Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as "anticipates," "expects," "intends," "will," "could," "believes," "estimates," "continues," and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, such as risks related to timing, delays, deferrals and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers' financial condition and demand for semiconductors; cyclicality in the semiconductor and nanotechnology industries; general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of timely product introductions; customer concentration; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain sufficient personnel to achieve our

targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; changes to financial accounting standards; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management's current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

We develop, manufacture and market photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and light emitting diodes ("LEDs"). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.2 million to $6.0 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and customer acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer's facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Net Sales



                                                   Three Months Ended
                                                April 4,       March 29,      Amount of       Percentage
(In thousands, except percentages)                2009           2008          Change           Change
Sales of:
Products                                       $    22,121    $    26,948    $    (4,827 )         -17.9 %
Services                                             3,452          4,188           (736 )         -17.6 %
Licenses                                                82             -              82              -

Total net sales                                $    25,655    $    31,136    $    (5,481 )         -17.6 %

Net sales consist of revenues from products (system and spare parts sales), services and licensing of technologies. Product sales decreased 17.9% to $22.1 million for the quarter ended April 4, 2009, compared to $26.9 million in the corresponding quarter of 2008, primarily due to a change in product mix and lower average selling prices.

On a product market application basis, system sales to the semiconductor industry, consisting of sales to the advanced packaging market, the laser processing applications market and the semiconductor market, decreased $6.2 million to $15.8 million for the quarter ended April 4, 2009, compared to $21.9 million in the corresponding quarter of 2008. This decrease was due to no sales to the laser processing market and a decrease in sales to the advanced packaging market of $1.5 million.

System sales to the nanotechnology market for the quarter ended April 4, 2009 were $4.1 million as compared with $1.6 million in the corresponding quarter of 2008. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, and therefore we expect to experience significant variations in sales to this market from quarter to quarter.

Revenues from services for the quarter ended April 4, 2009 decreased to $3.5 million as compared with $4.2 million in the corresponding quarter of 2008 primarily due to fewer new service contracts that were recognized as revenue in the quarter as compared to the corresponding period of 2008.

Revenues from licensing activities for the quarter ended April 4, 2009 were $82,000 primarily due to the resale of our tools by our existing customers to third parties. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We did not have any such revenues for the corresponding period of 2008. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2009.

At April 4, 2009, we had approximately $2.6 million of deferred product and services income compared to $4.3 million at December 31, 2008. The gross amounts of deferred revenues and deferred costs at April 4, 2009 were $2.6 million and $23,000, respectively. The gross amounts of deferred revenues and deferred costs at December 31, 2008 were $5.3 million and $1.0 million, respectively. Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or customer acceptance. Deferred services income is recognized as revenue ratably over the contract period (for time-based service contracts) or as purchased services are rendered (for contracts based on a purchased quantity of hours).

For the quarter ended April 4, 2009, international net sales were $8.2 million, or 31.8% of total net sales, compared with $18.2 million, or 58.6% of total net sales for the corresponding quarter of 2008. In the quarter ended April 4, 2009 compared to the corresponding quarter of 2008, sales to Europe decreased by $0.5 million, sales to Japan decreased by $7.8 million, sales to Taiwan decreased by $2.6 million and sales to the rest of Asia increased by $0.7 million. We expect sales to international customers will continue to represent a significant portion of our revenues during the remainder of 2009 as companies continue to build their manufacturing plants overseas, especially in Asia.

Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are sometime denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately $7.4 million of Japanese yen denominated receivables at April 4, 2009. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer's willingness to purchase our product. (See "Item 1A Risk Factors: International Sales").

Gross Profit

On a comparative basis, gross margins decreased to 48.3% for the three months ended April 4, 2009, compared to 49.3% for the corresponding period of 2008. This 1.0 percentage point decrease in gross margin was primarily due to a change in our product mix and lower average selling prices (0.5 percentage points) and severance and benefit charges of $0.2 million recorded during the first quarter of 2009 (0.5 percentage points). There were no severance and benefit charges recorded in cost of sales during the corresponding quarter of 2008.

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the following:
the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; and the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs.

Operating Expenses



                                                   Three Months Ended
                                                April 4,       March 29,      Amount of       Percentage
(In thousands, except percentages)                2009           2008          Change           Change
Research, development and engineering          $     5,177    $     5,971    $      (794 )         -13.3 %
Selling, general and administrative                  6,963          8,512         (1,549 )         -18.2 %

Total operating expenses                       $    12,140    $    14,483    $    (2,343 )         -16.2 %

Research, development and engineering expenses for the quarter ended April 4, 2009 were $5.2 million, as compared to $6.0 million for the corresponding period in 2008. This decrease was primarily attributable to lower salary and related expenses of $0.5 million, which were partially offset by severance and benefit charges of $0.3 million recorded during the first quarter of 2009, and lower overall spending resulting from our continuing effort to manage company-wide expenses. As a percentage of net sales, research, development and engineering expenses for the quarter ended April 4, 2009 increased to 20.2% from 19.2% for the corresponding quarter of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Selling, general, and administrative expenses for the quarter ended April 4, 2009 were $7.0 million as compared to $8.5 million for the corresponding quarter of 2008. This decrease was primarily attributable to lower travel and related expenses of $0.6 million, lower salary and related expenses of $0.3 million, which were partially offset by severance and benefit charges of $0.1 million recorded during the first quarter of 2009, and lower overall spending resulting from our continuing effort to manage company-wide expenses. As a percentage of net sales, selling, general and administrative expenses for the quarter ended April 4, 2009 decreased slightly to 27.1% from 27.3% for the corresponding quarter of 2008.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, which consists primarily of interest income and gain (loss) from foreign currency exchange, was $(45,000) for the three months ended April 4, 2009, as compared with $1.3 million for the comparable period of 2008. This decrease was primarily attributable to a decline in interest income earned by our cash and investment positions of $0.7 million and a loss from foreign currency exchange of $0.5 million. The loss from foreign currency exchange was a result of depreciation of Japanese yen. The lower interest income earned resulted from lower applicable interest rates. The cost of securities sold was determined based on the specific identification method. As of April 4, 2009, the weighted-average maturity of our investment portfolio was less than a year. Changes in interest rates have had, and will continue to have, an impact on our interest income.

Provision for Income Taxes

For the three-month period ended April 4, 2009, we recorded income tax provisions of $6,000, as compared to $166,000 for the comparable period in 2008. The income tax provisions recognized for the three months ended April 4, 2009 resulted primarily from foreign income taxes.

Income tax estimates can be affected by whether and within which jurisdictions future earnings will occur and how and when cash is repatriated to the United States, as well as other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate resolution.

Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, we concluded that it is more likely than not that our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. We closely monitor available evidence, and may release some or all of the valuation allowance in future period.

In accordance with FASB Financial Interpretation Number 48, Accounting for Uncertainty in Income Taxes, we had unrecognized tax benefits of $3.4 million as of January 1, 2009. We continue to recognize interest and penalties as a component of income tax provision and accrued $34,000 for these items as of January 1, 2009.

If we are able to eventually recognize these uncertain tax positions, $3.0 million of the unrecognized benefit would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Over the next twelve months, we expect an immaterial decline in liabilities associated with our uncertain tax positions as a result of expiring statutes of limitations.

We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2001 and forward. There are no tax examinations currently in progress.

Outlook

The anticipated timing of orders, shipments and customer acceptances usually requires that we fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect net sales for the second quarter of 2009 to range from 15% lower to 10% higher than the net sales reported in the first quarter of 2009. For the full fiscal year of 2009, we believe total net sales will decrease from the amount reported for 2008 and our operating cash flow will continue to be positive.

Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser processing product line, delays in customer acceptance, intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry and the other risks described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2008, we may not exceed or even maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems and our 1000 Platform steppers are of critical importance to our future financial results. At April 4, 2009, these critical systems represented approximately 77.6% of our backlog. To the extent that these products do not achieve or maintain significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles for these products, competition, excess capacity in the semiconductor or nanotechnology device industries, or for any other reason, our business, financial condition and results of operations would be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $0.1 million for the three months ended April 4, 2009, compared with $9.7 million for the comparable period in 2008. Net cash provided by operating activities during the three months ended April 4, 2009 was primarily attributable to our net income generated from product and service sales and lower overall spending from our cost-cutting measures plus the net effect of non-cash expenses from depreciation, amortization and stock-based compensation charges. Other source of cash from operating activities included decreases in trade receivables was due to strong collections in the three months ended April 4, 2009. These sources of cash were partially offset by uses of cash for

purchase of inventories, prepaid expenses and other current assets and lower deferred product and service income. The decrease in deferred product and services income was primarily due to reduced system shipments and acceptance resulting in fewer systems deferred at April 4, 2009. The decreases in accounts payable and other current liabilities were due to reduced purchases made during the period resulting from our cost-cutting measures.

We believe that because of the relatively long manufacturing cycle of certain of our systems, particularly newer products, our inventories will continue to represent a significant portion of working capital. Currently, we are devoting significant resources to the commercialization of our laser processing systems and to the development of our next generation 1X lithography technologies. We currently intend to continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing, and selling, general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs associated with the production of our laser processing systems and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Moreover, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in inventory write-offs and asset impairment charges, either of which could materially adversely impact our results of operations.

During the three months ended April 4, 2009, net cash used in investing activities was $4.2 million, attributable to net purchase of short-term investments of $3.4 million and capital expenditures of $0.8 million during the quarter ended April 4, 2009.

Net cash provided by financing activities was $2.1 million during the three months ended April 4, 2009, attributable to net proceeds of $2.5 million under our notes payable offset partially by tax payments of $0.5 million for the issuance of common stock from the release of restricted stock units under our employee stock option plans.

At April 4, 2009, we had working capital of $184.7 million. Our principal sources of liquidity at April 4, 2009 consisted of $151.2 million in cash, cash equivalents and short-term investments, net of outstanding borrowings under our line of credit. We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 125 basis points (approximately 1.44% as of April 4, 2009). Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding under this facility, but we are not restricted in the use of those assets. Funds are advanced to us under this facility in accordance with pre-determined advance rates based on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants other than a collateral requirement. As of April 4, 2009, $8.5 million was outstanding under this facility, with a related collateral requirement of approximately $11.3 million of our cash, cash equivalents and short-term investments.

The development and manufacture of new lithography and laser-based systems and system enhancements is highly capital-intensive. In order to be competitive, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash . . .