Second Lien Note is collateralized by a second priority security interest in substantially all of the collateral under the US Bank credit agreement. The Second Lien Note is subordinated in right of payment to the obligations under the US Bank credit agreement and provides for a maturity date that is 45 days after the maturity date of the US Bank credit agreement. The Second Lien Note provides for an interest rate of 16.0%, payable quarterly in kind (or payable in cash with written approval from US Bank). We have the option to prepay the Second Lien Note with a prepayment penalty up to 3.0% of the then outstanding principal balance. If the note is paid on the maturity date, a fee equal to 2.0% of the then outstanding principal balance is due. Accordingly, we are recording interest expense related to this 2.0% fee using the effective interest method. Since interest is payable in kind, accrued interest is added to the principal balance each quarter which has resulted in an outstanding principal balance of $11.4 million as of December 31, 2006.

In connection with the US Bank credit agreement, an affiliate of our majority stockholder also agreed to enter into an FCC maintenance agreement that requires the affiliate to make up to an additional $5.0 million of subordinated loans to us if the FCC ratio is below a prescribed level. Loans pursuant to the FCC maintenance agreement would have similar terms as the Second Lien Note; however, the interest rate on such additional loans can be up to 18.0%. We currently expect that the affiliate of our majority stockholder could be required to make loans pursuant to the FCC maintenance agreement of between $1.2 million and $2.0 million during the second quarter of 2007 (to achieve compliance with the FCC covenant for the first quarter of 2007). We currently do not expect that additional loans will be required to achieve compliance with the FCC covenant for the second through fourth quarters of 2007.

          We believe the financing and consolidation actions taken in 2006 will provide adequate liquidity and a more efficient cost structure to carry out our planned activities for the next year.

          EBITDA Alternative Performance Measure. The primary measure of our operating performance is net income (loss). However, our lenders and many investment analysts believe that other measures of operating performance are relevant. One of these alternative measures is Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”). Management emphasizes that EBITDA is a non-GAAP measurement that excludes many significant items that are also important to understanding and assessing Suntron’s financial performance. Additionally, in evaluating alternative measures of operating performance, it is important to understand that there are no standards for these calculations. Accordingly, the lack of standards can result in subjective determinations by management about which items may be excluded from the calculations, as well as the potential for inconsistencies between different companies that have similarly titled alternative measures. In order to illustrate our EBITDA calculations, we have provided the details below of the calculations for the year ended December 31, 2005 and December 31, 2006 using a “traditional” definition, as well as the calculation pursuant to the definition in our revolving credit agreement. For calculations related to compliance with financial covenants, our lenders have agreed to modify the traditional definition of EBITDA to exclude certain operating charges that may be considered unlikely to recur in the future or that may be excluded due to a variety of other reasons. As shown below, the measure of EBITDA under a “traditional” definition differs materially from the calculation of EBITDA for purposes of determining compliance with our financial covenants:

		2005				2006
		(Dollars in Millions)
Net loss		$	(11.3	)		$	(11.9	)
Interest expense			4.7				5.9
Income tax expense			—				—
Depreciation and amortization			7.8				4.6
EBITDA per “traditional” definition			1.2				(1.4	)
Restructuring costs (A)			1.7				3.5
Other charges (B)			1.4				3.9
EBITDA per credit agreement definitions		$	4.3			$	6.0

Impact of Recently Issued Accounting Standards

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that companies recognize in their financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening accumulated deficit. We do not expect the adoption of Interpretation No. 48 will have a material impact on our consolidated financial statements.

     In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments at fair value. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. We will be required to adopt Statement No. 159 in the first quarter of the year ending December 31, 2008. While we are currently evaluating the provisions of Statement No. 159, the adoption is not expected to have a material impact on our 2008 consolidated financial statements.

     In September 2006, the Financial Accounting Standards Board issued Statement No. 157, “Fair Value Measurements”. This new standard establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. Statement No. 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings. This statement is effective for fiscal years beginning after November 15, 2007. While we are currently evaluating the provisions of Statement No. 157, the adoption of which is not expected to have a material impact on our 2008 consolidated financial statements.

     In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 requires that public companies utilize a “dual-approach” to assess the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our 2006 consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     As of December 31, 2006, we had a revolving line of credit that provides for total borrowings up to $50.0 million. The interest rate under this agreement is based on the prime rate and LIBOR rates, plus applicable margins. Therefore, as interest rates fluctuate, we may experience changes in interest expense that will impact financial results. We have not entered into any interest rate swap agreements, or similar instruments, to protect against the risk of interest rate fluctuations. Assuming outstanding borrowings of $50.0 million, if interest rates were to increase or decrease by one percentage point, the result would be an increase or decrease in annual interest expense of $0.5 million. Accordingly, significant increases in interest rates could have a material adverse effect on the Company’s future results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference is made to the financial statements, the report thereon, the notes thereto, and the supplementary data commencing at page F-1 of this Report, which financial statements, report, notes, and data are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

     Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

ITEM 9B. OTHER INFORMATION

     Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     The information concerning the directors and executive officers of the Company is incorporated herein by reference to the sections labeled “Election of Directors”, and “Section 16(A) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement with respect to the Company’s 2007 Annual Meeting of Stockholders (the “Proxy Statement”).

ITEM 11. EXECUTIVE COMPENSATION

     The section labeled “Executive Compensation” appearing in the Company’s Proxy Statement is incorporated herein by reference, except for such information as need not be incorporated by reference under rules promulgated by the Securities and Exchange Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     The section labeled “Security Ownership of Principal Stockholders, Directors and Officers” appearing in the Company’s Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The section labeled “Certain Relationships and Related Transactions” appearing in the Company’s Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The section labeled “Relationship with Independent Registered Public Accountants” appearing in the Company’s Proxy Statement is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

Financial Statements and Financial Statement Schedule

	(1)		Financial Statements are listed in the Index to Financial Statements on page F-1 of this Report.
	(2)		Schedule II is listed in the Index to Financial Statements on page F-1 of this Report. Other schedules are omitted because they are not applicable, not required, or because required information is included in the consolidated financial statements or notes thereto.

(b)

Exhibits

Exhibit
Number		Description
2.1		Amended and Restated Agreement and Plan of Merger, dated as of May 3, 2001, by and among EFTC Corporation, K*TEC Electronics Holding Corporation, Thayer-Blum Funding II, L.L.C. and the registrant. (1)
3.1		Certificate of Incorporation of the registrant. (1)
3.2		Bylaws of the registrant. (1)
4.1		Specimen Stock Certificate. (1)
10.1		Suntron Corporation Amended and Restated 2002 Stock Option Plan. (3)
10.2		Registration Rights Agreement between the registrant and Thayer-Blum. (1)
10.3		Lease Agreement dated as of May 10, 1999 by and between Orsett/I-17 L.L.C. and EFTC Corporation. (1)
10.4		Industrial Lease dated December 18, 1998 by and between Buckhorn Trading Co., LLC and EFTC Corporation. (1)
10.5		Commercial/Industrial Lease dated as of April 1, 2001 by and between EFTC Corporation and H. J. Brooks, LLC. (1)
10.6		Management and Consulting Agreement by and between Suntron Corporation and Thayer-Blum Funding III, L.L.C. (2)
10.7		Amended and Restated Employment agreement between Suntron and Hargopal (Paul) Singh (5)
10.8		Form of Change of Control Severance Agreement between Suntron Corporation and certain executives (4)
10.9		Earnest Money Contract dated effective as of December 27, 2005 by and between Suntron GCO, LP and GSL Industrial Partners, L.P. (4)
10.10		First Letter Agreement to Earnest Money Contract dated as February 2, 2006 (4)
10.11		Second Letter Agreement to Earnest Money Contract dated as of March 8, 2006 (4)
10.12		Third Letter Agreement to Earnest Money Contract dated as of March 17, 2006 (4)
10.13		Fourth Letter Agreement to Earnest Money Contract dated as of March 22, 2006 (4)
10.14		Assignment of Earnest Money Contract dated as of March 21, 2006 between Suntron GCO, LP and GSL Industrial Partners, L.P. (4)
10.15		Triple Net Industrial Lease dated effective as of March 30, 2006 by and between Suntron GCO, LP and GSL 16/VIF Gillingham, L.P. (4)
10.16		Financing Agreement dated as of March 28, 2006 by and between Suntron Corporation and U.S. Bank National Association (4)

Exhibit
Number		Description
10.17		Note Purchase Agreement dated as of March 28, 2006 by and between Suntron Corporation and Thayer Equity Investors IV, L.P. (4)
10.18		Maintenance Agreement dated as of March 28, 2006 by and between Suntron Corporation and Thayer Equity Investors IV, L.P. (4)
21		List of Subsidiaries of the registrant. (6)
23.1		Consent of KPMG LLP (7)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002. (7)
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (7)
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (7)
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7)

SIGNATURES

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

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

Name				Title		Date
/s/Hargopal Singh       Hargopal Singh				President, Chief Executive Officer (Principal Executive Officer), and Director		March 30, 2007
/s/Thomas B. Sabol       Thomas B. Sabol				Chief Financial Officer and Director (Principal Financial Officer)		March 30, 2007
/s/James A. Doran       James A. Doran				Chief Accounting Officer and Secretary (Principal Accounting Officer)		March 30, 2007
/s/Allen S. Braswell, Jr.       Allen S. Braswell, Jr.				Director		March 30, 2007
/s/Ivor J. Evans       Ivor J. Evans				Director and Chairman of the Board		March 30, 2007
/s/James J. Forese       James J. Forese				Director		March 30, 2007
/s/Kurt D. Grindstaff       Kurt D. Grindstaff				Director		March 30, 2007
/s/Douglas P. McCormick       Douglas P. McCormick				Director		March 30, 2007
/s/Scott D. Rued       Scott D. Rued				Director		March 30, 2007
/s/Marc T. Schölvinck       Marc T. Schölvinck				Director		March 30, 2007
/s/William S. Urkiel       William S. Urkiel				Director		March 30, 2007

SUNTRON CORPORATION

		Page(s)
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2005 and 2006		F-3 to F-4
Consolidated Statements of Operations for the years ended December 31, 2004, 2005 and 2006		F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2004, 2005 and 2006		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005 and 2006		F-7 to F-8
Notes to Consolidated Financial Statements		F-9 to F-26
Supplementary Schedule:
Schedule II- Valuation and Qualifying Accounts		F-27

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Suntron Corporation:

We have audited the accompanying consolidated balance sheets of Suntron Corporation and subsidiaries as of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2006. In connection with our audits of the consolidated financial statements, we have also audited financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Suntron Corporation and subsidiaries as of December 31, 2005 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Notes 1 and 7 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, effective January 1, 2006.

/s/ KPMG LLP

Phoenix, Arizona
March 30, 2007

SUNTRON CORPORATION AND SUBSIDIARIES

		2005				2006
ASSETS
Current Assets:
Cash and equivalents		$	59			$	46
Trade receivables, net of allowance for doubtful accounts of $1,678 and $1,647, respectively			51,377				40,756
Inventories			61,985				56,038
Land, building and improvements held for sale, net			18,772				—
Prepaid expenses and other			1,430				1,186
Total Current Assets			133,623				98,026
Property and Equipment, at cost:
Leasehold improvements			7,338				6,693
Manufacturing machinery and equipment			48,050				44,972
Furniture, computer equipment and software			34,327				32,033
Total			89,715				83,698
Less accumulated depreciation and amortization			(81,348	)			(78,514	)
Net Property and Equipment			8,367				5,184
Intangible and Other Assets:
Goodwill			10,918				10,918
Deposits and other			180				1,690
Debt issuance costs, net			1,586				620
Identifiable intangible assets, net of accumulated amortization of $1,325 and $1,525, respectively			675				475
Total Intangible and Other Assets			13,359				13,703
Total Assets		$	155,349			$	116,913

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.

SUNTRON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
As of December 31, 2005 and 2006
(In Thousands, Except Per Share Amounts)

		2005				2006
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	38,605			$	30,285
Outstanding checks in excess of cash balances			1,039				804
Borrowings under revolving credit agreement			47,000				19,759
Accrued compensation and benefits			6,181				4,721
Current portion of accrued exit costs related to facility closures			494				469
Payable to affiliates			501				432
Other accrued liabilities			5,934				3,783
Total Current Liabilities			99,754				60,253
Long-term Liabilities:
Subordinated debt payable to affiliate			—				11,353
Accrued exit costs related to facility closures			122				—
Other			905				1,755
Total Liabilities			100,781				73,361
Commitments and Contingencies (Notes 5, 11, 12 and 13)
Stockholders’ Equity:
Preferred stock, $.01 par value. Authorized 10,000 shares, none issued			—				—
Common stock, $.01 par value. Authorized 50,000 shares; issued and outstanding 27,415 shares and 27,577 shares, respectively			274				276
Additional paid-in capital			380,744				381,329
Deferred stock compensation			(276	)			—
Accumulated deficit			(326,174	)			(338,053	)
Total Stockholders’ Equity			54,568				43,552
Total Liabilities and Stockholders’ Equity		$	155,349			$	116,913

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.

SUNTRON CORPORATION AND SUBSIDIARIES

		2004				2005				2006
Net Sales		$	475,388			$	328,730			$	320,786
Cost of Goods Sold			449,516				311,894				302,673
Gross profit			25,872				16,836				18,113
Operating Expenses:
Selling, general and administrative expenses			24,361				22,758				22,815
Severance, retention, and lease exit costs			1,085				869				619
Related party management and consulting fees			750				750				750
Total operating expenses			26,196				24,377				24,184
Operating loss			(324	)			(7,541	)			(6,071	)
Other Income (Expense):
Interest expense			(3,982	)			(4,703	)			(5,936	)
Gain (loss) on sale of assets			(11	)			695				25
Unrealized loss on marketable equity securities			(385	)			(144	)			—
Interest and other income			245				351				103
Total other income (expense)			(4,133	)			(3,801	)			(5,808	)
Net loss		$	(4,457	)		$	(11,342	)		$	(11,879	)
Loss Per Share (Basic and Diluted)		$	(0.16	)		$	(0.41	)		$	(0.43	)
Weighted Average Shares Outstanding (Basic and Diluted)			27,413				27,415				27,525

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.

SUNTRON CORPORATION AND SUBSIDIARIES

										Additional
		Common Stock								Paid-in				Deferred Stock				Accumulated
		Shares				Amount				Capital				Compensation				Deficit				Total
Balances, December 31, 2003			27,409			$	274			$	380,804			$	(754	)		$	(310,375	)		$	69,949
Amortization of deferred stock compensation			—				—				—				300				—				300
Write-off of unvested deferred stock compensation related to cancelled options			—				—				(189	)			189				—				—
Stock options exercised			6				—				22				—				—				22
Net loss			—				—				—				—				(4,457	)			(4,457	)
Balances, December 31, 2004			27,415				274				380,637				(265	)			(314,832	)			65,814
Compensation cost related to stock options granted to employees			—				—				414				(414	)			—				—
Amortization of deferred stock compensation			—				—				—				96				—				96
Write-off of unvested deferred stock compensation related to cancelled options			—				—				(307	)			307				—				—
Net loss			—				—				—				—				(11,342	)			(11,342	)
Balances, December 31, 2005			27,415				274				380,744				(276	)			(326,174	)			54,568
Stock options exercised			162				2				—				—				—				2
Attribution of share-based compensation cost			—				—				861				—				—				861
Elimination of deferred stock compensation in connection with adoption of FAS123R			—				—				(276	)			276				—				—
Net loss			—				—				—				—				(11,879	)			(11,879	)
Balances, December 31, 2006			27,577			$	276			$	381,329			$	—			$	(338,053	)		$	43,552

The Accompanying Notes Are an Integral Part of These Consolidated Financial Statements.

SUNTRON CORPORATION AND SUBSIDIARIES

		2004				2005				2006
Cash Flows from Operating Activities:
Net loss		$	(4,457	)		$	(11,342	)		$	(11,879	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			11,199				7,809				4,597
Amortization of debt issuance costs			962				843				2,077
Impairment of property, plant and equipment			—				—				734
Loss (gain) on sale of assets			11				(695	)			(25	)
Stock-based compensation expense			300				96				861
Interest on subordinated debt to affiliates			—				—				1,353
Marketable equity securities received for recovery of bad debt			(777	)			—				—
Unrealized loss on marketable equity securities			385				144				—
Changes in operating assets and liabilities, net of effects of purchase of businesses:
Decrease (increase) in:
Trade receivables, net			(15,940	)			(942	)			10,621
Inventories			(17,562	)			17,217				5,947
Prepaid expenses and other			2,697				(406	)			234
Increase (decrease) in:
Accounts payable			2,530				2,826				(8,795	)
Accrued compensation and benefits			(408	)			(486	)			(1,460	)
Other accrued liabilities			(1,714	)			1,436				(3,176	)
Net cash provided by (used in) operating activities			(22,774	)			16,500				1,089
Cash Flows from Investing Activities:
Proceeds from sale of property, plant and equipment			642				3,371				18,785
Professional fees associated with sale of property			—				—				(105	)
Payments for acquisition of businesses			(2,466	)			(1,383	)			—
Payments for property, plant and equipment			(2,697	)			(2,047	)			(2,338	)
Net cash provided by (used in) investing activities			(4,521	)			(59	)			16,342
Cash Flows from Financing Activities:
Proceeds from borrowings under debt agreements			505,224				323,951				364,360
Principal payments under debt agreements			(480,218	)			(336,529	)			(380,532	)
Payments for debt issuance costs			(1,998	)			(563	)			(1,039	)
Increase (decrease) in outstanding checks in excess of cash balances			4,253				(3,255	)			(235	)
Proceeds from exercise of stock options			22				—				2
Net cash provided by (used in) financing activities			27,283				(16,396	)			(17,444	)
Net increase (decrease) in cash and equivalents			(12	)			45				(13	)
Cash and Equivalents:
Beginning of year			26				14				59
End of year		$	14			$	59			$	46