CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

The preparation of the financial information contained in this 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis, including those related to allowances for doubtful accounts and returns, warranty obligations, inventory valuation, the carrying value and any impairment of intangible assets, and income taxes. These critical accounting policies are discussed in more detail in the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2008.

FORWARD LOOKING STATEMENTS:

The following management's discussion and analysis contains a number of estimates and predictions that are forward looking rather than based on historical fact. Among other matters, we discuss (i) our expectations regarding the transfer of our research and development and manufacturing operations for our systems products to Singapore and the costs we expect to incur this year, and avoid in the future, because of that transfer; (ii) our anticipated revenues and losses for the second quarter of 2009; (iii) the timing of introduction of and the potential margin improvement resulting from our SE500 next-generation solder paste inspection system; (iv) other new technologies that we have under development; (v) the potential effect, if any, of our sensors not being used in the future by a significant customer; (vi) our expectations regarding market acceptance of WaferSense™ and our other semiconductor products; (vii) our beliefs regarding trends in the general economy and its impact on markets for our equipment; (viii) the impact of currency fluctuations on our operations; and
(iv) the potential impact, if any, of ongoing Internal Revenue Service audits of our 2006 and 2007 federal income tax returns. Although we have made these statements based on our experience and best estimate of future events, there may be events or factors that we have not anticipated, and the accuracy of our statements and estimates are subject to a number of risks, including those identified in Item 1A of this Form 10-Q and in our Annual Report on Form 10-K.

RESULTS OF OPERATIONS:

General

Our products are sold primarily into the electronics assembly, semiconductor DRAM memory, and semiconductor fabrication capital equipment markets, where we sell products both to original equipment manufacturers of production equipment and to end-user customers that produce circuit boards and semiconductor wafers and devices. Historically these markets have been very cyclical, with periods of rapid growth as worldwide capacity is added to support increased consumer demand for electronic products, and new capital equipment is purchased as a result of technology changes in electronics components, such as miniaturization, and changing production requirements. These periods of growth have historically been followed by periods of excess capacity and reduced capital spending.

Our results were favorably impacted in 2006 and 2007 as the worldwide demand for cell phones, laptops and other consumer electronics remained strong, driving the need for increased production of printed circuit boards and memory modules, and thereby increasing demand for our electronic assembly and semiconductor products. After peaking in the third quarter of 2007, our revenue has sequentially declined each quarter since then, as our results were negatively impacted by reduced levels of capital spending for electronics manufacturing capacity brought about by the deepening weakness in the global economy. New orders dropped off sharply late in the fourth quarter of 2008 as the global economy fell into a severe recession.

Our first quarter results continued to be adversely affected by ongoing weakness in the global electronics market, and we expect this trend to continue at least into the second quarter of 2009. Revenues were $4.4 million in the quarter ended March 31, 2009, down 68% from $13.8 million in the same period last year. We lost $4.0 million from operations in the quarter ended March 31, 2009, down from operating income of $159,000 in the quarter ended March 31, 2008. For the quarter ending June 30, 2009, we are forecasting revenue of $4.5-$5.5 million and another significant loss from operations. Revenue in the quarter ending June 30, 2008 was $13.4 million.

• In February 2008, we announced plans to move a significant portion of our systems-related product development and manufacturing to Singapore. The transition of systems related product development to Singapore was substantially complete by the end of the fourth quarter of 2008 and transition of manufacturing for our system products was substantially complete by the end of the first quarter of 2009. Remaining transition costs in 2009 are not expected to be significant. The realignment of our systems-related product development and manufacturing to Singapore has resulted in lower costs and a more focused R&D effort.

• In addition to the impact of global economic conditions on our sales, Assembleon notified us in 2008 that it intended to start transitioning away from our current alignment products when it introduced its next generation of equipment in 2010, although the timing of this transition has become less clear as the economy has slowed. Approximately 10% of our revenue has historically been generated from new product sales to Assembleon, and although we would expect to continue to generate some repair work from Assembleon after the transition to new products, we expect most or all of this new product revenue will be eliminated.

• In response to the significant weakness in our markets and the global economy, we implemented workforce reductions in November 2008 and February 2009. Additional cost savings measures were implemented in February 2009, including salary reductions, consolidation of manufacturing operations for our semiconductor products into our Minneapolis, Minnesota facility and reductions in spending for non-labor costs such as travel, supplies and the like.

• From the start of the fourth quarter of 2008 through the end of the second quarter of 2009, we will have reduced our workforce by 50 employees or approximately 25%, resulting from the move to Singapore, relocation of manufacturing for our semiconductor operations, and the November 2008 and February 2009 workforce reductions. We incurred a $305,000 charge for severance in the three months ended March 31, 2009 related to these actions. We do not expect implementation of these cost reduction actions to impact our strategic growth programs.

• During 2008, we invested heavily in our recently introduced next-generation SE500 solder paste inspection system. Based on a new cost-reduced platform, we believe the SE500 is the fastest and most accurate solder paste inspection system available on the market. Given its industry-leading inspection capabilities we believe the SE500 will command improved pricing in comparison to the existing SE300. We also believe the SE500 should enable us to gain a larger share of the global solder paste inspection market.

• We continue to pursue several promising growth opportunities for our next generation inspection technology, which is aimed at lowering the cost of inspection, in addition to providing faster production through-put speeds, improved ease of use, and the higher resolution required for inspecting progressively smaller electronic components. Reflecting our progress with these R&D initiatives, we signed a new OEM contract in 2008 and a second OEM development contract with a manufacturer of electronic assembly equipment in the first quarter of 2009. Initial revenues from these projects are anticipated in 2010.

• We believe our ongoing focus on R&D, combined with the revenue generating potential of our new SE500 solder paste inspection system and strategic repositioning in Asia, will lead to improved operating results as the global electronics market starts to recover from the current economic recession.

We have no debt and our cash and marketable securities of $26.2 million at March 31, 2009 are more than adequate to fund our operations and various growth opportunities for an extended period of time, even given our expectation for weak financial results through at least the first half of 2009, due to the severe global economic recession.

Segment Results

Operating results for our electronic assembly and semiconductor segments for the
three month periods ended March 31, 2009 and 2008 are as follows:


                                   Three months ended March 31, 2009          Three months ended March 31, 2008
                                Electronic         Semi-                    Electronic        Semi-
(In thousands)                   Assembly        Conductor       Total       Assembly       Conductor       Total

Revenue                        $       3,685    $       677    $   4,362   $     12,410    $     1,397    $  13,807
Cost of revenue                        2,676            308        2,984          6,860            508        7,368
Gross profit                           1,009            369        1,378          5,550            889        6,439

Research and development
expenses                               1,786            291        2,077          2,121            491        2,612
Selling, general and
administrative expenses                2,604            328        2,932          3,032            398        3,430
Severance and recruitment                216             89          305            193              -          193
Amortization of intangibles               27             18           45             27             18           45

Income (loss) from
operations                     $      (3,624 )  $      (357 )  $  (3,981 ) $        177    $       (18 )  $     159

Revenues

Our revenues decreased by 68% to $4.4 million in the three months ended March
31, 2009 from $13.8 million in the three months ended March 31, 2008. The
following table sets forth revenues by product line for the three month periods
ended March 31, 2009 and 2008:


                                               Three Months Ended
                                                   March 31,
                 (In thousands)                 2009         2008

                 Electronic assembly
                 OEM sensors                 $    1,440    $  6,831
                 SMT systems                      2,245       5,579
                 Total electronic assembly        3,685      12,410
                 Semiconductor                      677       1,397
                 Total                       $    4,362    $ 13,807

Revenues from electronic assembly OEM sensors decreased by 79% to $1.4 million in the three months ended March 31, 2009 from $6.8 million in the three months ended March 31, 2008. Revenues from electronic assembly SMT systems decreased by 60% to $2.2 million in three months ended March 31, 2009 from $5.6 million in the three months ended March 31, 2008.

The severe weakness in the global economy and electronic markets experienced late in 2008 continued into the first quarter of 2009, causing the significant declines in revenue from both our electronic assembly OEM sensors and SMT system products when compared with the first quarter of 2008. We expect these trends to continue into the second quarter of 2009.

Export revenue from electronic assembly sensors and SMT systems totaled $2.9 million, comprising 79% of electronic assembly revenue in the three months ended March 31, 2009, compared to $11.7 million or 95% of electronic assembly revenue in the three months ended March 31, 2008. Sales to international customers continue to be significant, as manufacturing of electronic components has migrated offshore, particularly to China and other areas of Asia.

Revenues from semiconductor products decreased by $720,000 or 52% in the three months ended March 31, 2009 from $1.4 million in the three months ended March 31, 2008. The decrease in revenue was due to severe weakness in the global economy, difficult conditions in the market for semiconductor fabrication equipment and declining revenue from our older wafer mapper and frame grabber products.

Our wafer mapping and frame grabber products are relatively mature. We anticipate that future growth in our semiconductor revenues, exclusive of changes related to capital procurement cycles, will come from our new WaferSense™ products. WaferSense™ is a family of wireless, wafer like precision measurement tools for in-situ setup, calibration and process optimization in semiconductor processing equipment. We have recently introduced several new additions to the WaferSense™ product line, including additional leveling sensors, along with new gapping, teaching and vibration sensors.

Export revenue from semiconductor products totaled $208,000, comprising 31% of semiconductor revenue in the three months ended March 31, 2009, compared to $556,000 or 40% of semiconductor revenue in the three months ended March 31, 2008.

Gross Margin

Gross margin as a percentage of electronic assembly sales was 27% in the three months ended March 31, 2009, compared to 45% in the three months ended March 31, 2008. The reduction in gross margin percentage during the three months ended March 31, 2009 was due to significantly lower sales of higher margin electronic assembly sensors, which were more severely impacted by the recession. Additionally, the lower levels of revenue resulted in substantially lower production volumes over which to spread fixed manufacturing overhead costs.

In response to significant weakness in our markets resulting from the global recession, and transition of manufacturing for our SMT system products to Singapore, we will have reduced our manufacturing workforce by over 30 employees or 45% by the end of the second quarter of 2009. Transition of manufacturing for our SMT system products to Singapore was substantially complete by the end of the first quarter of 2009. We will also consolidate manufacturing for our semiconductor products with our sensor products in our Minneapolis Minnesota headquarters facility by the end of the second quarter of 2009. These actions will allow us to reduce our overall manufacturing costs and better leverage our manufacturing operations, thereby favorably impacting our gross margins not only in the second half of 2009, but also in future periods. We estimate factory cost savings by the middle of 2009 from our cost reduction actions and transition of systems-related manufacturing to Singapore of approximately $2.0 million per year.

The market for automated inspection has become increasingly competitive, causing us to decrease the selling prices of our existing products in some markets. We compensate for this pricing pressure by introducing new products with more features and improved performance and through manufacturing cost reduction programs. For example, we believe our recently introduced next-generation SE500 solder paste inspection system, which will be manufactured in Singapore, will be the fastest and most accurate solder paste inspection system available on the market. Although we expect to introduce several new systems platforms in the future based on new technology that will also allow for reduced cost and improvement in margins, we anticipate that the global recession will impact our ability to market these products and that margins will be depressed until the economy begins to recover.

Gross margin as a percentage of sales was 55% in the three months ended March 31, 2009, compared to 64% in the three months ended March 31, 2008. Gross margin as a percentage of semiconductor sales decreased due to lower levels of revenue, resulting in substantially lower production volumes over which to spread fixed manufacturing overhead costs. The consolidation of manufacturing for our semiconductor products into our Minneapolis Minnesota headquarters facility will start to have a favorable impact on semiconductor gross margins in the second quarter of 2009, with the full benefit being realized starting in the third quarter of 2009.

Operating Expenses

We believe continued investment in research and development of new products, coupled with continued investment in and development of our sales channel is critical to future growth and profitability. We maintain research and development and sales and marketing expenses at relatively high levels, even during periods of downturn in our electronic assembly and semiconductor capital equipment markets, as we continue to fund development of important new products, and continue to invest in our sales channels and develop new sales territories.

In February 2008, we announced plans to move a significant portion of our systems-related product development and manufacturing to Singapore. The transition of systems-related product development to Singapore was substantially complete by the end of the fourth quarter of 2008 and the transition of manufacturing for our system products was substantially complete by the end of the first quarter of 2009. Remaining transition costs in 2009 are not expected to be significant. The realignment of our systems-related product development and manufacturing to Singapore has resulted in lower costs and a more focused development effort.

In response to the significant weakness in our markets and the global economy, and also due to our transition of a significant portion of our operations to Singapore, we will have reduced our workforce by 50 employees or 25% (over 30 in manufacturing and approximately 20 in development, sales and marketing) from the start of the fourth quarter of 2008 through the end of the second quarter of 2009. Other cost saving measures include salary reductions of 12% for all officer and internal director level positions, 10% for other employees with salaries exceeding $100,000 and a smaller percentage reduction for employees with salaries ranging between $35,000 and $100,000. In addition, we will also reduce spending for non-labor costs such as travel, supplies and the like. We anticipate that the workforce reductions, salary reductions and other cost saving measures, combined with savings from our transition to Singapore will provide aggregate annual expense savings by the middle of 2009 of almost $5.0 million per year, of which approximately $3.0 million will be operating expense savings and $2.0 million will be the factory cost savings discussed above under gross margin.

We are continually evaluating existing and new research and development projects, and may elect to increase or decrease expenditures based on an assessment of the future revenue and profit potential of these projects. Implementation of the cost reduction actions discussed above will not impact any of our strategic growth programs; work on next generation inspection technologies or pursuit of new OEM contracts.

Research and development expenses for our electronic assembly segment were $1.8 million in the three months ended March 31, 2009, compared to $2.1 million in the three months ended March 31, 2008. The 16% decrease in research and development expenses in 2009 resulted from a more focused and efficient research and development effort due to transition of systems related research and development to Singapore. In addition, the cost reduction actions implemented in November 2008 and February 2009 contributed to the lower level of spending in the three months ended March 31, 2009. Singapore transition costs classified as research and development expense in the three months ended March 31, 2008 were not significant.

Selling, general and administrative expenses for our electronic assembly segment were $2.6 million in the three months ended March 31, 2009 compared to $3.0 million in the three months ended March 31, 2008. The decrease in selling, general and administrative expenses in 2009 compared to 2008 was due to a reduction in travel costs and commissions for third party sales representatives resulting from the lower level of SMT system sales. Selling general and administrative expense was positively impacted in 2009 due to lower foreign sales office expenses resulting from favorable foreign exchange rates.

Research and development expenses for our semiconductor segment were $291,000 in the three months ended March 31, 2009 compared to $491,000 in the three months ended March 31, 2008. The decline in research and development expenses resulted from the cost reduction actions that were implemented in November 2008 and February 2009.

Selling, general and administrative expenses for our semiconductor segment were $328,000 in the three months ended March 31, 2009 compared to $398,000 in the three months ended March 31, 2008. The decrease in selling, general and administrative expense in 2009 compared to 2008 was due to a reduction in salaries, consulting and sales commissions resulting from the lower level of revenue.

Severance and Recruitment Costs

We started to incur severance and recruitment costs in February 2008 in connection with our decision to move a significant portion of development and manufacturing for our systems products to Singapore. The transition of systems-related product development was substantially complete by the fourth quarter of 2008 and the transition of systems-related manufacturing was substantially complete by the end of the first quarter of 2009. Any remaining transition costs in 2009 are not expected to be significant.

Additional severance costs were incurred in November 2008 when we reduced our workforce by approximately 10% or 20 employees in response to the weak global economic conditions. In February 2009, we further reduced our workforce by 24 positions in response to weakening conditions in the global economy, our transition to Singapore and our decision to consolidate manufacturing for our semiconductor products in our Minneapolis facility. We anticipate that all of these employees will have departed by the end of the second quarter of 2009. Severance expense related to these actions of $305,000 was incurred in the three months ended March 31, 2009.

All of the severance costs related to the February 2008 transition to Singapore, November 2008 and February 2009 workforce reductions have been classified as severance and recruitment in our statement of operations.

A summary of our severance accruals follows:

                                     Electronic Assembly                                 Semiconductor

                                      November       February               November     February
                       February         2008           2009                   2008         2009
                         2008         workforce      workforce             workforce    workforce
(In thousands)         Singapore      reduction      reduction    Total    reduction    reduction    Total    Total

Balance, December
31, 2008              $       207    $       104    $         -   $  311   $        4   $        -   $    4      315

Cost incurred                  51              -            165      216            -           89       89      305

Payments made                 (90 )         (104 )          (97 )   (291 )         (4 )         (8 )    (12 )   (303 )

Balance, March 31,
2009                  $       168    $         -    $        68   $  236   $        -   $       81   $   81      317

Additional severance expense of approximately $100,000 is expected in the three months ended June 30, 2009.

Interest income and other includes interest earned on investments, realized gains and losses from sales of investments and gains and losses associated with foreign currency transactions and foreign currency swap agreements. Interest income and other decreased in the three months ended March 31, 2009 compared to the same period of 2008 due to lower rates of interest earned on invested funds and lower invested balances of cash equivalents and marketable securities, primarily resulting from repurchases of our common stock in 2008.

We anticipate that interest income and other will decline throughout 2009 due to lower available balances of cash and marketable securities, as well as lower rates of interest earned on invested funds.

Provision for Income Taxes and Effective Income Tax Rate

We recorded an income tax benefit in the three months ended March 31, 2009 at an effective tax rate of 36%, compared to an effective tax rate of 37% in the three months ended March 31, 2008. The change in the effective tax rate for 2009 is due to higher tax expense in foreign tax jurisdictions with tax rates differing from the U.S federal statutory rate, offset by reductions in the level of non-deductible expenses for income tax purposes and a small benefit from the research and experimentation (R&D) tax credit. No benefit from the R&D tax credit was recognized in the three months ended March 31, 2008 because the R&D tax credit for 2008 had not yet been signed into law. Discrete items impacting the effective tax rate in the three months ended March 31, 2009 and 2008 were inconsequential.

We file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2005. Our 2006 and 2007 federal income tax returns are being audited by the Internal Revenue Service. The audits are progressing and we presently anticipate that any potential settlements resulting from these audits will occur in the third quarter of 2009. At the present time, we are not able to reliably estimate what impact, if any, the audits may have on our future results of operations or financial condition.

We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and income before income taxes under U.S. generally accepted accounting principals, research and development tax credit carry forwards and foreign net operating loss carry . . .