This quarterly report on Form 10-Q contains forward-looking statements, which are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industry. Our forward-looking statements may include statements that relate to our future revenue, gross margin, customer demand, market share, competitiveness, margins, product development plans and levels of research and development (R&D) activity, outsourcing plans and operating expenses, tax expenses, the expected effects, cost and timing of restructurings, excess inventory reserves, the level of our vendor commitments as compared to our requirements, cost-saving initiatives, and consolidation of operations and facilities, economic conditions in general and in our industry, and the sufficiency of our financial resources to support future operations and capital expenditures. Forward-looking statements typically are identified by use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes," and similar expressions, although some forward-looking statements are expressed differently. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. Such risks and uncertainties include those set forth in Part II, Item 1A under "Risk Factors" and Part I, Item 2 under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our actual results could differ materially from those anticipated by these forward-looking statements. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward- looking statements, whether as a result of new information, future events, or for any other reason.

Documents to Review In Connection With Management's Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes in our last filed Annual Report on Form 10-K, for the year ended December 31, 2008 (our 2008 Form 10-K).

Overview

We are a supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits (ICs). Our manufacturing equipment is used for transistor level, or front-end-of-line manufacturing, and also in specialized applications for processing the interconnect layer, or back-end-of-line processing. Our manufacturing equipment utilizes innovative technology to deliver advanced processing capabilities and high productivity for the fabrication of current and next-generation ICs.

Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. Because the demand for semiconductor devices is highly cyclical, the demand for wafer processing equipment is also highly cyclical.

Beginning in the second half of 2007 and throughout 2008, we experienced weakness in the overall semiconductor market combined with the overall weakness in the economy, particularly in the financial sector, and we expect that weakness to continue into 2009 and perhaps into 2010. Oversupply conditions in the semiconductor market have significantly reduced the utilization at our customer's fabrication plants and delayed major capital investments indefinitely. There continue to be several uncertainties that could impact our financial performance during 2009. Revenue projections are unclear for the next year, and if revenue remains at the current low levels we may be required to book additional reserves for excess inventory, and/or vendor commitments that may be in excess of our requirements, and we will also continue to have significant under-absorption of our factories. These factors will have a major impact on our gross margin percentages for the remainder of 2009.

During the first quarter of 2009, end markets have continued to be severely impacted by global financial conditions. Accordingly, we have continued to focus on cash preservation, cost reduction and protecting the investment in our new products to position us for success in the future. Since the second quarter of 2008, we have implemented strict cost reduction initiatives including reductions of our global headcount and salary reductions for all employees. We continue to focus on our objectives to outsource manufacturing in Fremont and Germany to reduce manufacturing overhead costs. Our global headcount has been reduced as a result of various restructuring activities during 2008. We have optimized our worldwide facilities, reduced variable headcount expenses through shutdowns and unpaid time-off,

Going forward; the success of our business will be dependent on numerous factors, including, but not limited to, the market demand for semiconductors and semiconductor wafer processing equipment, and our ability to (a) significantly grow the Company, either organically or through acquisitions, in order to enhance our competitiveness and profitability, (b) develop and bring to market new products that address our customers' needs, (c) grow customer loyalty through collaboration with and support of our customers (d) maintain a cost structure that will enable us to operate effectively and profitably throughout changing industry cycles and (e) generate the gross margins necessary to enable us to make the necessary investments in our business.

Results of Operations

The following table sets forth our condensed consolidated results of operations
for the periods indicated, along with amounts expressed as a percentage of net
sales, and comparative information regarding the absolute and percentage changes
in these amounts:

                                   Three Months Ended
                      ---------------------------------------------
                          March 29, 2009          March 30, 2008       Increase (Decrease)
                      ----------------------   --------------------   ---------------------
                      (thousands)      %       (thousands)     %      (thousands)      %
                      -----------   --------   -----------   ------   -----------   -------
Sales
   Products              $ 4,699       84.3      $ 46,692     96.0     $ (41,993)    (89.9)
   Services                  873       15.7         1,963      4.0        (1,090)    (55.5)
                      -----------   --------   -----------   ------   -----------
      Net sales            5,572      100.0        48,655    100.0       (43,083)    (88.5)
                      -----------   --------   -----------   ------   -----------
Cost of sales
   Products               13,130    n/m (1)        27,111     55.7       (13,981)    (51.6)
   Services                  357        6.4           710      1.5          (353)    (49.7)
                      -----------   --------   -----------   ------   -----------
      Total cost of       13,487    n/m (1)        27,821     57.2       (14,334)    (51.5)
sales                 -----------   --------   -----------   ------   -----------
   Gross margin           (7,915)    n/m (1)       20,834     42.8       (28,749)   n/m (1)
Operating expenses:
   Research,
development and
engineering                6,650     n/m (1)        7,846     16.1        (1,196)    (15.2)
   Selling, general
and administrative        12,854     n/m (1)       16,775     34.5        (3,921)    (23.4)
   Amortization of
intangibles                   -          -            128      0.3          (128)   n/m (1)
   Restructuring             918       16.5            -        -            918    n/m (1)
charges               -----------   --------   -----------   ------   -----------
      Total               20,422    n/m (1)        24,749     50.9        (4,327)    (17.5)
operating expenses    -----------   --------   -----------   ------   -----------
Loss from
operations               (28,337)   n/m (1)        (3,915)    (8.0)      (24,422)   n/m (1)
Interest income              279        5.0         1,225      2.5          (946)    (77.2)
Interest expense             (33)      (0.6)           -        -            (33)   n/m (1)
Other income               1,026       18.4        (1,392)    (2.9)        2,418    n/m (1)
(expense), net        -----------   --------   -----------   ------   -----------
Loss before income
taxes                    (27,065)   n/m (1)        (4,082)    (8.4)      (22,983)   n/m (1)
Provision for                162        2.9           134      0.3            28      20.9
income taxes          -----------   --------   -----------   ------   -----------
Net loss               $ (27,227)   n/m (1)      $ (4,216)    (8.7)    $ (23,011)   n/m (1)
                      -----------   --------   -----------   ------   -----------


________________________

Net Sales decreased 89 percent to $5.6 million for the three months ended March 29, 2009 compared to $48.7 million for the same period in 2008. The decrease in net sales was primarily due to a $42.0 million decline in

Deferred revenue at March 29, 2009, decreased to $2.6 million from $4.2 million at December 31, 2008, primarily due to a $1.9 million net decrease in deferred revenue for system shipments and a $0.3 million net increase in deferred revenue from service contracts.

Gross margin was a negative $7.9 million for the three months ended March 29, 2009, a decrease of $28.7 million when compared to $20.8 million for the same period in 2008. The decrease was primarily attributable to an 89 percent decline in net sales for the first quarter of 2009 when compared to the same period in 2008, manufacturing under absorption of $2.0 million in 2009 when compared to $1.0 million for the same period in 2008 and an increase in reserves for excess inventory and vendor commitments of $9.3 million in 2009 compared to $0.9 million for the same period in 2008. The weakness in the overall semiconductor equipment market resulted in lower revenue levels and the corresponding under absorption of fixed manufacturing overhead costs in our factories. We have booked an additional $6.8 million for excess inventory due to lower forecasted revenue volumes and $2.5 million for potential liabilities resulting from vendor commitments.

Research, Development and Engineering ("RD&E") expenses were $6.7 million for the three months ended March 29, 2009, a decrease of $1.2 million or 15 percent when compared to $7.8 million for the same period in 2008. The decrease in RD&E expenses was primarily due to reduced headcount from restructuring activities that resulted in a salary reduction of $1.3 million, and lower outside service expenses of $0.2 million as we engaged in several cost reduction initiatives, offset partially by additional lab tool depreciation of $0.3 million.

Selling, General and Administrative ("SG&A") expenses were $12.9 million for the three months ended March 29, 2009, a decrease of $3.9 million or 23 percent when compared to $16.8 million for the same period in 2008. The decrease in SG&A expenses was primarily due to reduced headcount from restructuring activities that resulted in a salary reduction of $3.6 million, a reduction of outside service and travel expenses of $1.9 million, a reduction of logistics costs due to the decline in sales volumes of $0.6 million, and a reduction of $0.5 million in training and other employee related expenses. These were partially offset by an increase of $1.1 million in amortization expenses for evaluation tools and $1.6 million in additional market development and selling efforts.

During the year ended December 31, 2008, we implemented several restructuring programs, beginning in the second quarter of 2008 in response to the weakness in the overall semiconductor industry. As a result of our restructuring activities, we reduced headcount by 35 percent or approximately 200 employees and optimized facilities worldwide over the course of 2008. The estimated annual savings from all the restructuring activities are expected to be approximately $19.0 million. A percentage of the savings will be re-invested in our new product development activities and the remainder will help us reduce our cash loss from operations. As of December 31, 2008, we had $3.9 million in our restructuring reserves comprised of $3.5 million in severance reserves and $0.4 million for lease termination expenses.

During the first quarter of 2009, additional restructuring reserves of $1.0 million were booked, primarily for severance expenses relating to employees notified in the first quarter and additional lease termination expenses in accordance with SFAS No.146, Accounting for Costs associated with Exit or Disposal Activities. $2.7 million was paid against these restructuring reserves as severance expenses. As of March 29, 2009, we had $2.1 million in our restructuring reserves, comprised of $1.6 million in severance reserves and $0.5 million for lease termination

Interest income was $0.3 million for the three months ended March 29, 2009, a decrease of $0.9 million when compared to $1.2 million for the same period in 2008. The decrease was primarily due to lower cash investment balances and lower average interest rate yields. Interest rate yield decreased by 2.5 percent during the same period.

Other income, net was $1.0 million for the three months ended March 31, 2009, an increase of $2.4 million when compared to an expense of $1.4 million for the same period in 2008. The increase is primarily due to foreign currency exchange gains of $0.9 million compared to a loss of $1.1 million for the same period in 2008. The dollar has strengthened against the Euro and Canadian dollar in the first quarter of 2009, resulting in these foreign exchange gains.

The provision for income taxes for the three months ended March 29, 2009 primarily consisted of a $0.2 million provision for foreign taxes. We recorded no Federal or states tax provision for the first quarter of 2009 primarily due to projected losses incurred in the United States.

The provision for income taxes for the three months ended March 30, 2008 primarily consisted of a $0.2 million provision for Federal taxes and a $0.4 million provision for foreign taxes, which was partially reduced by a non-recurring foreign tax benefit of $0.5 million.

On a quarterly basis, we evaluate our expected income tax expense or benefit based on our year to date operations, and record an adjustment in the current quarter. The net tax provision is the result of the mix of profits earned by us in tax jurisdictions with a broad range of income tax rates.

Our valuation allowance at March 29, 2009 is primarily attributable to Federal and state deferred tax assets, as well as certain foreign deferred tax assets. We believe that sufficient uncertainty exists with regard to the realizability of these tax assets such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits and a lack of carry-back capacity resulting in the inability to realize these assets. Based on the absence of objective evidence, we are unable to assert that it is more likely than not that we will generate sufficient taxable income to realize these remaining net deferred tax assets.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and judgments, including those related to reserves for excess and obsolete inventory, warranty obligations, bad debts, intangible assets, income taxes, restructuring costs, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. These form the basis for making judgment about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

º Revenue Recognition

º Allowance For Doubtful Accounts

º Warranty

º Inventories and Inventory Valuation

º Fair Value Measurement of Assets and Liabilities

º Impairment of Long-Lived Assets

º Restructuring

º Income Taxes

º Stock-based Compensation

There have been no material changes from the methodology applied by management for critical accounting estimates previously disclosed in our 2008 Form 10-K.

Liquidity and Capital Resources

Our cash, cash equivalents and short-term investments were $91.6 million at March 29, 2009, a decrease of $11.8 million from $103.4 million at December 31, 2008. Stockholders' equity at March 29, 2009 was $129.2 million compared to $156.8 million at December 31, 2008. Working capital at March 29, 2009 was $112.5 million compared to $140.5 million at December 31, 2008.

In June 2007, we renewed our $10 million revolving line of credit with a bank. The revolving line of credit now expires in June 2009 and has a facility fee of $25,000. At March 29, 2009, we had no borrowing under this credit line. All borrowings under this credit line bear interest at a per annum rate equal to either the bank's prime rate minus 50 basis points or the London Interbank Offered Rate (LIBOR) plus 200 basis points, at our option. The line of credit is collateralized by a blanket lien on all of our domestic assets excluding intellectual property. The covenants were modified in February 2009 and the new terms of the line of credit require us to satisfy certain quarterly financial covenants, including SEC reporting compliance, maintaining minimum financial ratios related to current assets and current liabilities and maintaining a minimum cash balance of $50 million. The cash balances may be withdrawn, but the availability of short- term lines of credit is dependent upon maintenance of such cash balances. As of March 29, 2009, we were in compliance with all covenants.

At March 29, 2009, we did not have any significant "off-balance-sheet" arrangements, as defined in Item 303 (a)(4)(ii) of Regulation S-K.

Under accounting principles generally accepted in the United States of America, certain obligations and commitments are not required to be included in our consolidated balance sheets. These obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity. For further discussion of our contractual obligations, see our 2008 Form 10-K.

Net cash used in operations of $9.0 million during the first quarter of 2009 was due to a net loss of $27.2 million, non-cash charges of $12.3 million and a $5.9 million increase from changes in assets and liabilities. The increase in net assets of $5.9 million primarily represented an $11.8 million reduction in accounts receivable and advance billings, a

Net cash used in operations during the first quarter of 2008 was $7.2 million, primarily due to a $4.2 million net loss, a $4.7 million increase in advance billings, a $3.8 million increase in inventories, a $3.8 million increase in inventories - delivered systems and a $1.0 million decrease in accrued liabilities, which were partially offset by a $4.2 million increase in deferred revenue, $1.8 million in depreciation, a $1.6 million decrease in prepaid expenses and other current assets, $1.2 million in stock-based compensation and a $0.8 million inventory valuation charge. The increase in inventories was primarily due to higher finished goods inventories shipped to customer sites for evaluation. The increases in advance billings, inventories - delivered systems and deferred revenue were due to an increase in systems shipped during the quarter where revenue was deferred in accordance with our revenue recognition policies.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net sales and operating results, amount of revenue deferred, inventory purchases, collection of accounts receivable and timing of payments.

Net cash used in investing activities of $5.6 million during the first quarter of 2009 was primarily due to purchases of available-for-sale investments of $14.2 million, partially offset by $10.5 million of sales and maturities of available-for-sale investments, and capital spending of $1.9 million. Our capital spending in the first quarter of 2009 was primarily for tools and equipment used in our manufacturing activities.

Net cash provided by investing activities during the first quarter of 2008 was $5.6 million, due to proceeds of $12.0 million from sales and maturities of available-for-sale investments, partially offset by purchases of $5.0 million of available-for-sale investments and capital spending of $1.4 million.

We engaged in no financing activities during the first quarter of 2009.

Net cash used in financing activities during the first quarter of 2008 was $2.6 million, attributable to purchases of 329,000 shares of treasury stock, which was partially offset by net proceeds of $20,000 from stock plans.

At March 29, 2009, we had cash, cash equivalents and short-term investments of $91.6 million. We believe that these balances will be sufficient to fund our working and other capital requirements over the course of the next twelve months. We will continue to review our expected cash requirements, increase all efforts to collect any aged receivables, and plan to take appropriate cost reduction measures to ensure that we have at least six to eight quarters of available cash. In the event additional needs for cash arise, we may raise additional funds from a combination of sources including the potential issuance of debt or equity securities. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.

Recent Accounting Pronouncements and Accounting Changes

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 29, 2009, as compared to the recent accounting pronouncements described in our 2008 Form 10-K, that are of significance, or potential significance, to us.