fabrication equipment forecast, and is now reflecting an increase of 26.4 percent from calendar 2009, as compared to an increase of 17.1 percent when they last released their forecast. The change reflects increasing demand for semiconductors and improved factory utilization for many of the device producers, as well as increased investment in equipment needed for next generation devices.
In summary, cautious investment patterns remain, however, several device manufacturers are at least discussing capacity increases. The primary investments that are being considered are for leading edge and future technology nodes and productivity improvement. In addition, device producers are asking equipment manufacturers to provide evaluation systems, price concessions or extended payment terms as they deal with the impact that the global economic situation has had on their business.
Application of Critical Accounting Policies and Estimates In accordance with SEC guidance, those material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below.
Our critical accounting policies and estimates are as follows:
• revenue recognition;

• valuation of long-lived assets;

• estimation of valuation allowances and accrued liabilities, specifically product warranty, inventory provisions and allowance for doubtful accounts;

• stock-based compensation; and

• income taxes.

Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the purchase price is fixed or determinable and collectibility is reasonably assured. If our equipment sales involve sales to our existing customers who have previously accepted the same type(s) of equipment with the same type(s) of specifications, we account for the product sales as a multiple element arrangement. Revenue from multiple element arrangements is allocated among the separate accounting units based on the residual method. Under the residual method, the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue allocated to delivered elements. We recognize the equipment revenue upon shipment and transfer of title. The other multiple elements include installation, service contracts and training. Equipment installation revenue is valued based on estimated service person hours to complete installation and published or quoted service labor rates and is recognized when the installation has been completed and the equipment has been accepted by the customer. Service contract revenue is valued based on estimated service person hours to complete the service and quoted service labor rates and is recognized over the contract period. Training revenue is valued based on quoted training class prices and is recognized when the customers complete the training classes or when a customer-specific training period has expired. The quoted service labor rates and training class prices are rates actually charged and billed to our customers.
All other product sales with customer-specific acceptance provisions are recognized upon customer acceptance. Future revenues may be negatively impacted if we are unable to meet customer-specific acceptance criteria. Revenue related to spare part sales is recognized upon shipment or delivery based on the title transfer terms. Revenues related to maintenance and service contracts are recognized ratably over the duration of such contracts.

The timing and amount of revenue recognized depends on whether revenue is recognized upon shipment versus acceptance. For revenue recognized upon acceptance, it is dependent upon when customer-specific criteria are met. Valuation of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with the FASB's SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
If we determine that the carrying amount of long-lived assets may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model or another valuation technique. Net long-lived assets amounted to $15.8 million as of May 30, 2009.
In fiscal 2008, we had positive cash flows from operations. In the first nine months of fiscal 2009, we did not generate positive cash flows from operations. If we do not return to positive cash flows from operations and generate cash flows in excess of the carrying amount of our long-lived assets, future impairments of those assets may occur.*
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets and the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections and industry information in making such estimates. These estimates are subject to some uncertainty due to the current economic conditions.
We did not recognize any impairment charges for our long-lived assets during the third quarters or the first nine months of fiscal 2009 or 2008. We currently believe the fair value of those long-lived assets exceeds the carrying amount. Product Warranty Estimation
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, releases of new products and other factors. The warranty periods for new equipment manufactured by us typically range from one to two years. Special warranty reserves are also accrued for major rework campaigns. Although management believes the likelihood to be relatively low, claims experience could be materially different from actual results because of the introduction of new, more complex products; competition or other external forces; manufacturing changes that could impact product quality; or as yet unrecognized defects in products sold.
During the first nine months of fiscal 2008, we reversed approximately $250,000 of unused prior period warranty accruals associated with improved claims experience.

Inventory Provisions Estimation
We record provisions for inventory shrinkage and for potentially excess, obsolete and slow moving inventory. These provisions are based upon historical loss trends, inventory levels, expected product lives, forecasted sales demand and recoverability. Results could be materially different if demand for our products decreased because of economic or competitive conditions, length of the industry downturn, or if products become obsolete because of technical advancements in the industry or by us.
Since we recorded the POLARIS® systems product inventory provisions primarily as a result of the wind-down of our microlithography business in the second quarter of fiscal 2003, we have had cumulative sales of POLARIS systems product inventory that had previously been written down to zero and reductions in inventory buyback requirements of approximately $11.0 million and have disposed of approximately $6.8 million of POLARIS systems product inventory. The original cost of POLARIS systems product inventory available for sale or to be disposed of as of May 30, 2009 that has been written down to zero was approximately $8.7 million.
Allowance for Doubtful Accounts Estimation Management must estimate the uncollectibility of our accounts receivable. The most significant risk is a sudden unexpected deterioration in financial condition of a significant customer who is not considered in the allowance. Management specifically analyzes accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Results could be materially impacted if the financial condition of a significant customer deteriorated and related accounts receivable are deemed uncollectible. Accounts receivable are written off after management determines that they are uncollectible. As of the end of the third quarter of fiscal 2009, our accounts receivable included $2.0 million attributable to a past due receivable with a customer in Asia. The customer has delayed payment due to their cash flow issues and lower than expected capacity utilization. We still believe that this receivable is collectible and will continue to monitor the situation closely.* Stock-Based Compensation
We utilize the Black-Scholes option-pricing model to estimate fair value of each award on the date of grant. The Black-Scholes model requires the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value include the expected life of stock-based awards and our stock price volatility. Additionally, we expense only the fair value those shares expected to vest. The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect management's best estimates. However, circumstances may change and additional data may become available over time, which could result in changes to these assumptions that materially impact the fair value determination of their estimated rate of forfeiture.
Income Taxes
Our effective income tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. We have established valuation allowances against a portion of the U.S. and non-U.S. net operating losses to reflect the uncertainty of our ability to fully utilize these benefits given the limited carryforward periods permitted by the various jurisdictions. The evaluation of the realizability of our net operating losses requires the use of considerable management judgment to estimate the future taxable income for the various jurisdictions, for which the ultimate amounts and timing may differ. The valuation allowance can also be impacted by changes in the tax regulations.

Significant judgment is required in determining our unrecognized tax benefits. We have established accruals using management's best judgment and adjust these accruals as warranted by changing facts and circumstances. A change in our tax liabilities in any given period could have a significant impact on our results of operations and cash flows for that period.
We adopted the provisions of FASB Interpretation No. 48 ("FIN48"), "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109," during the first quarter of fiscal 2008, which had no impact on our financial position or results of operation. There was no change in the accrual for unrecognized tax benefits for the third quarter and for the first nine months of fiscal 2009. During the third quarter and first nine months of fiscal 2008, we effectively settled tax audits in foreign tax jurisdictions which resulted in a $0.1 million and $0.4 million, respectively, decrease in the accrual for unrecognized tax benefits. The benefits were partially offset by state income tax expense.

THIRD QUARTER AND FIRST NINE MONTHS OF FISCAL 2009 COMPARED TO THIRD QUARTER AND
FIRST NINE MONTHS OF FISCAL 2008
The Company
   The following table sets forth on a consolidated basis, for the fiscal period
indicated, certain income and expense items as a percent of total sales.

                                              Percent of Sales         Percent of Sales
                                               Quarter Ended           Nine Months Ended
                                            May 30,      May 31,      May 30,      May 30,
                                              2009        2008         2009         2008

     Sales                                    100.0 %     100.0 %       100.0 %     100.0 %
     Cost of sales                             72.0        48.5          72.1        54.4

     Gross margin                              28.0        51.5          27.9        45.6
     Selling, general and administrative       25.3        36.4          43.1        32.8
     Research and development                  20.0        23.1          33.3        21.4

     Operating loss                           (17.3 )      (8.0 )       (48.5 )      (8.6 )
     Other (expense) income, net               (0.4 )       0.6           0.4         1.3

     Loss before income taxes                 (17.7 )      (7.4 )       (48.1 )      (7.3 )
     Income tax expense (benefit)               0.5        (0.5 )         0.3        (0.2 )

     Net loss                                (18.2) %     (6.9) %      (48.4) %     (7.1) %

Sales Revenue and Shipments
Sales revenue decreased to $15.4 million for the third quarter of fiscal 2009 as compared to $20.3 million for the third quarter of fiscal 2008. The decrease in sales revenue related to a decrease in shipments from $20.5 million in the third quarter of fiscal 2008 to $13.0 million in the third quarter of fiscal 2009 associated with industry conditions. Sales revenue decreased to $36.3 million for the first nine months of fiscal 2009 as compared to $64.2 million for the first nine months of fiscal 2008. The decrease in sales revenue related to a decrease in shipments from $64.8 million in the first nine months of fiscal 2008 to $35.3 million in the first nine months of fiscal 2009 associated with industry conditions.
Based upon our revenue recognition policy, certain shipments to customers are not recognized until customer acceptance. Therefore, depending on the timing of shipments and customer acceptances, there are time periods where shipments may exceed sales revenue or sales revenue may exceed shipments.
International sales revenues were $9.9 million, representing 64% of total sales, during the third quarter of fiscal 2009 and $14.1 million, representing 70% of total sales, during the third quarter of fiscal 2008. International sales were $25.5 million, representing 70% of total sales, during the first nine months of fiscal 2009 and $49.0 million, representing 76% of total sales, during the first nine months of fiscal 2008.

We expect fourth quarter of fiscal 2009 revenues to be between $12 and $15 million.* A portion of the expected revenue is subject to obtaining new orders and timely acceptance from our customers for certain shipments. Orders are subject to cancellation.
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products sold; the geographic mix of products sold, with international sales generally having lower gross profit than domestic sales; initial product placement discounts; utilization of manufacturing capacity; sales of inventory previously written down to zero; and the competitive pricing environment.
Gross margin as a percentage of sales for the third quarter of fiscal 2009 was 28.0% as compared to 51.5% for the third quarter of fiscal 2008. Gross margin as a percentage of sales for the first nine months of fiscal 2009 was 27.9% as compared to 45.6% for the first nine months of fiscal 2008. The decreases in gross margin related primarily to product mix with a significant portion of the fiscal 2009 period revenue related to initial placements of our new product and to increases in manufacturing variances associated with the lower manufacturing utilization as a result of lower production and shipment levels. Gross margins were also impacted by higher inventory reserves of $0.8 million in the third quarter of fiscal 2009 and $1.2 million in the first nine months of fiscal 2009, as compared to the prior year periods.
The change in margins was also impacted by the usage of POLARIS Systems product inventory that had previously been written down to zero. During the third quarters of fiscal 2009 and 2008, we had sales of POLARIS Systems product inventory with an original cost of $90,000 and $185,000, respectively, that had previously been written down to zero. During the first nine months of fiscal 2009 and 2008, we had sales of POLARIS Systems product inventory with an original cost of $347,000 and $854,000, respectively, that had previously been written down to zero.
We will continue to try to sell the impaired inventory to our customers as spares, refurbished systems and upgrades to existing systems. If unsuccessful, some of the items will be disposed. Any significant sales of the impaired inventory will be disclosed. Gross margins will be favorably impacted if inventory carried at a reduced cost is sold.
Gross margins for the fourth quarter of fiscal 2009 are expected to be between 35% and 38% of revenues based upon expected product and geographic sales mix and anticipated improved manufacturing utilization.* Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to $3.9 million for the third quarter of fiscal 2009 as compared to $7.4 million for the third quarter of fiscal 2008. Selling, general and administrative expenses were $15.6 million for the first nine months of fiscal 2009 as compared to $21.0 million for the same period in fiscal 2008. The decreases in selling, general and administrative expenses for fiscal 2009 periods related primarily to the cost reduction initiatives associated with reductions in headcount and salary reductions taken in fiscal 2009 and improved service technician utilization rates. The decreases were net of $1.2 million of severance expense recorded in the first nine months of fiscal 2009. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a discussion of these actions.
We expect selling, general and administrative expenses in the fourth quarter of fiscal 2009 to be in the range of $3.8 to $4.0 million.*

Research and Development Expenses
Research and development expenses were $3.1 million for the third quarter of fiscal 2009 as compared to $4.7 million for the third quarter in fiscal 2008. Research and development expenses were $12.1 million for the first nine months of fiscal 2009 as compared to $13.8 million for the same period in fiscal 2008. The decreases related primarily to the cost reduction initiatives associated with reductions in headcount and salary reductions taken in fiscal 2009. See Note 8 of the Notes to Condensed Consolidated Financial Statements for a discussion of these actions.
Research and development expenses for the fourth quarter of fiscal 2009 are expected to be in the range of $2.9 to $3.1 million as we continue to invest in new application and product development programs and provide support for product evaluations at customer locations along with laboratory demonstrations.* Income Taxes
We recorded income tax expense of $70,000 in the third quarter of fiscal 2009 and $98,000 in the first nine months of fiscal 2009. The income tax expense in the fiscal 2009 periods related primarily to foreign taxes. We recorded an income tax benefit of $98,000 in the third quarter of fiscal 2008 and $163,000 in the first nine months of fiscal 2008. The income tax benefits in the fiscal 2008 periods related to tax positions that were effectively settled with tax authorities during the second and third quarters of fiscal 2008, which were partially offset by state income tax expense.
Our deferred tax assets on the balance sheet as of May 30, 2009 have been fully reserved with a valuation allowance. We do not expect to reverse our valuation allowance until we are consistently profitable on a quarterly basis.* We have net operating loss carryforwards for federal income tax purposes of approximately $179.0 million, which will begin to expire in fiscal year 2011 through fiscal 2029 if not utilized. Of this amount, approximately $15.0 million is subject to Internal Revenue Code Section 382 limitations on utilization. This limitation is approximately $1.4 million per year. Net Loss
Net loss was $2.8 million in the third quarter of fiscal 2009, as compared to a net loss of $1.4 million in the third quarter of fiscal 2008. Net loss was $17.6 million for the first nine months of fiscal 2009, as compared to a net loss of $4.6 million for the first nine months of fiscal 2008.
Assuming that we can achieve the projected revenue, gross margin and operating expense levels, we expect to report net loss of $1.0 to $2.0 million for the fourth quarter of fiscal 2009.*
Liquidity and Capital Resources
Cash and cash equivalents, restricted cash and marketable securities were approximately $10.4 million as of May 30, 2009, a decrease of $12.5 million from the end of fiscal 2008. The decrease was primarily due to $11.6 million of cash used in operations attributable to losses, the timing of shipments and to fund severance costs. This decrease was net of $2.4 million of proceeds from the surrender of certain of our life insurance investments.
As of May 30, 2009, we had investments in ARS reported at a fair value of $4.5 million after reflecting a $0.2 million other than temporary impairment against $4.7 million par value. The other than temporary impairment was recorded in other expense for fiscal 2008. We value the majority of our ARS using a mark-to-model approach that relies on discounted cash flows, market data and inputs derived from similar instruments. This model takes into account, among other variables, the base interest rate, credit spreads, downgrade risks and default/recovery risk, the estimated time required to work out the disruption in the traditional auction process and its effect on liquidity, and the effects of insurance and other credit enhancements.

The ARS we hold are marketable securities with long-term stated maturities for which the interest rates are reset through a Dutch auction every 28 days. The auctions have historically provided a liquid market for these securities as investors historically could readily sell their investments at auction. Due to . . .