We design, manufacture, install and service highly-engineered equipment for use in the fabrication of semiconductor devices. Our products are focused on the wet chemical process steps in integrated circuit, or IC, manufacturing and include systems for wafer surface preparation and electrochemical deposition, or ECD, applications. Our surface preparation systems are designed for Front End of Line (FEOL), Back End of Line (BEOL) and wafer level packaging of ICs processes. Our single-wafer FEOL surface preparation systems are used for photoresist stripping, post etch and pre-diffusion cleans. Our BEOL surface preparation systems are used for polymer removal and packaging applications. Our ECD systems are used to plate copper and other metals, which are used for the IC's internal wiring, or interconnects; to plate solder and lead free solder bumps for wafer level packaging applications; and to plate other metals for various semiconductor and related applications. Also, our surface preparation systems are used for cleaning and etching processes for wafer level packaging. Our primary product for all of these processes is the Raider platform, which is a multi-chamber single-wafer tool. Our products address critical applications within the semiconductor manufacturing process, and help enable our customers to manufacture more advanced semiconductor devices that feature higher levels of performance. The fabrication of semiconductor devices typically requires several hundred manufacturing steps, with the number of steps continuing to increase for advanced devices. Due to the breadth of our product portfolio and advanced technology capabilities, our solutions address over 150 of these manufacturing steps.

There are several key trends in the semiconductor manufacturing industry driving growth in demand for wafer surface preparation, ECD and other advanced semiconductor equipment:

º smaller device features for lower cost and higher performance;
º new materials to fabricate more advanced semiconductor devices;
º move to single-wafer processing technologies for enhanced surface preparation;
º wafer level and other advanced packaging to enable smaller portable products; and
º emerging need for 3D chipstacking driven by the demand for smaller portable devices.

As the semiconductor manufacturing process increases in complexity and production parameters become even more stringent, semiconductor manufacturers increasingly rely upon manufacturers of semiconductor equipment to achieve improved process control, provide a smaller equipment footprint and lower the cost of ownership of their manufacturing processes. Key elements of our solution include technological leadership, a comprehensive product portfolio, including our Raider platform and vertically-integrated manufacturing and design capabilities.

Key Performance Indicators

Our management focuses on revenues, gross margin, operating expenses and profitability in managing our business. In addition to these financial measures found in our consolidated financial statements, we also use bookings, backlog, shipments, deferred revenue and shipment-based results of operations. Bookings are firm orders for which we have received written customer authorization in the fiscal period. Backlog is the balance of undelivered orders at the end of a fiscal period. In order to be included in bookings or backlog, an order must be scheduled to ship within the next 12 months. Backlog and forecasted orders drive our production schedule. Shipments measure how well we have met our production plan and are viewed as a primary measure of factory output. Deferred revenue primarily represents tool shipments for which we are awaiting final customer acceptance.

A summary of key factors that impacted our financial performance during fiscal year 2008 includes:

º Although the semiconductor industry experienced a downturn in fiscal 2008, our business grew as we penetrated key customers in Asia and North America. Even though capital spending slowed among several major device manufacturers, demand remained strong for wafer-level packaging and copper plating for memory applications. In the first quarter of fiscal 2009, there were severe disruptions in the world economies which we expect to negatively impact us going forward.

º Our fiscal 2008 bookings were $232.7 million and include $149.0 million in bookings for our Raider platform. Fourth quarter fiscal 2008 net bookings were $35.5 million and were negatively impacted by the cancellation of a large order related to a proposed gallium arsenide fab in China that was halted. Our consolidated orders backlog of $54.5 million and deferred revenue of $13.6 million resulted in a revenue backlog of $68.1 million at September 30, 2008.

º Shipments in fiscal 2008 were $237.0 million including $155.8 million from Raider shipments.

º Net income was $6.0 million, or 2.5%, on net sales of $238.6 million in fiscal 2008 compared with net income of $5.2 million, or 2.4%, on net sales of $215.2 million in fiscal 2007.

º Our gross margin increased to 49.2% of net sales, up from 47.2% in fiscal 2007.

º Cash and cash equivalents, including restricted cash and marketable securities were $12.8 million at September 30, 2008, a decrease of $3.3 million from $16.1 million at September 30, 2007.

The following table sets forth our consolidated results of operations for the periods indicated as a percentage of net sales:

                                                    Year Ended September 30,
                                                   2008        2007       2006
                                                 ---------    -------    -------
        Net sales                                    100.0 %    100.0 %    100.0 %
        Cost of sales                                 50.8 %     52.8 %     53.6 %
                                                 ---------    -------    -------
        Gross profit                                  49.2 %     47.2 %     46.4 %
                                                 ---------    -------    -------
        Operating expenses:
         Selling, general and administrative          32.2 %     33.3 %     30.3 %
         Research and development                     12.8 %     12.6 %     10.1 %
         Downsizing costs                               -- %      0.3 %       -- %
         Gain on sale of building                       -- %     (0.3 )%      -- %
                                                 ---------    -------    -------
        Total operating expenses                      45.0 %     45.9 %     40.4 %
                                                 ---------    -------    -------
        Income from operations                         4.2 %      1.2 %      6.0 %
        Other income (expense)                        (0.5 )%     0.3 %       -- %
                                                 ---------    -------    -------
        Income before income taxes                     3.7 %      1.5 %      6.0 %
        Income tax provision (benefit)                 1.2 %     (0.9 )%     2.0 %
                                                 ---------    -------    -------
        Net income                                     2.5 %      2.4 %      4.0 %
                                                 ---------    -------    -------

Fiscal 2008 Compared with Fiscal 2007 and Fiscal 2006

Net Sales
                                                          Year Ended September 30,
                                                       2008          2007         2006
                                                    ----------    ----------    ---------
                                                            (Dollars in millions)
Net Sales                                            $   238.6     $   215.2    $   243.2
  By Product Line:
   Semiconductor equipment                           $   237.4     $   214.0    $   242.5
   License fees                                      $     1.2     $     1.2    $     0.7
  By Geographical Distribution, percentage of
net tool sales:
   North America                                          22.6 %        30.4 %       31.6 %
   Europe                                                 22.9 %        43.5 %       26.9 %
   Asia, including Japan                                  54.5 %        26.1 %       41.5 %

Net sales consist of revenues from sales of semiconductor equipment, spare parts and service and license fees. Our revenue recognition policy provides that revenue from sales of semiconductor equipment may be recognizable upon shipment if the tool incorporates proven technology ("existing tool") and is shipped to a customer environment in which we have already successfully installed and gained acceptance of our products and the revenue recognition criteria in SEC Staff Accounting Bulletin (SAB) 104, "Revenue Recognition" have been met. Alternatively, revenue will be deferred and only recognized upon final customer acceptance for tools that are new technology products ("new tools") or where an existing tool is sold into a new customer environment. Revenue for elements other than equipment, such as installation revenue, is included in tool acceptance revenue. License fee revenue represents royalties generated from our anode technology.

Our products are highly customized. Each customer has specific technical requirements for the performance of the equipment in the fabrication of semiconductor devices. Consequently, the specific terms of the acceptance provisions are negotiated with each customer on a tool-specific basis in order to reflect the technical specifications that will be used to determine whether the tool passes the applicable acceptance tests. These acceptance specifications are lengthy, technically complex and vary greatly from customer to customer and product to product.

We have a proven track recording of obtaining customer acceptances within a reasonable timeframe. In the rare event when acceptance does not occur because the customer does not believe that the tool has met the applicable technical specifications, the parties treat the matter as a contractual issue that needs to be resolved before the customer accepts the equipment. That resolution can take many different forms, including re-testing the equipment, making technical modifications to resolve the disagreement or extending the warranty to accommodate a delayed acceptance. Whether or not a customer may have any further remedy where a resolution cannot be agreed between the parties, including any right of return of the equipment, would be a question of contract interpretation that ultimately would have to be adjudicated in accordance with applicable law.

We expect net sales to decline in the first quarter of fiscal 2009 due to the overall decline in the worldwide economy.

Net sales declined 11.5% or $28.0 million to $215.2 million for fiscal 2007 as compared to $243.2 million in fiscal 2006. Business activity levels declined and we experienced a slow down in our bookings in the first three quarters of fiscal 2007. Revenues for ECD Raiders for copper interconnect applications increased by over 70% as compared with fiscal 2006 levels while revenues from our wafer level packaging applications decreased by approximately 23%. Revenues for our single-wafer surface preparation Raiders for FEOL applications increased approximately 23% while revenues for BEOL cleans applications declined approximately 38% from prior year levels. FEOL tools benefited from the transition away from batch processing to single-wafer processing to more closely control cleaning processes of smaller geometry devices whereas BEOL applications for current industry standard 300mm wafer fabs had previously made the transition to single-wafer and were affected by the overall decline in semiconductor industry business levels. Overall, revenues from our Raider platform contributed just more than 60% to our fiscal 2007 revenues and while Raider revenue declined in absolute dollars, the decline is the equivalent of two or three tools. Revenues from automated and manual batch tools, used primarily for cleaning applications declined by approximately $14 million when compared with fiscal 2006 levels as single-wafer processing continues to supplant batch processing in 300mm fabs. The revenue contribution from spare parts, service and from our Rhetech subsidiary was proportionate with fiscal 2006 levels.

Geographically, our sales mix shifted toward Asia in fiscal 2008 after being weighted toward North America and Europe in fiscal 2007. Asian tool sales increased 28.4 percentage points in fiscal 2008 contributing 54.5% to total tool sales in fiscal 2008 as we penetrated key customers in FEOL cleans and wafer level packaging markets. European tool sales declined 20.6 percentage points, contributing 22.9% to total tool sales, as one of our key customers in Europe cut back capital spending in fiscal 2008. North American tool sales declined 7.8 percentage points in fiscal 2008 as compared with fiscal 2007 and contributed 22.6% to total tool sales.

Gross Profit
                                              Year Ended September 30,
                                            2008        2007        2006
                                          ---------   ---------   ---------
                                               (Dollars in thousands)
              Gross profit                $ 117,395   $ 101,491   $ 112,919
              Percentage of net sales          49.2 %      47.2 %      46.4 %

Gross profit increased $15.9 million in absolute dollars or 15.7% in fiscal 2008 as compared to fiscal 2007. Gross profit decreased $11.4 million or 10.1% in fiscal 2007 compared to fiscal 2006 gross profit.

Gross profit increased in absolute dollars in fiscal 2008 because of higher sales volumes. On a percentage basis, gross margin improved two percentage points. Tool margins declined slightly year-over-year but contributed approximately one percentage point to the margin increase because of higher sales volumes. Warranty and installation expense decreased in fiscal 2008, contributing approximately one percentage point to the margin increase. Margins improved on wafer level packaging tools primarily due to a higher percentage of installation revenue than in fiscal 2007 but declined on BEOL Raiders due to product mix and on copper interconnect tools. Geographically, margins improved in North America but declined slightly in Asia, primarily due to product mix.

Gross profit decreased in absolute dollars in fiscal 2007 because of lower sales volumes but improved by 0.8 percentage points from fiscal 2006. Margins improved a combined three percentage points on tool revenues, spare parts and service revenues and on sales from our Rhetech subsidiary. Our tool margins improved on copper interconnect, FEOL and BEOL tools. Margin improvements were realized in both North America and Asia. Installation revenues contributed more to overall revenue in both absolute dollars and on a percentage basis. Warranty and installation expense decreased in fiscal 2007 as compared with fiscal 2006, contributing approximately one percentage point to the margin increase. These margin improvements were partially offset by increased obsolescence and inventory reserve charges in the fourth quarter related to product enhancements on our Raider tool line that rendered certain component parts obsolete.

--------------------------------------------------------------------------------
Selling, General and Administrative
                                                    Year Ended September 30,
                                                   2008        2007       2006
                                                 ---------   --------   --------
                                                     (Dollars in thousands)
         Selling, general and administrative      $ 76,929   $ 71,749   $ 73,624
         Percentage of net sales                      32.2 %     33.3 %     30.3 %

Selling, general and administrative (SG&A) expenses include employment costs for sales, marketing, customer support and administrative personnel as well as travel, communications, professional fees and expenses related to sales and service offices at our global locations. SG&A expenses increased $5.2 million in fiscal 2008 as compared to fiscal 2007 and decreased $1.9 million in fiscal 2007 as compared with fiscal 2006.

Employment costs and travel expense increased approximately $4.4 million in fiscal 2008 as compared with fiscal 2007. In fiscal 2008, we increased our service support staff in Asia to better support our increasing Asian customer base. Employment costs in certain of these regions are typically higher than in the United States. Travel expense related to supporting our Asian customers also increased year-over-year. Commission expense increased approximately $1.5 million in the annual comparison related to increased revenues in fiscal 2008.

In April 2007, in response to a slowdown in the semiconductor industry, we implemented a plan to align our cost structure with our business outlook for the remainder of the fiscal year. The plan consisted primarily of a seven percent reduction in our worldwide work force, management pay cuts, mandatory leave and reduced overtime. As a result, travel, aircraft and general business costs decreased over the course of the fiscal 2007. Employment costs increased $2.4 million over fiscal 2006 levels primarily related to expenses incurred prior to the implementation of the cost alignment plan in the second half of fiscal 2007. Employment costs decreased $1.9 million in the second half of fiscal 2007. Commission expense declined $2.8 million in fiscal 2007 related to our transition to a direct marketing and sales force in Taiwan and China. Professional fees also declined in fiscal 2007 as compared with fiscal 2006 as fiscal 2006 professional fees included certain duplicate expenses related to the change in our external auditors.

Research and Development
                                              Year Ended September 30,
                                             2008        2007       2006
                                           ---------   --------   --------
                                               (Dollars in thousands)
              Research and development      $ 30,440   $ 27,080   $ 24,525
              Percentage of net sales           12.8 %     12.6 %     10.1 %

Research and Development (R&D) expense consists of salaries, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. R&D expense increased $3.4 million in fiscal 2008 as compared with fiscal 2007. R&D expense increased $2.6 million in fiscal 2007 as compared with fiscal 2006.

Employment costs increased approximately 16% in fiscal 2008 as compared with fiscal 2007 as we increased our staff to improve our wafer process engineering capabilities for our customers and due to merit increases, stock-based compensation and recruiting costs. Depreciation expense increased by approximately $700,000 as we updated our demonstration laboratories with new technology tools to support our customers' development efforts. Other expenses increased because of developmental work being completed at our Austrian facility to develop Cintillio, a batch tool designed for electroless plating applications. We continued to work on a number of leading edge projects including on-going development of porous silicon for the solar industry, FEOL cleaning applications, wafer edge cleaning processes, deep via and through silicon via applications and others.

Increasing $1.7 million, prototype expense was the primary driver in the $2.6 million increase in R&D expense in fiscal 2007 as compared with fiscal 2006. Our surface preparation R&D efforts were focused on FEOL cleaning applications, wafer edge cleaning processes and related equipment. ECD R&D focused on the development of a new processing chamber capable of plating copper for devices at the 32 nanometer node and below, deep via applications, direct-on-barrier plating, thin seed layer enhancement processes, porous silicon processes and related equipment. R&D projects also included a single-wafer copper annealing process. Travel expense increased in fiscal 2007 related to increased process support for our tools.

Our research and development expense has fluctuated from period to period in the past. We expect such fluctuations to continue in the future, both in absolute dollars and as a percentage of net sales, primarily due to the timing of expenditures and fluctuations in the level of net sales in a given period. We expect to continue to fund R&D expenditures with a multi-year perspective and are committed to technology leadership in our sector of the semiconductor equipment industry.

Downsizing Costs
                                              Year Ended September 30,
                                            2008        2007        2006
                                           -------    ---------    -------
                                               (Dollars in thousands)
               Downsizing costs             $   --     $    677     $   --
               Percentage of net sales          -- %        0.3 %       -- %

In April 2007, we announced and implemented a plan to align our cost structure with then current business activity levels. The cost reduction plan consisted primarily of a seven percent reduction in our worldwide work force, management pay cuts, mandatory leave and reduced overtime. Severance costs of $677,000 were reported as a separate component of operating expenses in our fiscal third quarter. All costs related to the downsizing plan were fully incurred in the third quarter. Net of the downsizing costs, we saved approximately $5 million in employment, travel and general business expenses in the second half of fiscal 2007 as compared with spending in the first half of fiscal 2007.

In November 2008,we took actions to align our cost structure with forecasted business activity levels. The cost reduction measures consist primarily of layoffs, management pay cuts, reduced sales commissions and overtime and a company-wide shutdown over the holidays. Severance costs will be reported as a separate component of operating expenses in the first quarter of fiscal 2009. We are continuing to evaluate cost-saving measures to further reduce our expenses.

Gain on Sale of Building
                                               Year Ended September 30,
                                            2008         2007         2006
                                           -------    ----------      -----
                                                (Dollars in thousands)
              Gain on sale of building      $   --     $    (648 )     $ --
              Percentage of net sales           -- %        (0.3 )%      -- %

We sold a manufacturing facility located near Kalispell, Montana during the first quarter of fiscal 2007 for approximately $1.9 million and recognized a gain on the sale of approximately $648,000.

Other Income (Expense)
                                                Year Ended September 30,
                                                2008         2007      2006
                                             -----------    -------   ------
                                                     (In thousands)
            Interest income                   $      240     $  352   $  493
            Interest expense                        (488 )     (649 )   (479 )
            Foreign exchange gain (loss)            (414 )      233     (148 )
            Other                                   (381 )      770       17
                                             -----------    -------   ------
            Total other income (expense)      $   (1,043 )   $  706   $ (117 )
                                             -----------    -------   ------

In the fourth quarter of fiscal 2008, based on an analysis that considered general economic conditions and company-specific conditions, we determined that the one million shares acquired as an investment security in exchange for certain thermal assets in the first quarter of fiscal 2008, had experienced an Other-than-temporary impairment under the guidance of Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Investments in Certain Debt and Equity Securities" (SFAS No. 115). Accordingly, we revised our cost basis in the investment by writing off $900,000 to Other expense. This was partially offset by recycling income from our Kalispell facilities and rental income from a portion of our Cambridge facility. Interest income declined to $240,000 from $352,000 in fiscal 2007 and from $493,000 in fiscal 2006 because of lower investment levels. Interest expense decreased to $488,000 in fiscal 2008 because of lower bank interest rates and decreased use of our line of credit. Interest expense increased to $649,000 in fiscal 2007 because we used our line of credit more in fiscal 2007 than in fiscal 2006.

. . .