Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations of earnings, revenues, tax rates or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the cost, timing and impact on operations of the Restructuring; factors that may affect our 2008 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, sales and bookings or anticipated performance of products or services; any statements related to future capital expenditures; any statements related to the needs or expected growth of our target markets; any statement related to our ability to recognize value from auction rate securities we hold; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing. You can identify these statements by the

fact that they do not relate strictly to historical or current facts and use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "appear" and other words and terms of similar meaning. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. You also should read Item 1A. "Risk Factors" included in Part II of this report for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.

Summary of Products and Segments

We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the Electronics market, the Research and Industry market, the Life Sciences market and the Service and Components market. During the first quarter of 2008, we renamed our markets, but did not reclassify any revenue categories between markets. Previously, the Electronics market was the NanoElectronics market; the Research and Industry market was the NanoResearch and Industry market; and the Life Sciences market was the NanoBiology market.

Our products include focused ion beam systems, or FIBs; scanning electron microscopes, or SEMs; transmission electron microscopes, or TEMs; and DualBeam systems, which combine a FIB and SEM on a single platform.

Our DualBeamsystems include models that have wafer handling capability and are purchased by semiconductor and data storage manufacturers ("wafer-level DualBeam systems") and models that have small stages and are sold to customers in several markets ("small-stage DualBeam systems").

The Electronics market consists of customers in the semiconductor, data storage and related industries such as printers and microelectromechanical systems ("MEMs"). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 65 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures. In the data storage market, our products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our business include the transition from longitudinal to perpendicular recording heads, rapidly increasing storage densities that require smaller recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, metals, mining and petrochemicals. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are also used in root cause failure analysis and quality control applications.

The Life Sciences market includes universities and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products' ultra-high resolution imaging allows cell biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

Overview

Net sales decreased to $141.8 million in the third quarter of 2008 compared to $154.0 million in the second quarter of 2008 and $145.8 million in the third quarter of 2007. Compared to the second quarter of 2008, sales for Life Sciences and Service and Components increased, while sales for our Research and Industry and Electronics markets declined due, in part, to the reduction in semiconductor capital spending. Compared to the third quarter of 2007, sales for Service and Components and Life Sciences increased, offset by decreased sales for Electronics and Research and Industry.

At September 28, 2008, our total backlog was $329.5 million, which consisted of product and service and components backlog of unfilled orders of $269.7 million and $59.8 million, respectively, compared to $256.1 million and $54.7 million, respectively, at December 31, 2007. Orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog. We only recognize backlog for purchase commitments for which the terms of the sale have been agreed upon, including price, configuration, options and payment terms. Product backlog consists of all open orders meeting these criteria. Service and Components backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts. In addition, some of the U.S. government backlog represents uncommitted funds.

Of our total backlog at September 28, 2008, approximately 90% is expected to be shippable within 12 months and approximately 10% requires some incremental development. Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been minor. However, the global markets are in a period of extraordinary financial uncertainty and historic cancellation rates may not continue in the future. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in securing electronic components from a certain vendor. In addition, product shipments have been delayed due to delays in completing certain application development, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. For this reason, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

Outlook for the Remainder of 2008

We expect revenue in the fourth quarter of 2008 to increase compared with the third quarter of 2008, due to strong third quarter bookings in all market segments. We expect the revenue growth to be partly offset by the significant strengthening of the U.S. dollar against the euro and the Czech koruna in the last month of the third quarter of 2008 and the first few weeks of the fourth quarter of 2008. In general, a stronger dollar reduces our bookings and revenue growth, but causes higher margins and operating income. Gross and operating margins are expected to improve in the fourth quarter of 2008 compared with the third quarter of 2008 due to improved operations, currency movements and somewhat higher volume.

Research and Industry bookings were strong in the second and third quarters of 2008, and we expect this segment's revenue to grow for the full year as governments, institutions and corporations globally continue to invest in nanotechnology research and product development. While a small portion of our Research and Industry business could be affected somewhat by a global economic downturn, as well as the tightening of global credit markets, we believe the global reach of our products and the multi-year budget cycles of many of our customers will be sufficient to provide further growth in 2008. We also expect continued growth in our Life Sciences business in 2008, although it will vary from quarter to quarter. This is an emerging, research-oriented market, and we expect our revenue to continue to be positively affected by the introduction of the Titan Krios TEM in early 2008. Bookings in our Electronics business were strong in the third quarter of 2008 due to demand from data storage customers and semiconductor customers who are making investments in next-generation technology development. While we believe we have the potential to show better performance than the semiconductor capital equipment industry as a whole because of increased demand for higher-resolution images as

manufacturers move to smaller line widths and new processes, among other factors, the industry appears to be in a near-term cyclical downturn and our Electronics bookings and revenues may decline as a result. Demand for service of our products is expected to continue to grow modestly as our installed base of products grows.

We believe we hold leadership positions, both technologically and in the markets in which we compete, with our TEM and DualBeam products. While some competitors introduced new products in these areas in 2007, we expect to maintain our leadership through the fourth quarter of 2008. In the SEM product line, we have introduced an important new product that, we believe, establishes technology leadership in this product line as well. We believe this will improve our competitive position and will have a positive impact on bookings and revenue primarily in 2009.

Growth in research and development and marketing spending is reduced by the stronger U.S. dollar, because a large percentage of our research and development operations are located in Europe. In addition, our total employee count was down approximately 4% from the beginning of 2008 to the end of the third quarter of 2008. As a result, operating expenses in the third quarter of 2008 were down from the second quarter of 2008, and we expect further expense declines in the fourth quarter of 2008.

Our non-operating loss was $591,000 in the third quarter of 2008 and is expected to be in the same range in the fourth quarter of 2008, although it could vary depending on financial market conditions. The non-operating loss contrasts with non-operating income earlier in the year because volatility in foreign exchange markets tends to increase foreign exchange losses and because net interest income is reduced due to lower market rates and the payoff of our $150.0 million of zero-coupon convertible notes near the end of the second quarter of 2008. Our annualized tax rate is expected to be approximately 25% for 2008.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2007 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. During the first three quarters of 2008, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 29, 2008.

Results of Operations

The following tables set forth our statement of operations data, both in
absolute dollars and as a percentage of net sales (dollars in thousands).



                                                 Thirteen Weeks Ended(1)          Thirteen Weeks Ended(1)
                                                   September 28, 2008                September 30, 2007
Net sales                                     $      141,768          100.0 %   $       145,788        100.0 %
Cost of sales                                         85,066           60.0              84,556         58.0

Gross profit                                          56,702           40.0              61,232         42.0
Research and development                              17,168           12.1              16,414         11.3
Selling, general and administrative                   31,685           22.3              30,915         21.2
Amortization of purchased technology                     455            0.3                 444          0.3
Restructuring, reorganization, relocation
and severance                                          1,176            0.8                  -            -

Operating income                                       6,218            4.4              13,459          9.2
Other (expense) income, net                             (591 )         (0.4 )             3,161          2.2

Income from continuing operations before
income taxes                                           5,627            4.0              16,620         11.4
Income tax expense                                     1,679            1.2               3,236          2.2

Net income                                    $        3,948            2.8 %   $        13,384          9.2 %

                                              Thirty-Nine Weeks Ended(1)          Thirty-Nine Weeks Ended(1)
                                                  September 28, 2008                  September 30, 2007
Net sales                                   $        447,453         100.0 %   $        442,302           100.0 %
Cost of sales                                        272,906          61.0              255,570            57.8

Gross profit                                         174,547          39.0              186,732            42.2
Research and development                              53,471          12.0               47,883            10.8
Selling, general and administrative                   96,304          21.5               90,661            20.5
Amortization of purchased technology                   1,367           0.3                1,327             0.3
Restructuring, reorganization, relocation
and severance                                          3,447           0.8                 (404 )          (0.1 )

Operating income                                      19,958           4.5               47,265            10.7
Other income, net                                      2,805           0.6                7,488             1.7

Income from continuing operations before
income taxes                                          22,763           5.1               54,753            12.4
Income tax expense                                     5,810           1.3               12,408             2.8

Income from continuing operations                     16,953           3.8               42,345             9.6
Income from discontinued operations, net
of tax                                                    -             -                   127              -

Net income                                  $         16,953           3.8 %   $         42,472             9.6 %

(1) Percentages may not add due to rounding.

Net sales decreased $4.0 million, or 2.8%, to $141.8 million, in the thirteen weeks ended September 28, 2008 (the third quarter of 2008) compared to $145.8 million in the thirteen weeks ended September 30, 2007 (the third quarter of 2007). Net sales increased $5.2 million, or 1.2%, to $447.5 million in the thirty-nine week period ended September 28, 2008 compared to $442.3 million in the thirty-nine week period ended September 30, 2007. These changes are described more fully below.

Exchange rate fluctuations increased net sales by approximately $5.4 million and $27.2 million, respectively, during the thirteen and thirty-nine week periods ended September 28, 2008 as approximately 64% and 67%, respectively, of our net sales were denominated in foreign currencies that strengthened against the U.S. dollar during the periods.

Net Sales by Segment

Net sales by market segment (in thousands) and as a percentage of net sales were
as follows:



                                               Thirteen Weeks Ended
                                   September 28, 2008        September 30, 2007
         Electronics              $     35,427     25.0 %   $     48,051     33.0 %
         Research and Industry          47,763     33.7 %         51,590     35.4 %
         Life Sciences                  23,441     16.5 %         13,924      9.5 %
         Service and Components         35,137     24.8 %         32,223     22.1 %

                                  $    141,768    100.0 %   $    145,788    100.0 %

                                              Thirty-Nine Weeks Ended
                                   September 28, 2008        September 30, 2007
         Electronics              $    119,677     26.7 %   $    165,654     37.4 %
         Research and Industry         171,353     38.3 %        146,752     33.2 %
         Life Sciences                  52,573     11.8 %         34,744      7.9 %
         Service and Components        103,850     23.2 %         95,152     21.5 %

                                  $    447,453    100.0 %   $    442,302    100.0 %

Electronics

The $12.6 million, or 26.3%, decrease and the $46.0 million, or 27.8%, decrease, respectively, in Electronics sales in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were primarily due to global softness for semiconductor capital spending. The softness in the semiconductor industry resulted in fewer large wafer-level DualBeam and high-end TEM shipments.

Research and Industry

The $3.8 million, or 7.4%, decrease and the $24.6 million, or 16.8%, increase, respectively, in Research and Industry sales in the thirteen and thirty-nine week periods ended September 28, 2008 compared to

the same periods of 2007 were due primarily to seasonality in the thirteen week period, offset in the thirty-nine week period by the filling of backlog from previous quarters in the first quarter of 2008 and included increased shipments of our high-end TEM products.

Life Sciences

The $9.5 million, or 68.3%, increase and the $17.8 million, or 51.3%, increase, respectively, in Life Sciences sales in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were due primarily to the timing of orders and shipments, with an increase in shipments of high-end TEMs. We built backlog in the past several quarters and have several high-end TEMs scheduled to be built and delivered to Life Sciences customers over the next several quarters.

Service and Components

The $2.9 million, or 9.0%, increase and the $8.7 million, or 9.1%, increase, respectively, in Service and Components sales in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were due primarily to a higher volume of service contracts as our installed base continues to grow. Component sales include sales of individual components as well as equipment refurbishment.

Sales by Geographic Region

A significant portion of our revenue has been derived from customers outside of
the United States, and we expect this to continue. The following table shows our
net sales by geographic location (dollars in thousands):



                                              Thirteen Weeks Ended                               Thirty-Nine Weeks Ended
                                  September 28, 2008        September 30, 2007        September 28, 2008        September 30, 2007
North America                    $     51,402     36.3 %   $     46,510     31.9 %   $    149,708     33.5 %   $    167,294     37.8 %
Europe                                 57,345     40.4 %         61,470     42.2 %        180,491     40.3 %        154,191     34.9 %
Asia-Pacific Region                    33,021     23.3 %         37,808     25.9 %        117,254     26.2 %        120,817     27.3 %

                                 $    141,768    100.0 %   $    145,788    100.0 %   $    447,453    100.0 %   $    442,302    100.0 %

North America

The $4.9 million, or 10.5%, increase and the $17.6 million, or 10.5%, decrease, respectively, in sales to North America in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were primarily due to the timing of orders in the thirteen week period, offset in the thirty-nine week period by the decline in our Electronics market sales, which was related to the general slow-down in semiconductor capital spending.

Europe

The $4.1 million, or 6.7%, decrease and the $26.3 million, or 17.1%, increase, respectively, in sales to Europe in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were primarily due to the timing of sales within the Research and Industry market in the thirteen week period, offset in the thirty-nine week period by strong sales of our high-end research tools, especially our TEMs. Our backlog for Europe grew from the end of the second quarter of 2008 to the end of the third quarter of 2008.

Asia-Pacific Region

The $4.8 million, or 12.7%, decrease and the $3.6 million, or 2.9%, decrease, respectively, in sales to the Asia-Pacific region in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were primarily due to variability of sales in Japan, as that country is more affected by the Electronics market slowdown, offset in part by an increase of sales in China, primarily related to our Research and Industry market segment.

Cost of Sales and Gross Margin

Our gross margin (gross profit as a percentage of net sales) by market segment
was as follows:



                                           Thirteen Weeks Ended                    Thirty-Nine Weeks Ended
                                    September 28,        September 30,        September 28,        September 30,
                                        2008                 2007                 2008                 2007
Electronics                                  49.8 %               50.2 %               47.6 %               51.8 %
Research and Industry                        39.8 %               42.4 %               40.0 %               40.9 %
Life Sciences                                40.9 %               45.5 %               38.6 %               42.8 %
Service and Components                       29.8 %               27.7 %               27.6 %               27.5 %
Overall                                      40.0 %               42.0 %               39.0 %               42.2 %

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead, as well as all of the costs of our customer service function such as labor, materials, travel and overhead. We see five primary drivers affecting gross margin: product mix (including the effect of price competition), volume, cost reduction efforts, competitive pricing pressure and currency fluctuations.

Cost of sales increased $0.5 million, or 0.6%, to $85.1 million in the thirteen week period ended September 28, 2008 compared to $84.6 million in the thirteen week period ended September 30, 2007 and increased $17.3 million, or 6.8%, to $272.9 million in the thirty-nine week period ended September 28, 2008 compared to $255.6 million in the thirty-nine week period ended September 30, 2007. These increases were primarily due to increased sales in the thirty-nine week period and the impact of higher costs of products produced in Europe due to the stronger euro and a shift to more higher-cost TEMs and SEMs shipped in the current periods compared to the prior periods.

Electronics

The decreases in Electronics gross margins in the thirteen and thirty-nine week periods ended September 28, 2008 compared to the same periods of 2007 were due primarily to the negative impact of the strengthening of the euro and Czech koruna on our costs of products produced in Europe and a shift in product mix to fewer semiconductor-related high-end TEM and wafer-level DualBeam tools for the data storage market.

Research and Industry

The decrease in Research and Industry gross margin in the thirteen week period ended September 28, 2008 compared to the same period of 2007 was primarily due to the negative impact of the strengthening of the euro and Czech koruna on our costs of products produced in Europe. These factors were partially offset by a shift in product mix to higher-end TEM tools in the thirty-nine week period ended September 28, 2008 compared to the same period of 2007.

Life Sciences

. . .