CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

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

FORWARD LOOKING STATEMENTS:

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

RESULTS OF OPERATIONS:

General

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

Our results were favorably impacted in 2006 and 2007 as the worldwide demand for cell phones, laptops and other consumer electronics remained strong, driving the need for increased production of printed circuit boards and memory modules, and thereby increasing demand for our electronic assembly and semiconductor products. After peaking in the third quarter of 2007, our revenue declined sequentially each quarter through the first quarter of 2009, as our results were negatively impacted by reduced levels of capital spending for electronics manufacturing capacity brought about by the deepening weakness in the global economy. New orders dropped off sharply late in the fourth quarter of 2008 as the global economy fell into a severe recession. Our results for the six months ended June 30, 2009 continued to be adversely affected by ongoing weakness in the global electronics market. Revenues were $5.2 million in the quarter ended June 30, 2009, down 61% from $13.4 million in the same period last year. We lost $4.0 million from operations in the quarter ended June 30, 2009, down from an operating loss of $733,000 in the quarter ended June 30, 2008.

For the quarter ending September 30, 2009 we are forecasting revenue of $6.5-$7.5 million, down from revenue of $11.6 million in the quarter ending September 30, 2008. Although we expect revenue for the third quarter of 2009 to be down when compared to last year, we are seeing early signs of strengthening in the global electronics market. Manufacturers of SMT assembly equipment, who did not place sensor orders in this year's first half, have notified us they will resume ordering in the third quarter. In addition, demand for SE500 solder paste inspection and AOI systems from Asian original design manufacturers is improving, particularly those involved with producing SMT circuit boards for laptop computers. Reflecting these developments, we ended the second quarter with an order backlog of $6.4 million, of which $4.0 million is scheduled for shipment or customer acceptance in the third quarter ending September 30, 2009. This backlog is up 76% from the level at the end of this year's first quarter.

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

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

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

• From the start of the fourth quarter of 2008 through the end of the second quarter of 2009, we will have reduced our workforce by 50 employees or approximately 25%, resulting from the move to Singapore, relocation of manufacturing for our semiconductor operations, and the November 2008 and February 2009 workforce reductions. We incurred a $395,000 charge for severance in the six months ended June 30, 2009 related to these actions. We do not expect implementation of these cost reduction actions to impact our strategic growth programs.

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

• We continue to pursue several promising growth opportunities for our next generation inspection technology, which is aimed at lowering the cost of inspection, in addition to providing faster production through-put speeds, improved ease of use, and the higher resolution required for inspecting progressively smaller electronic components. Reflecting our progress with these R&D initiatives, we have signed two new OEM development contracts in the past year with manufacturers of electronic assembly equipment for our embedded inspection technology. Following these two earlier contracts, we recently signed a third OEM development contract for an embedded sensor for the photovoltaic solar market. Initial revenues from these projects are anticipated in 2010.

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

We have no debt and our cash and marketable securities of $23.4 million at June 30, 2009 are more than adequate to fund our operations and various growth opportunities for an extended period of time, even given our expectation for weak financial results through at least the third quarter of 2009, due to the severe global economic recession.

Segment Results

Operating results for our electronic assembly and semiconductor segments for the
three and six month periods ended June 30, 2009 and 2008 are as follows:


                           Three months ended June 30, 2009          Three months ended June 30, 2008
                         Electronic        Semi-                   Electronic        Semi-
(In thousands)            Assembly       Conductor      Total       Assembly       Conductor      Total

Revenues                $      4,524    $       655    $  5,179   $     12,042    $     1,349    $ 13,391
Cost of revenues               3,304            277       3,581          6,954            515       7,469
Gross margin                   1,220            378       1,598          5,088            834       5,922

Research and
development expenses           1,484            246       1,730          2,158            402       2,560
Selling, general and
administrative
expenses                       3,396            306       3,702          3,514            351       3,865
Severance and
recruitment expenses              65             25          90            185              -         185
Amortization of
intangibles                       28             18          46             27             18          45

Income (loss) from
operations              $     (3,753 )  $      (217 )  $ (3,970 ) $       (796 )  $        63    $   (733 )

                            Six months ended June 30, 2009            Six months ended June 30, 2008
                         Electronic        Semi-                   Electronic        Semi-
(In thousands)            Assembly       Conductor      Total       Assembly       Conductor      Total

Revenue                 $      8,209    $     1,332    $  9,541   $     24,452    $     2,746    $ 27,198
Cost of revenue                5,980            585       6,565         13,814          1,023      14,837
Gross profit                   2,229            747       2,976         10,638          1,723      12,361

Research and
development expenses           3,270            537       3,807          4,279            893       5,172
Selling, general and
administrative
expenses                       6,000            634       6,634          6,546            749       7,295
Severance and
recruitment expenses             281            114         395            378              -         378
Amortization of
intangibles                       55             36          91             54             36          90

Income (loss) from
operations              $     (7,377 )  $      (574 )  $ (7,951 ) $       (619 )  $        45    $   (574 )

Revenues

Our revenues decreased by 61% to $5.2 million in the three months ended June 30,
2009 from $13.4 million in the three months ended June 30, 2008, and decreased
by 65% to $9.5 million in the six months ended June 30, 2009 from $27.2 million
in the six months ended June 30, 2008. The following table sets forth revenues
by product line for the three and six month periods ended June 30, 2009 and
2008:


                                       Three Months Ended       Six Months Ended
                                            June 30,                June 30,
         (In thousands)                 2009         2008       2009        2008

         Electronic Assembly
         OEM Sensors                 $    1,204    $  5,931   $   2,644   $ 12,762
         SMT Systems                      3,320       6,111       5,565     11,690
         Total Electronic Assembly        4,524      12,042       8,209     24,452
         Semiconductor                      655       1,349       1,332      2,746
         Total                       $    5,179    $ 13,391   $   9,541   $ 27,198

Revenues from our electronic assembly OEM sensors decreased by 80% to $1.2 million in the three months ended June 30, 2009 from $5.9 million in the three months ended June 30, 2008 and decreased by 79% to $2.6 million in the six months ended June 30, 2009 from $12.8 million in the six months ended June 30, 2008. Revenues from our SMT systems products, decreased by 46% to $3.3 million in the three months ended June 30, 2009 from $6.1 million in the three months ended June 30, 2008 and decreased by 52% to $5.6 million in the six months ended June 30, 2009 from $11.7 million in the six months ended June 30, 2008.

The severe weakness in the global economy and electronics markets experienced late in 2008 continued into the first half of 2009, causing the significant declines in revenue from both our electronic assembly OEM sensors and SMT system products when compared with the first half of 2008. Although we expect revenue for the third quarter of 2009 to be down when compared to last year, we are seeing early signs of strengthening in the global electronics market. Manufacturers of SMT assembly equipment, who did not place sensor orders in this year's first half, have notified us they will resume ordering in the third quarter. In addition, demand for SE500 solder paste inspection and AOI systems from Asian original design manufacturers is improving, particularly those involved with producing SMT circuit boards for laptop computers.

Export revenue from electronic assembly sensors and SMT systems totaled $3.8 million or 85% of revenue in the three months ended June 30, 2009, compared to $10.6 million or 88% of revenue in the three months ended June 30, 2008. Export revenue from electronic assembly sensors and SMT systems totaled $6.7 million or 82% of revenue in the six months ended June 30, 2009, compared to $22.3 million or 91% of revenue in the six months ended June 30, 2008. Sales to international customers continue to be significant, as manufacturing of electronic components has migrated offshore, particularly to China and other areas of Asia.

Although our markets have contracted with decreased demand for consumer and commercial electronics, we believe the trend toward automated inspection using SMT inspection systems will continue due to ongoing miniaturization of SMT circuit board components. Required for downsizing products, many SMT circuit board components have become so small that it is now virtually impossible for the human eye to inspect circuit boards for defects in solder paste quality, component placement and solder joints. We believe, supported by increased competition in our markets, that automated inspection has become the only viable means for inspecting SMT circuit boards with such tiny components. Although we will be required to continue to innovate to grow in this increasingly competitive market, we believe that our SMT systems products will be one of our primary growth drivers over the next few years.

Revenues from semiconductor products decreased by 51% to $655,000 in the three months ended June 30, 2009 from $1.3 million in the three months ended June 30, 2008 and decreased by 51% to $1.3 million in the six months ended June 30, 2009 from $2.7 million in the six months ended June 30, 2008. The decrease in revenue was due to severe weakness in the global economy, difficult conditions in the market for semiconductor fabrication equipment and declining revenue from our older wafer mapper and frame grabber products.

Export revenue from semiconductor products totaled $120,000 or 18% of revenue in the three months ended June 30, 2009, compared to $604,000 or 45% of revenue in the three months ended June 30, 2008. Export revenue from semiconductor products totaled $328,000 or 25% of revenue in the six months ended June 30, 2009, compared to $1.2 million or 42% of revenue in the six months ended June 30, 2008.

Gross Margin

Gross margin as a percentage of electronic assembly sales was 27% in the three months ended June 30, 2009, compared to 42% in the three months ended June 30, 2008. Gross margin as a percentage of electronic assembly sales was 27% in the six months ended June 30, 2009, compared to 44% in the six months ended June 30, 2008. The reduction in gross margin percentage during the three and six months ended June 30, 2009 was due to significantly lower sales of higher margin electronic assembly sensors, which were more severely impacted by the recession. Additionally, the lower levels of revenue resulted in substantially lower production volumes over which to spread fixed manufacturing overhead costs.

In response to significant weakness in our markets resulting from the global recession, and transition of manufacturing for our SMT system products to Singapore, we had reduced our manufacturing workforce by over 30 employees or 45% by the end of the second quarter of 2009. In addition, by the end of the second quarter of 2009, we completed consolidating our Portland-based semiconductor manufacturing into our Minneapolis facility, a move that will further streamline our cost structure going forward. These actions will allow us to reduce our overall manufacturing costs and better leverage our manufacturing operations, thereby favorably impacting our gross margins not only in the second half of 2009, but also in future periods. We estimate factory cost savings starting in the third quarter of 2009 from our cost reduction actions and transition of systems-related manufacturing to Singapore of approximately $2.0 million per year.

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

Gross margin as a percentage of semiconductor sales was 58% in the three months ended June 30, 2009, compared to 62% in the three months ended June 30, 2008. Gross margin as a percentage of semiconductor sales was 56% in the six months ended June 30, 2009, compared to 63% in the six months ended June 30, 2008. Gross margin as a percentage of semiconductor sales decreased due to lower levels of revenue, resulting in substantially lower production volumes over which to spread fixed manufacturing overhead costs. The full benefit from consolidation of manufacturing for our semiconductor products into our Minneapolis, Minnesota headquarters facility will be realized starting in the third quarter of 2009.

Operating Expenses

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

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

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

Research and development expenses for our electronic assembly segment were $1.5 million in the three months ended June 30, 2009, compared to $2.2 million in the three months ended June 30, 2008. Research and development expenses for our electronic assembly segment were $3.3 million in the six months ended June 30, 2009, compared to $4.3 million in the six months ended June 30, 2008. The 31% and 24% decrease in research and development expenses in 2009 resulted from a more focused and efficient research and development effort due to transition of systems related research and development to Singapore, as well as transition costs incurred in 2008. Singapore transition costs classified as research and development expense were $325,000 and $374,000 in the three and six months ended June 30, 2008. No transition costs were incurred in 2009. In addition, the cost reduction actions implemented in November 2008 and February 2009 contributed to the lower level of spending in the three and six months ended June 30, 2009.

Selling, general and administrative expenses for our electronic assembly segment were $3.4 million in the three months ended June 30, 2009, compared to $3.5 million in the three months ended June 30, 2008. Selling, general and administrative expenses for our electronic assembly segment were $6.0 million for both the six months ended June 30, 2009 and the six months ended June 30, 2008. Selling, general and administrative expenses for the three and six months ended June 30, 2009 includes an $800,000 provision for doubtful accounts related to a key distributor of our SMT system products. The distributor remains in business, and is committed to paying us the amount owed. The increase in the provision for doubtful accounts was mostly offset by reductions in travel costs, commissions for third party sales representatives resulting from the lower level of SMT system sales and lower foreign sales office expenses resulting from favorable foreign exchange rates.

Research and development expenses for our semiconductor segment were $246,000 in the three months ended June 30, 2009 compared to $402,000 in the three months ended June 30, 2008. Research and development expenses for our semiconductor segment were $537,000 in the six months ended June 30, 2009 compared to $893,000 in the six months ended June 30, 2008. The decline in research and development expenses resulted from the cost reduction actions that were implemented in November 2008 and February 2009.

Selling, general and administrative expenses for our semiconductor segment were $306,000 in the three months ended June 30, 2009, compared to $351,000 in the three months ended June 30, 2008. Selling, general and administrative expenses for our semiconductor segment were $634,000 in the six months ended June 30, 2009, compared to $749,000 in the six months ended June 30, 2008. The decrease in selling, general and administrative expenses in 2009 compared to 2008 was due to lower salary and consulting costs, and lower sales commissions resulting from the reduced level of revenue.

We started to incur severance and recruitment costs in February 2008 in connection with our decision to move a significant portion of development and manufacturing for our systems products to Singapore. The transition of systems-related product development was substantially complete by the fourth quarter of 2008, and the transition of systems-related manufacturing was substantially complete by the end of the first quarter of 2009.

Additional severance costs were incurred in November 2008 when we reduced our workforce by approximately 10% or 20 employees in response to the weak global economic conditions. In February 2009, we further reduced our workforce by 24 positions in response to weakening conditions in the global economy, our . . .