BUSINESS OVERVIEW
We design, manufacture, sell and support industrial power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin-film deposition for various products, such as semiconductor devices, flat panel displays, solar panels and architectural glass, as well as grid-tie power conversion in the solar market. We also supply gas flow control technology and thermal instrumentation products for control and detection of gases in the thin-film deposition process for these same markets. Our global network of service centers provides local repair and field service capability in key regions. Our installed base provides a recurring revenue opportunity as we offer repair services, conversions, upgrades and refurbishments to companies using our products.
In the fourth quarter of 2008 and continuing in the first quarter of 2009, there have been adverse changes in the overall business climate that caused deterioration in the markets in which we operate and as a result our revenues have declined substantially.
Our analysis presented below is organized to provide the information we believe will be instructive for understanding the relevant trends going forward. However, this discussion should be read in conjunction with our consolidated financial statements in Part I Item 1 of this report, including the notes thereto.
Results of Operations
SALES
The following tables summarize net sales, and percentages of net sales, by customer type for each of the three month periods ended March 31, 2009 and 2008:

                                                   Three Months Ended March 31,              Increase/
                                                   2009                   2008              (Decrease)         % Change
                                                                     (In thousands)
Semiconductor capital equipment               $       14,399         $        57,669        $   (43,270 )          (75.0 )%
Non-semiconductor equipment                           18,228                  31,218            (12,990 )          (41.6 )

Total Sales                                   $       32,627         $        88,887        $   (56,260 )         (63.3) %




                                              Three Months Ended March 31,
                                                 2009               2008
         Semiconductor capital equipment            44.1 %              64.9 %
         Non-semiconductor equipment                55.9 %              35.1 %

                                                   100.0 %             100.0 %

We provide solutions to a diverse range of markets and geographic regions with the semiconductor capital equipment market being our largest market and sales to the solar market being our second largest market. Overall sales declined by $56.3 million, or 63.3%, to $32.6 million in the three months ended March 31, 2009 from $88.9 million for the three months ended March 31, 2008, generally as a result of the weakened global economy and, more specifically, as a result of severe weakness in the semiconductor capital equipment market. Sales to the semiconductor capital equipment market decreased to $14.4 million, or 44.1% of sales, in the three months ended March 31, 2009, as compared to $57.7 million, or 64.9% of sales, in the three months ended March 31, 2008.
Sales to Applied Materials Inc., our largest customer, were $5.4 million, or 16.7%, of our sales, in the three months ended March 31, 2009, as compared to $22.8 million, or 25.7% of our sales, in the three months ended March 31, 2008. Our sales to Applied Materials include sales for the semiconductor capital equipment market, as well as the solar, flat panel display and architectural glass markets.
Sales to customers in the non-semiconductor markets accounted for the remaining $18.2 million, or 55.9% of our sales, in the three months ended March 31, 2009, as compared to $31.2 million, or 35.1% of our sales, in the three months ended March 31, 2008. The decrease in absolute dollars resulted from the same global economic factors described above, however, the increase as a percentage of sales is evidence that the semiconductor capital equipment industry was more negatively impacted by the global recession than were the other markets we serve relative to the sale of our products. The markets that comprise our non-semiconductor markets include

solar, flat panel display, data storage, architectural glass, and other industrial thin-film manufacturing equipment. Our customers in these markets, other than the solar market, are predominantly large original equipment manufacturers (OEM's) for new equipment.
The solar market, which is included in non-semiconductor revenue above, was our fastest growing market in 2008; however, sales to this market were also affected by the weakened global economy in the three months ended March 31, 2009. Despite increasing as a percentage of overall product sales, absolute sales dollars to customers in the solar market decreased to $6.2 million, or 19.1% of sales, in the three months ended March 31, 2009 as compared to $8.3 million, or 9.4% of sales, in the three months ended March 31, 2008. We expect that our past investments in capacity for solar panel production lines will drive continued revenue opportunities in future periods. Our products are used in leading thin-film solar cell production technologies, such as polysilicon, copper indium gallium selenide (CIGS), copper indium selenide (CIS) and cadmium telluride. Sales of our Solaron® solar inverter are included in sales to the solar market.
Sales from global support services were $7.7 million, or 23.6% of sales, in the three months ended March 31, 2009 as compared to $15.2 million, or 17.1% of sales, in the three months ended March 31, 2008. The decrease in absolute dollars resulted from a continuing practice by our customers of utilizing idle equipment for spare parts in efforts to conserve cash as opposed to repairing malfunctioning or worn parts. Sales from our global support services are included in both the sales to semiconductor capital equipment and non-semiconductor equipment markets.
Although we have experienced continued success in our non-semiconductor business over the past eighteen months, demand for our products is driven by requirements for capacity expansion in each of the markets we serve. We have experienced, and expect to continue to experience, near term weakness throughout 2009 due to the softness in the global economy. This global downturn has impacted our customers' expansion plans, and coupled with difficulties in obtaining capital and deteriorating market conditions which may lead to the inability of our customers to obtain financing, has also resulted in a reduction of our sales to the non-semiconductor markets. We do, however, anticipate a continued shift in our business towards our non-semiconductor markets as we continue to invest in new technology and products for the solar market.
GROSS PROFIT
Our gross profit was $6.4 million, or 19.6% of sales, in the three months ended March 31, 2009 as compared to $35.8 million, or 40.3% of sales, in the three months ended March 31, 2008. The large decrease, in absolute dollars and as a percentage of sales, was due to an overall decrease in production volume related to the weakening economy and a lower margin product mix. Although we reduced our overall manufacturing expenses throughout 2008 by reducing fixed production and overhead costs as well as personnel costs through restructuring activities, we currently have excess manufacturing capacity related to buildings, machinery and unabsorbed overhead expenses.
RESEARCH AND DEVELOPMENT EXPENSES
The markets we serve constantly present us with opportunities to develop our products for new or emerging applications and require technological changes driving for higher performance, lower cost, and other attributes that will advance our customers' products. We believe that continued and timely development of new and differentiated products, as well as enhancements to existing products to support customer requirements, is critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue. Since inception, all of our research and development costs have been expensed as incurred.
Our research and development expenses for the three months ended March 31, 2009 were $11.1 million or 34.0% of sales, as compared to $13.1 million, or 14.7% of sales, in the same period last year.
The decrease in expenses in absolute dollars for the three months ended March 31, 2009, as compared to the same period for 2008, was primarily due to a reduction in personnel through the restructuring activities executed in the first three months of this year as well as in the fourth quarter of 2008. We continue to develop products for the solar market including products that address the thin film solar market and our Solaron® utility grade solar inverter product line. We expect to continue these investments in order to deliver an expanded product suite to the solar equipment market and the solar inverter market.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses are comprised of all global sales and marketing activities which include personnel, trade shows, advertising, third-party sales representative commissions and other selling and marketing activities. General and administrative expenses are comprised of our worldwide corporate, legal, patent, tax, financial, governance, administrative, information systems and human resource functions in addition to our general management.
Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2009 were $9.4 million, or 28.8% of sales compared to $14.5 million, or 16.3% of sales in the same period last year.
The decrease in expenses in absolute dollars for the three months ended March 31, 2009, as compared to the same period for 2008, was a result of the reductions of personnel and their related costs that were implemented throughout 2008 and early 2009 aimed at reducing administrative costs and increasing efficiencies as well as a $1.0 million adjustment for depreciation expense related to a change in the estimated useful life of our facility in Japan. We have also implemented cost reductions in all discretionary spending areas, such as travel and professional fees. As part of our continuing cost reduction efforts related to general and administrative expenses, in 2008 we consolidated our worldwide accounting processing functions in a shared services center in Shenzhen, China. Additionally, third party sales compensation to independent sales representatives was lower due to a decrease in overall sales revenue.
GOODWILL IMPAIRMENT CHARGE
We recorded a non-cash goodwill impairment charge in the amount of $63.3 million for the three months ended March 31, 2009 based upon the results of our impairment tests performed during the first quarter of 2009. For further discussion of the goodwill impairment charge recorded, see Note 7 - "Goodwill, Purchased Technology and Other Intangible Assets" to the Condensed Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates
- Goodwill Impairment."
RESTRUCTURING CHARGES We incurred restructuring costs of $3.4 million in the three months ended March 31, 2009, $2.1 million of which was related to global cost reduction efforts in March 2009. These cost reduction efforts were in response to deteriorating economic conditions and weakening demand from our end markets. Overall, we reduced our global workforce by approximately 315 people or 18% of total headcount across all functional areas and geographies in the three months ended March 31, 2009. The additional $1.3 million of restructuring costs incurred in the current period were related to similar cost reduction activities that occurred in the fourth quarter of 2008. As of March 31, 2009, $2.3 million in accrued severance and benefits were still unpaid due to the departure date of certain affected employees. Those payments, which are included in accrued restructuring on the condensed consolidated balance sheets, are expected to be made in the current year. For the year ended December 31, 2008, we recognized restructuring costs of $3.5 million, of which $3.3 million was associated with global cost reduction plans implemented at various times throughout the year made through job elimination. The remaining $0.2 million of restructuring charges recognized in 2008 was a result of a plan to transition the production of a number of our legacy products from our manufacturing facility in Fort Collins, Colorado to our manufacturing facility in Shenzhen, China. Restructuring activity in 2008 led to the elimination of 139 positions on a worldwide basis. As of March 31, 2009, $1.0 million in accrued severance and benefits were still unpaid due to the departure date of certain affected employees. Those payments, which are included in accrued restructuring on the condensed consolidated balance sheets, are expected to be made in the current year. During the three months ended March 31, 2008, we recognized restructuring costs of $0.7 million related to a restructuring of a portion of our administrative operations. All severance benefits and other liabilities related to this restructuring have been paid. We continue to look for ways to make our global workforce more efficient and effective, which may lead to additional cost reduction activities in the future.
OTHER INCOME, NET
Other income, net consists primarily of investment income and expense, foreign exchange gains and losses and other miscellaneous gains, losses, income and expense items. Other income decreased 68.8% to $0.3 million in the three months ended

March 31, 2009 from $0.9 million in the three months ended March 31, 2008, primarily due to lower interest rates and decreased investment balances.
PROVISION (BENEFIT) FOR INCOME TAXES
During 2008, based on our 2008 operating results and projection of future operating results within the United States, our management evaluated the recoverability of our deferred tax assets in the United States and concluded a portion of our U.S. deferred tax assets were not recoverable under the more likely than not criteria in SFAS 109, "Accounting for Income Taxes." As such, an increase to the valuation allowance of $18.0 million dollars was recorded during the quarter ended December 31, 2008.
In the three months ended March 31, 2009, we sustained further losses in the United States and, as a result, management determined that an increase to the valuation allowance of $1.0 million was necessary since management believes that we are not likely to utilize the benefits of the associated deferred tax assets. The ultimate realization of our overall deferred tax assets is dependent upon the generation of approximately $72.2 million of future taxable income in the U.S., the timing and amount of which is uncertain. We assess the recoverability of our net deferred tax assets on a quarterly basis. If our expectation of future realization of our deferred tax assets changes, we will adjust the valuation allowance with a corresponding change in income tax expense in such period.
The income tax benefit for the three months ended March 31, 2009 was $0.9 million, all of which related to foreign losses and represented an effective tax rate of 1.2% compared to a tax provision of $2.3 million, or a 28% effective tax rate, for the three months ended March 31, 2008. The decrease in the current three month effective tax rate as compared to the rate for the three months ended March 31, 2008 resulted primarily from the recording of the additional valuation allowance discussed above and a continued change in the profitability mix between the U.S. and our global subsidiaries, whereby losses were also generated at our higher income tax subsidiaries throughout the world during the current period as compared to the generation of income in those same jurisdictions in the comparable period in 2008. The effective tax rate in the current period was also impacted by the impairment of goodwill incurred this quarter, which is non-deductible for tax purposes, as well as income recognized in the U.S. from the repatriation of cash from our subsidiary in Japan.
Management believes it is likely that we will utilize the deferred tax assets associated with the foreign losses and, therefore; we have taken a benefit for those foreign losses in the current period. Liquidity and Capital Resources
Our primary sources of liquidity are our available cash levels and cash flows generated by operating activities. We utilize these capital resources to make capital expenditures primarily for our operational needs, investment in technology applications and tools to further develop our products and for other general corporate purposes, including the funding of possible acquisitions. In future periods, we intend similar uses of these funds.
During the three months ended March 31, 2009, we used $0.6 million for capital expenditures and generated $3.5 million from the sale of marketable securities and $1.0 million in cash from operating activities, resulting in a $1.0 million decrease in available cash (including the $4.9 million of unfavorable effects of international currency exchange rates on cash).
Net cash flows provided by operating activities in the three months ended March 31, 2009 were $1.0 million, compared to $1.1 million in the three months ended March 31, 2008. The $0.1 million decrease in net cash flows from operating activities was due to an $85.7 million decrease in net income, offset by a $61.9 million increase in non-cash reconciling items such as goodwill impairment, depreciation and amortization, stock-based compensation and deferred income taxes and a $23.7 million increase in cash flows from changes in operating assets and liabilities, principally the collection of receivables.
Capital expenditures, which are generally funded by cash generated from operating activities and available cash balances, were $0.6 million in the three months ended March 31, 2009, compared to $1.6 million in the three months ended March 31, 2008. Capital expenditures in both periods presented primarily include the cost of lab and testing equipment to support sustaining engineering and new product development efforts.
At March 31, 2009, our long-term investments had a fair value of $23.2 million and consisted of auction rate securities ("ARS") whose underlying assets are primarily student loans originated under the Federal Family Education Loan Program ("FFELP"). FFELP student loans are guaranteed by state guarantors who have reinsurance agreements with the U.S. Department of Education. In addition to the student loans, a smaller portion of our portfolio is held in municipal securities. These ARS were intended to provide liquidity

via an auction process that resets the applicable interest rate approximately every 30 days and allows investors to either roll over their holdings or gain immediate liquidity by selling such investments at par. The underlying maturities of these investments range from 18 to 39 years. As a result of negative conditions in the global credit markets, since February 2008, the majority of the auctions for our investment in these securities have failed to settle, causing us to hold such securities. Consequently, the investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful or redeemed. To this end, in November 2008, we executed the Put Agreement and expect to liquidate all of our remaining ARS at par during the latter half of 2010. We do not expect to incur any loss of principal; however, until we liquidate our ARS, we will recognize any decline in fair value of the ARS in earnings. We expect the subsequent changes in the value of the Put Agreement will largely offset any subsequent fair value declines of the ARS, subject to the continued performance by the financial institution of its obligations under the Put Agreement. Other than via the Put Agreement, the principal could become available under three different scenarios: (1) the ARS is called; (2) the market has returned to normal and auctions have resumed and are successful; and (3) the principal has reached maturity.
At March 31, 2009, we had $173.4 million in cash, cash equivalents and marketable securities, including our auction rate securities. We believe that our current cash levels and cash flows from future operations will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures and contractual obligations for the foreseeable future. Critical Accounting Policies and Estimates In preparing our financial statements, we must make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies, as discussed in this Form 10-Q and/or our Form 10-K for the year ended December 31, 2008, affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements:
WARRANTY COSTS - We offer warranty coverage for a majority of our products for periods typically ranging from 12 to 24 months after shipment. We warrant our solar inverter for five years, and we offer extended warranties for up to an additional five years. We estimate the anticipated costs of repairing products under warranty based on the historical or expected cost of the repairs and expected failure rates. The assumptions used to estimate warranty accruals are reevaluated quarterly, at a minimum, in light of actual experience and, when appropriate, the accruals or the accrual percentage is adjusted based on specific estimates of project repair costs and quantity of product returns. Our determination of the appropriate level of warranty accrual is based on estimates of the percentage of units affected and the repair costs. Estimated warranty costs are recorded at the time of sale of the related product, and are recorded within cost of sales in the consolidated statements of operations.
The following table summarizes the activity in our warranty reserve during the three months ended March 31, 2009 and 2008:

                                                  Three Months Ended
                                                       March 31,
                                                   2009          2008
                                                    (In thousands)
               Balance at beginning of period   $    6,189     $  8,812
               Additions charged to expense            843        1,962
               Deductions                           (1,418 )     (2,319 )

               Balance at end of period         $    5,614     $  8,455

EXCESS AND OBSOLETE INVENTORY- Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity of inventory on hand to management's forecast of customer demand. Customer demand is dependent on many factors, including both micro and macroeconomic, and requires us to use significant judgment in our forecasting process. We must also make assumptions regarding the rate at which new products will be accepted in the marketplace, the rate at which customers will transition from older products to newer products, effect of engineering changes to a product or discontinuance of a product line. If actual market conditions or our customers' product demands are less favorable than those projected, additional valuation adjustments may be necessary.

We will continue to evaluate the estimates related to our excess and obsolete inventory reserve. If market conditions and customer demand continue to weaken in future periods, we may determine that increases in our reserve and, therefore, further increases in cost of goods sold and decreases in gross profit may be necessary.
GOODWILL IMPAIRMENT- In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), we perform a goodwill impairment analysis using the two-step method on an annual basis as of October 31 and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The recoverability of goodwill is measured by comparing the company's carrying amount, including goodwill, to its fair market value.
As of October 31, 2008, and again as of December 31, 2008, after completing the first step of the impairment test, no indication of impairment existed because our market capitalization exceeded our carrying value as of those dates. However, based upon a combination of factors subsequent to December 31, 2008, including a significant decline in market capitalization below our carrying value, the deteriorating macro-economic environment, which had resulted in a significant decline in customer demand, and illiquidity in the overall credit markets, we concluded that sufficient indicators existed to require us to perform an interim goodwill impairment analysis at February 28, 2009.
We determined our fair market value at February 28, 2009 based on our market capitalization, an average weighting of both projected discounted future cash flows and the use of comparative market multiples and relative control premiums. The use of comparative market multiples (the market approach) compares the Company to other comparable companies based on valuation multiples to arrive at a fair value. The use of discounted cash flows is based on assumptions that are consistent with our estimates of future growth and the strategic plan used to manage the underlying business, and also includes a probability-weighted expectation as to our future cash flows. Factors requiring significant judgment . . .