Certain statements in this quarterly report on Form 10-Q are forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In addition, we may, from time to time, make oral forward looking statements. Forward looking statements may be identified by the words "anticipate", "believe", "expect", "intend", "will" and similar expressions, as they relate to us or our management. These statements include, without limitation, the statement that we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future.

The forward looking statements contained herein reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially from those projected in such forward looking statements due to a number of factors, risks and uncertainties, including the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2008. We disclaim any obligation to update any forward looking statements as a result of developments occurring after the date of this quarterly report.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

A critical accounting policy is defined as one that is both material to the presentation of our consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. Specifically, these policies have the following attributes: (1) we are required to make judgments and assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, could have a material effect on our financial position and results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 in the section entitled "Risk Factors." Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a fair presentation of our financial position and results of operations.

For more information, please see our critical accounting policies as previously disclosed in our 2008 Annual Report on Form 10-K.

See Note 16 to the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q regarding the impact of recent accounting pronouncements on the Company's financial position and results of operations.

Results of Operations for the Three Month Periods Ended March 31, 2009 and 2008

We are a worldwide leader in the design, development, manufacture and support of high-performance process control metrology, defect inspection, and data analysis systems used by semiconductor device manufacturers. We provide yield management solutions used in both wafer processing and final manufacturing through a family of standalone systems and integrated modules for both transparent and opaque thin film measurements and macro-defect inspection. All of these systems feature production-worthy automation and are backed by worldwide customer support.

On January 22, 2008, we announced that we had acquired all intellectual property and selected assets from privately-held RVSI Inspection, LLC, headquartered in Hauppauge, New York. The acquired business is currently known as the Rudolph Technologies Wafers Scanner Product Group. We account for this acquisition as a business combination. The impact of the acquisition was not material to our consolidated financial position or results of operations.

Rudolph's business is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to capital equipment spending depends on a number of factors, including general worldwide economic conditions as well as other economic drivers such as personal computer, cell phone and personal electronic device sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project a year-over-year decrease in capital spending of 35-50% for 2009. We monitor capital equipment spending through announced capital spending plans by our customers and monthly-published industry data such as the book-to-bill ratio. The book-to-bill ratio is a 3-month running statistic that compares bookings or orders placed with capital equipment suppliers to billings or shipments. A book-to-bill above one shows that semiconductor device equipment manufacturers are ordering equipment at a pace that exceeds the equipment suppliers' shipments for the period. The three month rolling average North American semiconductor equipment book-to-bill ratio was 0.6 for the month of March 2009, decreasing from the December 2008 book-to-bill ratio of 0.9.

Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. For the three month period ended March 31, 2009 and for the years ended December 31, 2008, 2007 and 2006, sales to customers that individually represented at least five percent of our revenues accounted for 52.1%, 36.3%, 37.1%, and 40.9% of our revenues, respectively.

We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products, and they could cease purchasing products from us at any time. A delay in purchase or cancellation by any of our large customers could cause quarterly revenues to vary significantly. In addition, during a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems. Our transparent film measurement systems range in average selling price from approximately $250,000 to $1.0 million per system, our opaque film measurement systems range in average selling price from approximately $900,000 to $2.0 million per system and our macro-defect inspection and probe card and test analysis systems range in average selling price from approximately $250,000 to $1.4 million per system. Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results. Because fluctuations in the timing of orders from our major customers or in the number of our individual systems we sell could cause our revenues to fluctuate significantly in any given quarter or year, we do not believe that period-to-period comparisons of our financial results are necessarily meaningful, and they should not be relied upon exclusively as an indication of our future performance.

A significant portion of our revenues has been derived from customers outside of the United States. In the three month period ended March 31, 2009, approximately 47.9% of our revenues were derived from customers outside of the United States, of which 34.6% were derived from customers in Asia and 13.3% were derived from customers in Europe. In 2008, approximately 76.5% of our revenues were derived from customers outside of the United States, of which 57.0% were derived from customers in Asia and 19.5% were derived from customers in Europe. In 2007, approximately 77.1% of our revenues were derived from customers outside of the United States, of which 58.5% were derived from customers in Asia and 18.6% were derived from customers in Europe. In 2006, approximately 70.6% of our revenues were derived from customers outside of the United States, of which 59.9% were derived from customers in Asia and 10.7% were derived from customers in Europe. We expect that revenues generated from customers outside of the United States will continue to account for a significant percentage of our revenues.

The sales cycle for our systems typically ranges from six to 15 months, and can be longer when our customers are evaluating new technology. Due to the length of these cycles, we invest significantly in research and development and sales and marketing in advance of generating revenues related to these investments. Additionally, the rate and timing of customer orders may vary significantly from month to month. Accordingly, if sales of our products do not occur when we expect, our expenses and inventory levels may increase relative to revenues and total assets.

Revenues. Our revenues are primarily derived from the sale of our systems, services, spare parts and software licensing. Our revenues were $11.1 million for the three month period ended March 31, 2009, compared to $37.2 million for the three month period ended March 31, 2008, representing a decrease for the three month period of 70.3% in the respective year-over-year periods.

The following table lists the different sources of our revenue (in thousands):

                                             Three Months Ended
                                                 March 31,
                                           2009              2008
                  Systems:
                     Metrology        $  2,420    22%  $   8,265    22%
                     Inspection          2,423    22%     20,468    55%
                  Parts                  2,499    23%      3,904    11%
                  Services               3,153    28%      3,304     9%
                  Software licensing       566     5%      1,269     3%
                     Total revenue   $  11,061   100%  $  37,210   100%

The year-over-year decrease in systems revenue for the three month periods ended March 31, 2009 and 2008 is due to continued weakness in the global economy, including the overall semiconductor industry, and reflects a decrease in inspection systems revenues of $18.0 million and a decrease in metrology systems revenue of $5.8 million. Systems revenue generated by our latest product releases and major enhancements in each of our product families amounted to 9% of total revenues for the three month period ended March 31, 2009, compared to 42% of total revenues for the three month period ended March 31, 2008. The year-over-year decrease in total parts and services revenue for the three month periods ended March 31, 2009 and 2008 is primarily due to decreased spending by our customers due to the prolonged semiconductor industry downturn. Parts and services revenues are generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls. The year-over-year decrease in software licensing revenues for the three month periods ended March 31, 2009 and 2008 is primarily due to the sale of certain technology rights to Tokyo Electron in 2008.

Deferred revenues of $3.2 million are recorded in other current liabilities at March 31, 2009 and primarily consist of $3.0 million for deferred maintenance agreements and $0.2 million for systems awaiting acceptance and outstanding deliverables.

Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including manufacturing efficiencies, product sales mix, production volume, inventory step-up from purchase accounting, excess and obsolete inventory write-offs, pricing by competitors or suppliers, new product introductions, customization and reconfiguration of systems, international and domestic sales mix, and parts and service margins. Our gross profit was $2.3 million for the three month period ended March 31, 2009, compared to $15.1 million for the three month period ended March 31, 2008. Our gross profit represented 20.6% of our revenues for the three month period ended March 31, 2009 and 40.6% of our revenues for the same period in the prior year. The decrease in gross profit as a percentage of revenue for the three month period ended March 31, 2009, compared to the three month period ended March 31, 2008 is primarily due to product mix and volume, and idle manufacturing facility costs.

Research and Development. Our research and development expense was $6.7 million for the three month period ended March 31, 2009, compared to $7.8 million for the same period in the prior year. Research and development expense represented 61.0% of our revenues for the three month period ended March 31, 2009, compared to 21.0% of revenues for the same period in the prior year. The year-over-year dollar decrease for the three month periods ended March 31, 2009 and 2008 in research and development expenses primarily reflects reduced compensation cost and lower project costs as part of our continued cost reduction efforts, offset by an increase in litigation expenses.

Selling, General and Administrative. Our selling, general and administrative expense was $6.3 million for the three month period ended March 31, 2009, compared to $9.1 million for the same period in the prior year. Selling, general and administrative expense represented 57.3% of our revenues for the three month period ended March 31, 2009, compared to 24.4% of our revenues for the same period in the prior year. The year-over-year dollar decrease for the three month periods ended March 31, 2009 and 2008 in selling, general and administrative expense was primarily due to elimination of administrative costs associated with prior business combinations, foreign currency exchange gains from international operations and lower compensation costs in the 2009 period, offset by a reserve established for an account receivable related to a customer that is in financial difficulty.

Over the past twelve months, in reaction to the slowdown in the semiconductor industry, the Company has reduced ongoing operating expense by approximately 25 percent. The Company currently anticipates that operating expenses in the second quarter of 2009 will be approximately $12.5 to $14.0 million.

Interest income and other, net. Interest income and other, net was $0.1 million for the three month period ended March 31, 2009, compared to $0.4 million for the same period in the prior year. The year-over-year decrease in interest income and other, net was primarily attributable to lower interest rates.

Income Taxes. For the three-month period ended March 31, 2009, we recorded income tax benefits of $0.9 million, as compared to $1.4 million for the comparable period in 2008. The income tax benefits recognized for the three months ended March 31, 2009 resulted primarily from projected tax refunds due from the carryback of current losses.

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 substantially all of our net deferred tax assets will not be realized. Therefore, we continue to provide a valuation allowance against these net deferred tax assets. A portion of our net deferred tax assets relate to R&D credits which are reserved for in our FIN 48 provision. We closely monitor available evidence, and may release some or all of the valuation allowance in future periods.

Liquidity and Capital Resources

At March 31, 2009, we had $73.7 million of cash, cash equivalents and marketable securities and $138.4 million in working capital. At December 31, 2008, we had $78.3 million of cash, cash equivalents and marketable securities and $147.7 million in working capital.

Typically during periods of revenue growth, changes in accounts receivable and inventories represent a use of cash as we incur costs and expend cash in advance of receiving cash from our customers. Similarly, during periods of declining revenue, changes in accounts receivable and inventories represent a source of cash as inventory purchases decline and revenue from prior periods is collected.

Operating activities used $4.0 million in cash and cash equivalents for the three month period ended March 31, 2009. The net cash and cash equivalents used in operating activities during the three month period ended March 31, 2009 was primarily a result of net loss, adjusted to exclude the effect of non-cash charges, of $7.5 million and decreases in other current liabilities of $1.8 million and accounts payable and accrued liabilities of $0.7 million, partially offset by a decrease accounts receivable of $6.3 million. Operating activities used $5.4 million in cash and cash equivalents for the three month period ended March 31, 2008. The net cash and cash equivalents used in operating activities during the three month period ended March 31, 2008 was primarily a result of net loss, adjusted to exclude the effect of non-cash charges, of $4.0 million and increases in inventories of $6.8 million, accounts receivable of $6.9 million, and prepaid expenses and other assets of $2.7 million, partially offset by increases in accounts payable and accrued liabilities of $3.2 million, and other current and non-current liabilities of $3.7 million.

Net cash and cash equivalents provided by investing activities during the three month period ended March 31, 2009 of $2.0 million was due to proceeds from sales of marketable securities of $3.3 million, partially offset by purchases of marketable securities of $1.1 million, and capital expenditures of $0.2 million.
Net cash and cash equivalents used for investing activities during the three month period ended March 31, 2008 of $3.9 million was due to acquisition costs for business combinations of $8.6 million, purchases of marketable securities of $5.9 million, and capital expenditures of $1.4 million, offset by proceeds from sales of marketable securities of $12.0 million.

There was no cash and cash equivalents provided by or used in financing activities for the three month periods ended March 31, 2009. Net cash and cash equivalents provided by financing activities for the three month periods ended March 31, 2008 was due to proceeds received and tax benefit for sales of shares through share-based compensation plans.

From time to time we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all or a portion of the purchase price of these acquisitions in cash. On January 22, 2008, we announced that we had acquired all intellectual property and selected assets from privately-held RVSI Inspection, LLC, headquartered in Hauppauge, New York. We will account for this acquisition as a business combination.

In July 2008, our Board of Directors approved a stock repurchase program of up to 3 millio n shares. We did not purchase any shares to date under this program.

Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.