Motley Fool Hidden Gems recommendation FormFactor (NASDAQ:FORM) is one of the most interesting companies I follow. It makes advanced probe cards that enable makers of DRAM (used in computers), flash memory (used in lots of mobile devices), and logic chips to perform electrical tests on newly fabricated devices. FormFactor's products help semiconductor manufacturers eliminate defective chips earlier in the manufacturing process, resulting in significant cost savings.

So what is an advanced probe card? Good question, but you're jumping the gun a bit. First, let's talk about how semiconductor devices are manufactured and tested. It'll help you understand where FormFactor's products fit in, and why they're so well-received.

A Fool's guide to semiconductor manufacturing
Semiconductor devices are built on top of circular silicon wafers using a process called lithography, and their manufacture involves a large number of processing steps. To boil it down a bit, the structures necessary to make a functional chip are built layer by layer, and a pattern is "drawn" in those layers using lithography. Lithography allows the patterns to have the extremely fine features needed in modern chips. Currently, devices with minimum feature sizes of 90 nanometers, or 90 billionths of a meter, are common. (To understand the scale involved, note that a single human hair is 100,000 nanometers thick!) Amazingly, devices with feature sizes as small as 65 nanometers are starting to appear on the market. For example, Apple (NASDAQ:AAPL) is using Intel's (NASDAQ:INTC) 65-nanometer Core Duo chip in the new iMacs.

The end result of all the processing steps (besides exhausted technicians and process engineers) is a set of completed wafers, each of which contains a large number of identical individual devices called die.

After manufacturing is complete, the wafers are cut up and the individual die are packaged. Packaging encloses the semiconductor device in a case that will protect it from the rigors of the outside world. These days, in order to make chips small enough to fit inside the handheld electronic doohickeys we all love, many chips use stack packaging, in which four or five die are wired together, then put inside a single case and sold as one device. After this packaging step, the devices must be tested. Unfortunately, if a single die malfunctions, the entire package has to be thrown on the junk heap. This means that four functional die are wasted, and the cost of packaging is lost as well. Since packaging costs can represent 15%-20% of the cost of the total device, it is advantageous to do as much testing as possible before packaging to uncover and discard defective die. That's where FormFactor comes in.

So, how does an advanced probe card help?
Probe cards allow some testing to be done after the die have been manufactured, but before they're cut up and packaged. This can be a tricky process. The tester has to make electrical contact with the die without causing damage, and the locations at which contact must be made (called pads) are tiny and delicate.

Some manufacturers, using old-style needle probe cards like those formerly made by Kulicke & Soffa
(NASDAQ:KLIC), place extra pads on the wafer solely for testing purposes. (Kulicke & Soffa may have realized that needle probe cards don't have a great future since they recently sold this business.) A needle probe card makes electrical contact with the wafer using a number of needles that touch those additional test pads. Needle probe cards can cause their own problems; for one thing, putting extra test pads on the wafer takes room that would otherwise be occupied by additional die.

On the other hand, FormFactor's advanced probe card contains a large number of tiny springs (appropriately called MicroSprings) that delicately touch the pads on each die and make reliable electrical contact. FormFactor's probe cards can make more than 18,000 simultaneous contacts with multiple die. Better yet, since the MicroSprings make electrical contact with a very light touch, the wafers don't need special test pads.

Time for testing
The testing process aims to ensure that as few defective die as possible will be packaged. In the first test, Wafer Sort, the electrical response of each die is measured at low operational speeds. Since a large number of die are being tested simultaneously, an avalanche of data is generated, and the results can't be processed quickly enough to run the die at high speed. Despite the low speeds, most of the defective die are found in this step.

After Wafer Sort, the die are sent off for packaging. At least, this is what users of needle probe cards must do, but FormFactor's customers can do two more tests, which were previously performed after packaging.

One of these is burn-in testing, in which a chip is run over the full real-world temperature range in which it must function. Because of the physical properties of semiconductors, it is possible for a device to function correctly at room temperature, but malfunction at a higher or lower temperature. Burn-in testing finds many of the defective die that were good enough to pass the Wafer Sort test, but wouldn't work out in the real world.

The last test that FormFactor enables its customers to do at the wafer level is called "high-frequency test at probe." The die are run at full speed, allowing a few more bad die to be eliminated.

FormFactor refers to this capability, to move testing upstream from the post-packaging stage to the wafer level, as "known good die" or KGD, because only good die are moved along to the next step. It's a key reason why FormFactor's products help manufacturers lower costs.

The future looks bright
Currently, most of FormFactor's business -- 77% in 2005 -- comes from DRAM makers. Despite the current DRAM focus, FormFactor isn't ignoring the fast-growing NAND flash market. FormFactor expects a new product called Harmony to take off with NAND flash manufacturers in the second half of this year. Harmony will be capable of making simultaneous electrical contact with every die on a 30-millimeter wafer. It has the possibility for significant growth, allowing FormFactor to get its probe cards into additional production lines at memory manufacturers.

I'm even more excited about the potential for a product that FormFactor has named Takumi, which will enable electrical testing on die during manufacturing. This will help semiconductor makers to more quickly discover and correct variations in their manufacturing processes that would otherwise result in defective die. Currently, manufacturers don't conduct this sort of testing, because the test can damage the die at the point of contact. Nevertheless, FormFactor believes its MicroSpring technology will allow Takumi to conduct these tests non-destructively. Takumi is FormFactor's first step into this sort of testing; if successful, it could pave the way for significant growth.

The stock market has certainly noticed FormFactor's performance and potential. Its share price currently hovers around $37, resulting in a trailing-12-month P/E around 51. I wouldn't buy in at the current price, but you can bet I'll be watching for a dip.

We've chipped in with further Foolishness:

Live and let die on the Fool's FormFactor message board.

FormFactor's testing may be rigorous, but it's got nothing on Tom Gardner. Tom and the Motley Fool Hidden Gems team scour the market to discover the very best small caps. To learn more and see Tom's other picks, sign up today for a 30-day free trial.

Fool contributor Dan Bloom doesn't own shares of any company mentioned in this column, although he used to own Apple. In characteristic fashion, he sold too soon. He welcomes your comments at blm_dn@yahoo.com.