The information in this report, except for the historical information, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by that statute. Typically, we identify forward-looking statements by use of an asterisk "*." In some cases, you can identify forward-looking statements by terminology such as "expects," "anticipates," "intends," "may," "should," "plans," "believes," "seeks," "estimates," "could," "would," or the negative of such terms or other comparable terminology. These forward-looking statements include, but are not limited to, expected orders, expected revenues, expected financial results, expected cash usage and other expected financial performance for the second quarter of fiscal 2009. These statements are subject to various risks and uncertainties, both known and unknown. Factors that could cause actual results to differ include, but are not limited to, changes in industry conditions; order delays or cancellations; general economic conditions; changes in customer capacity requirements and demand for microelectronics; the extent of demand for our products and our ability to meet demand; global trade policies; worldwide economic and political stability; our successful execution of internal performance plans; the cyclical nature of our business; volatility of the market for certain products; performance issues with key suppliers and subcontractors; the level of new orders; the timing and success of current and future product and process development programs; the success of our direct distribution organization; legal proceedings; the potential impairment of long-lived assets; and the potential adverse financial impacts resulting from declines in the fair value and liquidity of investments we presently hold; as well as other factors listed from time to time in our SEC reports including, but not limited to, the Risk Factors set forth in our Form 10-K for the fiscal year ended August 30, 2008. Readers also are cautioned not to place undue reliance on these forward-looking statements as actual results could differ materially. We undertake no duty to update any of the forward-looking statements after the date of this report.
This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report.
Industry
Gartner, Inc. ("Gartner"), a leading equipment industry research group, in December 2008 revised downward its semiconductor demand forecast for calendar 2008 and 2009. Gartner now predicts that demand for semiconductors will decrease approximately 4.4 percent in calendar 2008 from the $274 billion calendar 2007 level. Gartner attributes the decline primarily to lower memory device demand. Quarterly memory system orders have now declined 82 percent from the calendar 2007 first quarter run rate to the calendar 2008 third quarter run rate. Gartner is forecasting a 16.3 percent decrease in demand for semiconductors in calendar 2009 from calendar 2008, as Gartner expects consumer and corporate demand for microelectronics to remain weak.
Many device producers have announced operation shutdowns with some announcing the possibility of additional shutdown periods in calendar 2009 if conditions do not improve. Some device manufacturers have announced the closing of less productive fabrication facilities. Increasingly, device manufacturers are adopting some form of "fabrication light" manufacturing philosophy by outsourcing a portion of the manufacturing to third parties in an attempt to reduce capital investments and transition their business from a fixed cost to a variable cost model.
As recently forecasted by Gartner, total wafer fabrication equipment spending in calendar 2008 is expected to decrease approximately 31 percent, when compared to the $36 billion calendar 2007 level. In general, analysts have a mixed view on how significant the calendar 2009 forecasted total equipment spending will decline; however, most are forecasting another significant year-over-year decline as semiconductor manufacturers' factory utilization rates continue to decline. Gartner is currently forecasting that total wafer fabrication equipment spending will decrease 33 percent in calendar 2009 as compared to calendar 2008.

We do not expect to see much of an investment in capital spending by device manufacturers in calendar 2009. Indeed, many device manufacturers remain cautious toward placing new orders; in addition, we expect to continue to receive requests from device manufacturers to provide evaluation systems or extended payment terms as they deal with the current credit crunch. Application of Critical Accounting Policies and Estimates In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below.
Our critical accounting policies and estimates are as follows:
• revenue recognition;

• valuation of long-lived assets;

• estimation of valuation allowances and accrued liabilities, specifically product warranty, inventory provisions and allowance for doubtful accounts;

• stock-based compensation; and

• income taxes.

Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectibility is reasonably assured. If our equipment sales involve sales to our existing customers who have previously accepted the same type(s) of equipment with the same type(s) of specifications, we account for the product sales as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. We recognize the equipment revenue upon shipment and transfer of title. The other multiple elements include installation, service contracts and training. Equipment installation revenue is valued based on estimated service person hours to complete installation and quoted service labor rates and is recognized when the installation has been completed and the equipment has been accepted by the customer. Service contract revenue is valued based on estimated service person hours to complete the service and quoted service labor rates and is recognized over the contract period. Training revenue is valued based on quoted training class prices and is recognized when the customers complete the training classes or when a customer-specific training period has expired. The quoted service labor rates and training class prices are rates actually charged and billed to our customers.
All other product sales with customer-specific acceptance provisions are recognized upon customer acceptance. Future revenues may be negatively impacted if we are unable to meet customer-specific acceptance criteria. Revenue related to spare part sales is recognized upon shipment or delivery based on the trade terms. Revenues related to maintenance and service contracts are recognized ratably over the duration of such contracts.
The timing and amount of revenue recognized depends on whether revenue is recognized upon shipment versus acceptance. For revenue recognized upon acceptance, it is dependent upon when customer-specific criteria are met.

Valuation of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with the FASB's SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
If we determine that the carrying amount of long-lived assets, including intangible assets, may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model or another valuation technique. Net intangible assets and long-lived assets amounted to $17.3 million as of November 29, 2008.
In fiscal 2008, we had positive cash flows from operations. If we do not continue to yield positive cash flows in excess of the carrying amount of our long-lived assets, we would anticipate possible future impairments of those assets.*
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets, including intangible assets, and the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates.
We did not recognize any impairment charges for our long-lived assets, including intangible assets, during the first quarters of fiscal 2009 or 2008. We currently believe the fair value of those long-lived assets exceeds the carrying amount.
Product Warranty Estimation
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, releases of new products and other factors. The warranty periods for new equipment manufactured by us typically range from six months to two years. Special warranty reserves are also accrued for major rework campaigns. Although management believes the likelihood to be relatively low, claims experience could be materially different from actual results because of the introduction of new, more complex products; competition or other external forces; manufacturing changes that could impact product quality; or as yet unrecognized defects in products sold.
Inventory Provisions Estimation
We record reserves for inventory shrinkage and for potentially excess, obsolete and slow moving inventory. These reserves are based upon historical loss trends, inventory levels, expected product lives, forecasted sales demand and recoverability. Results could be materially different if demand for our products decreased because of economic or competitive conditions, length of the industry downturn, or if products become obsolete because of technical advancements in the industry or by us.
Since we recorded the POLARIS® system product inventory reserves primarily as a result of the wind-down of our microlithography business in the second quarter of fiscal 2003, we have had sales of POLARIS System product inventory that had previously been written down to zero and reductions in inventory buyback requirements of approximately $10.8 million, have disposed of approximately $6.8 million of POLARIS system product inventory and have recorded additional reserves of $1.8 million. The original cost of POLARIS system product inventory available for sale or to be disposed of as of November 29, 2008 that has been written down to zero was approximately $8.7 million.

Allowance for Doubtful Accounts Estimation Management must estimate the uncollectibility of our accounts receivable. The most significant risk is a sudden unexpected deterioration in financial condition of a significant customer who is not considered in the allowance. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Results could be materially impacted if the financial condition of a significant customer deteriorated and related accounts receivable are deemed uncollectible. Accounts receivable are written off after management determines that they are uncollectible. We collected receivables of $21,000 in the first quarter of fiscal 2009 and $67,000 in the first quarter of fiscal 2008 that had previously been written down to zero, resulting in credits to selling, general and administrative expenses.
Stock-Based Compensation
We utilize the Black-Scholes option-pricing model to estimate fair value of each award on the date of grant. The Black-Scholes model requires the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value include the expected life of stock-based awards and our stock price volatility. Additionally, we expense only those shares expected to vest. The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect management's best estimates. However, circumstances may change and additional data may become available over time, which could result in changes to these assumptions that materially impact the fair value determination of future awards or their estimated rate of forfeiture.
Income Taxes
Our effective income tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. We have established valuation allowances for all operating losses to reflect the uncertainty of our ability to fully utilize these benefits given the limited carryforward periods permitted by the various jurisdictions. The evaluation of the realizability of our net operating losses requires the use of considerable management judgment to estimate the future taxable income for the various jurisdictions, for which the ultimate amounts and timing of such estimates may differ. The valuation allowance can also be impacted by changes in the tax regulations.
Significant judgment is required in determining unrecognized tax benefits. We have established accruals for unrecognized tax benefits using management's best judgment and adjust these accruals as warranted by changing facts and circumstances. A change in our accruals in any given period could have a significant impact on our results of operations for that period.
We adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN48") during the first quarter of fiscal 2008, which had no impact on our financial position or results of operation. The accrual for unrecognized benefits decreased by $11,000 for the first quarter of fiscal 2009 and zero for the first quarter of fiscal 2008.

FIRST QUARTER OF FISCAL 2009 COMPARED WITH FIRST QUARTER OF FISCAL 2008
The Company
   The following table sets forth for the fiscal quarter indicated, certain
income and expense items as a percent of our total sales.

                                                      Percent of Sales
                                                November 29,     November 24,
         First quarter ended:                       2008             2007
         Sales                                       100.0 %          100.0 %
         Cost of goods sold                           62.2             61.7

         Gross profit                                 37.8             38.3
         Selling, general and administrative          46.2             30.0
         Research and development                     35.9             19.1

         Operating loss                              (44.3 )          (10.8 )
         Other income, net                             0.8              1.3

         Loss before income taxes                    (43.5 )           (9.5 )
         Income taxes                                 (0.1 )              -

         Net loss                                    (43.4 %)          (9.5 %)

Sales Revenues and Shipments
Sales revenues decreased to $12.2 million for the first quarter of fiscal 2009 as compared to $22.4 million for the first quarter of fiscal 2008. The decrease related primarily to industry and overall global economic conditions. The decreases occurred in all regions with the most significant decrease occurring in European sales where sales decreased 78% in the first quarter of fiscal 2009 from the first quarter of fiscal 2008. International sales were $9.3 million, representing 76% of total sales during the first quarter of fiscal 2009 and $19.1 million, representing 85% of total sales, during the first quarter of fiscal 2008.
Shipments were $9.6 million in the first quarter of fiscal 2009 as compared to $20.7 million in the first quarter of fiscal 2008.
Based upon our revenue recognition policy, certain shipments to customers are not recognized until customer acceptance. Therefore, depending on timing of shipments and customer acceptances, there are time periods where shipments may exceed sales revenue or, due to timing of acceptances, sales revenue may exceed shipments.
We currently expect second quarter of fiscal 2009 revenues to be between $11 and $14 million.* In order to achieve this revenue level, we will need to receive several system orders that can be shipped and recognized as revenue in the second quarter.*
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products sold; the geographic mix of products sold, with international sales generally having lower gross profit than domestic sales; initial product placement discounts; utilization of manufacturing capacity; the sales of inventory previously written down to zero; and the competitive pricing environment.
Gross margin as a percentage of sales was 37.8% for the first quarter of fiscal 2009 compared to 38.3% for the first quarter of fiscal 2008. The decrease in gross margin was primarily related to a decrease in capacity utilization of manufacturing related to the decline in shipments. This was partially offset by a change in product mix in which the sale of spare parts and service represented 42% of our total sales in the first quarter of fiscal 2009 as compared to 29% of our total sales in the first quarter of fiscal 2008, as spare parts and service generally have higher margins.

Gross profit margins are expected to be 40% to 42% of revenues for the second quarter of fiscal 2009.* We anticipate improved capacity utilization as a result of expected higher shipments in the second quarter of fiscal 2009 as compared to the first quarter of fiscal 2009.*
Selling, General and Administrative Expenses Selling, general and administrative expenses were $5.7 million in the first quarter of fiscal 2009 and $6.7 million in the first quarter of fiscal 2008. The decrease related primarily to cost reduction initiatives associated with reductions in headcount taken in the first quarter of fiscal 2009. For additional information regarding these initiatives, see Note 8 of the Notes to Condensed Consolidated Financial Statements.
We expect selling, general and administrative expenses in the second quarter of fiscal 2009 to be in the range of $5.6 to $5.8 million as we continue to focus on managing costs.*
Research and Development Expenses
Research and development expenses were $4.4 million for the first quarter of fiscal 2009 and $4.3 million for the first quarter of fiscal 2008. The increase related primarily to new product and process development expenses. The majority of our research and development investment is focused on expanding the application capabilities of our products, supporting customer evaluations and continuous improvement programs for our products and services.
We expect research and development expenses to range from $4.1 to $4.3 million for the second quarter of fiscal 2009.* This reflects the engineering resources required to support customer demonstrations, evaluation tool placements and our ORION® System introduction initiative. Income Taxes
We recorded an income tax benefit of $11,000 in the first quarter of fiscal 2009 and income tax expense of $13,000 in the first quarter of fiscal 2008.
Our net deferred tax assets on the balance sheet as of November 29, 2008 have been fully reserved for with a valuation allowance. We do not expect to significantly reduce our valuation allowance until we are consistently profitable on a quarterly basis.*
We have net operating loss carryforwards for federal income tax purposes of approximately $169.2 million, which will begin to expire in fiscal 2011 through fiscal 2029 if not utilized. Of this amount, approximately $15.0 million is subject to Internal Revenue Code Section 382 limitations on utilization. This limitation is approximately $1.4 million per year. Net Loss
The net loss was $5.3 million in the first quarter of fiscal 2009 as compared to a net loss of $2.1 million in the first quarter of fiscal 2008.
Assuming that we can achieve the projected revenues, gross margin and operating expense levels, we expect to report a net loss between $4.0 and $5.5 million in the second quarter of fiscal 2009.*

Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable securities were approximately $18.0 million as of November 29, 2008, a decrease of $4.8 million from the end of fiscal 2008. The decrease was due primarily to $4.6 million of net cash used for operations.
As of November 29, 2008, we had investments in auction rate securities ("ARS") reported at a fair value of $6.3 million after reflecting a $0.4 million other than temporary impairment against $6.7 million par value. The other than temporary impairment was recorded in other expense for fiscal 2008. We value the majority of our ARS using a mark-to-model approach that relies on discounted cash flows, market data and inputs derived from similar instruments. This model takes into account, among other variables, the base interest rate, credit spreads, downgrade risks and default/recovery risk, the estimated time required to work out the disruption in the traditional auction process and its effect on liquidity, and the effects of insurance and other credit enhancements.
The ARS we hold are marketable securities with long-term stated maturities for which the interest rates are reset through a Dutch auction every 28 days. The auctions have historically provided a liquid market for these securities as investors historically could readily sell their investments at auction. Due to the liquidity issues experienced in global credit and capital markets, the ARS held by us have experienced multiple failed auctions, beginning on February 19, 2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders. During fiscal 2008, $0.8 million of ARS were partially redeemed. An additional $1.0 million were redeemed in the first quarter of fiscal 2009 and an additional $0.3 million were redeemed in December 2008.
All of the ARS held by us continue to carry investment grade ratings and have not experienced any payment defaults. Of the ARS held by us, $6.6 million par value are backed by student loans and are collateralized, insured and guaranteed by the United States Federal Department of Education and are classified as long-term. In the first quarter of fiscal 2009, an issuer of certain of these ARS offered to repurchase such ARS in a conditional tender offer received by us in October 2008 from the issuer. The tender offer expired December 4, 2008 without meeting the minimum participation requirements. ARS that did not successfully auction reset to the maximum interest rate as prescribed in the underlying indenture and all of our holdings continue to be current with their interest payments. If uncertainties in the credit and capital markets continue, these markets deteriorate further or any ARS we hold are downgraded by the rating agencies, we may be required to recognize additional impairment charges.
In addition, these ARS may not provide the liquidity to us as we need it, and it could take until the final maturity of the underlying notes (from 5 to 35 years) to realize our investments' recorded value. Currently, there is a very limited market for any of these securities and future liquidations at this time, if possible, would likely be at a significant discount.
Accounts receivable decreased $3.5 million from the end of fiscal 2008. The decrease in accounts receivable related primarily to the decrease in shipments to $9.6 million in the first quarter of fiscal 2009 as compared to $13.1 million in the fourth quarter of fiscal 2008. Accounts receivable will fluctuate quarter to quarter depending on individual customers' timing of shipping dates and payment terms.
Inventory was approximately $28.4 million at November 29, 2008 and $27.2 million at the end of fiscal 2008. The increase in inventory related primarily to an increase in work-in-process inventory associated with anticipated demonstration tool and new product placement orders. Inventory provisions were $15.9 million at the end of fiscal 2008 and remained the same at the end of the first quarter of fiscal 2009.
Trade accounts payable increased to $4.6 million as of November 29, 2008 as compared to $4.3 million at the end of fiscal 2008. The increase in trade accounts payable related primarily to the timing of inventory receipts and payments to vendors.
As of November 29, 2008, our current ratio of current assets to current liabilities was 3.3 to 1.0, and working capital was $37.9 million.

The following table provides aggregate information about our contractual payment obligations and the periods in which payments are due (in thousands):

                                                                       Payments due by period
                                                       Less than 1                                                More than 5
Contractual Obligations:                Total             Year              1-3 years          3-5 years             years
Operating lease obligations            $ 1,338        $         815        $       505        $        18        $           -
Capital lease obligations                  640                  640                                     -                    -
Purchase obligations                     3,161                3,161                  -                  -                    -
Royalty obligations                        143                  143                  -                  -                    -
Other long-term commitments (1)          1,625                  125                500                500                  500

Total                                  $ 6,907        $       4,884        $     1,005        $       518        $         500

(1) Other long-term commitments represent payments related to minimum royalty payments or discounts granted under a . . .