Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as "anticipates," "expects," "intends," "will," "could," "believes," "estimates," "continues," and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, such as risks related to timing, delays, deferrals and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers' financial condition and demand for semiconductors; cyclicality in the semiconductor and nanotechnology industries; general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of timely product introductions; customer concentration; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain sufficient personnel to achieve our targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; changes to financial accounting standards; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of the H1N1 influenza pandemic or terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management's current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

We develop, manufacture and market photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and light emitting diodes ("LEDs"). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.2 million to $6.0 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and customer acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer's facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long

production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Net Sales

Third Quarter



                                           Three Months Ended
                                      October 3,     September 27,     Amount of       Percentage
(In thousands, except percentages)       2009            2008           Change           Change
Sales of:
Products                             $     21,050   $        30,114   $    (9,064 )         (30.1 )%
Services                                    3,889             4,322          (433 )         (10.0 )%
Licenses                                       -                 -             -               -

Total net sales                      $     24,939   $        34,436   $    (9,497 )         (27.6 )%

Net sales consist of revenues from products (system and spare parts sales), services and licensing of technologies. Product sales decreased 30.1% to $21.1 million for the quarter ended October 3, 2009, compared to $30.1 million in the corresponding quarter of 2008, primarily due to a decrease in system unit volume resulting from the continuing weakening of global financial and economic conditions.

On a product market application basis, system sales to the semiconductor industry, consisting of sales to the advanced packaging market, the laser processing applications market and the semiconductor market, decreased $6.5 million to $18.1 million for the quarter ended October 3, 2009, compared to $24.6 million in the corresponding quarter of 2008. This decrease was primarily due to a decrease in sales to the laser processing market of $6.4 million.

There were no system sales to the nanotechnology market for the quarter ended October 3, 2009 as compared to $2.9 million in the corresponding quarter of 2008. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, and therefore we expect to experience significant variations in sales to this market from quarter to quarter.

Revenues from services for the quarter ended October 3, 2009 decreased by $0.4 million to $3.9 million, as compared with $4.3 million in the corresponding quarter of 2008. This decrease is primarily due to fewer new service contracts that were recognized as revenue in the quarter as compared to the corresponding quarter of 2008.

There was no revenue from licensing activities for each of the quarters ended October 3, 2009 and September 27, 2008. This is primarily due to the timing and frequency of the resale of our tools by our existing customers to third parties. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2009.

At October 3, 2009, we had approximately $2.5 million of deferred product and services income compared to $4.3 million at December 31, 2008. The gross amount of deferred revenues at October 3, 2009 was $2.5 million as compared to $5.3 million at December 31, 2008. The gross amount of deferred costs at October 3, 2009 was immaterial as compared to $1.0 million at December 31, 2008. Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or customer acceptance. Deferred services income is recognized as revenue ratably over the contract period (for time-based service contracts), or as purchased services are rendered (for contracts based on a purchased quantity of hours).

For the quarter ended October 3, 2009, international net sales were $21.7 million, or 86.8% of total net sales, compared with $28.8 million, or 83.5% of total net sales for the corresponding quarter of 2008. For the quarter ended October 3, 2009 compared to the corresponding quarter of 2008, sales to Europe decreased by $7.4 million, sales to Japan increased by $0.1 million, sales to Taiwan

increased by $3.0 million and sales to the rest of Asia decreased by $2.6 million. We expect sales to international customers will continue to represent a significant portion of our revenues during the remainder of 2009 as companies continue to build their manufacturing plants overseas, especially in Asia.

Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are sometime denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately ¥49.1 million of Japanese yen denominated receivables at October 3, 2009. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer's willingness to purchase our product. (See Part II, Item 1A, "Risk Factors" herein).

Year-To-Date



                                                    Nine Months Ended
                                             October 3,        September 27,      Amount of         Percentage
(In thousands, except percentages)              2009               2008             Change            Change
Sales of:
Products                                    $      58,177     $        84,317     $  (26,140 )           (31.0 )%
Services                                           10,931              12,917         (1,986 )           (15.4 )%
Licenses                                               82                 400           (318 )           (79.5 )%

Total net sales                             $      69,190     $        97,634     $  (28,444 )           (29.1 )%

Product sales decreased 31.0% to $58.2 million for the nine months ended October 3, 2009 as compared to the same period in 2008. This decrease was primarily attributable to a change in product mix, decrease in system unit volume and lower average selling prices of systems sold resulting from the continuing weakening of global financial and economic conditions.

On a market segment basis, in the nine months ended October 3, 2009, system sales to the semiconductor industry decreased $25.0 million from the corresponding period of 2008. This decrease was due to lower sales to the advanced packaging market of $8.5 million and the laser processing market of $17.6 million, partially offset by an increase in sales to the semiconductor market of $1.1 million. In the nine months ended October 3, 2009, system sales to the nanotechnology market decreased $0.4 million from the corresponding period of 2008.

Revenues from services in the nine months ended October 3, 2009 decreased 15.4% from the comparable period of 2008, primarily as a result of decreases in the number of service contracts in effect during the period. Revenues from licensing activities decreased in the nine months ended October 3, 2009 as compared to the same period of 2008, primarily due to lower licensing revenue associated with the resale of our tools by our existing customers to third parties.

For the nine months ended October 3, 2009, international net sales were $45.2 million, or 65.3% of total net sales, as compared with $62.8 million, or 64.3% of total net sales, for the comparable period of 2008. For the nine months ended October 3, 2009, as compared to the same period of 2008, sales to Europe decreased $13.4 million, sales to Japan decreased $5.2 million, sales to Taiwan increased $0.6 million and sales to the rest of Asia increased $0.5 million.

Gross Profit

On a comparative basis, gross margins increased to 50.4% for the three-month period ended October 3, 2009, compared to 48.5% for the corresponding period of 2008. This 1.9 percentage point increase in gross margin was primarily due to a change in our product mix (3.0 percentage points) and lower warranty and installation costs (2.9 percentage points), partially offset by higher service cost due to lower utilization (4.0 percentage points).

Gross margin for the nine months ended October 3, 2009 decreased to 46.4% compared to 48.4% in the corresponding period of 2008. This 2.0 percentage point decrease in gross margin was primarily due to higher service cost due to lower utilization (4.8 percentage points) and severance and benefit charges recorded during the first quarter of 2009 (0.2 percentage points), partially offset by lower warranty and installation costs (2.6 percentage points) and a change in our product mix (0.4 percentage points).

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the following:
the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; and the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs.

Operating Expenses

Third Quarter



                                                    Three Months Ended
                                              October 3,       September 27,       Amount of         Percentage
(In thousands, except percentages)               2009              2008             Change             Change
Research, development, and engineering       $      4,573     $         5,811     $    (1,238 )           (21.3 )%
Selling, general, and administrative                7,262               8,047            (785 )            (9.8 )%

Total operating expenses                     $     11,835     $        13,858     $    (2,023 )           (14.6 )%

Research, development and engineering expenses for the quarter ended October 3, 2009 were $4.6 million, as compared to $5.8 million for the corresponding period in 2008. This decrease was primarily attributable to lower salary and related expenses of $0.9 million resulting from workforce reduction and lower travel expenses and outside services of $0.2 million. As a percentage of net sales, research, development and engineering expenses for the quarter ended October 3, 2009 increased to 18.3% from 16.9% for the corresponding quarter of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Selling, general, and administrative expenses for the quarter ended October 3, 2009 were $7.3 million as compared to $8.0 million for the corresponding quarter of 2008. This decrease was primarily attributable to lower salary and related expenses of $0.9 million. As a percentage of net sales, selling, general and administrative expenses for the quarter ended October 3, 2009 increased to 29.1% from 23.4% for the corresponding quarter of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Year-To-Date



                                                     Nine Months Ended
                                              October 3,        September 27,       Amount of         Percentage
(In thousands, except percentages)               2009               2008             Change             Change
Research, development, and engineering       $      14,208     $        17,594     $    (3,386 )           (19.2 )%
Selling, general, and administrative                20,186              24,207          (4,021 )           (16.6 )%

Total operating expenses                     $      34,394     $        41,801     $    (7,407 )           (17.7 )%

Research, development and engineering expenses were $14.2 million for the nine months ended October 3, 2009 as compared to $17.6 million for the corresponding period in 2008. This decrease was primarily due to workforce reduction and our continuing effort to manage company-wide expenses discussed above. As a percentage of net sales, research, development and engineering expenses for the nine-month period ended October 3, 2009 increased to 20.5% from 18.0% for the corresponding period of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Selling, general and administrative expenses were $20.2 million for the nine months ended October 3, 2009 as compared with $24.2 million for the corresponding period in 2008. This decrease was primarily due to workforce reduction and our continuing effort to manage company-wide expenses discussed above. As a percentage of net sales, selling, general and administrative expenses for the nine-month period ended October 3, 2009 increased to 29.2% from 24.8% for the corresponding period of 2008. This increase was due primarily to the decrease in net sales as compared to the corresponding quarter of 2008 discussed above.

Interest and Other Income, Net

Interest and other income, net, which consists primarily of interest income, was $0.3 million for the three months ended October 3, 2009, as compared with $0.5 million for the comparable period of 2008.

For the nine months ended October 3, 2009, interest and other income, net, which consists primarily of the recognition of a foreign consumption tax incentive and interest income, was $2.7 million as compared to $2.8 million in the comparable period of 2008. This slight decrease was primarily attributable to the recognition of a foreign consumption tax incentive totaling $2.2 million during the nine months ended October 3, 2009, partially offset by a decline in interest income earned by our cash and investment positions of $1.8 million and an increase in loss from foreign currency exchange of $0.3 million.

The foreign consumption tax incentive related to a benefit we received in fiscal years 2004 and 2005 and was previously reserved due to uncertainties as to the ultimate realization of the incentive. We have determined that those uncertainties have been sufficiently reduced to allow recognition of the benefit. We do not expect to recognize any additional benefit with respect to this tax incentive. The loss from foreign currency exchange was a result of depreciation of Japanese yen. The lower interest income earned resulted from lower applicable interest rates. The cost of securities sold was determined based on the specific identification method. As of October 3, 2009, the weighted-average maturity of our investment portfolio was less than a year. Changes in interest rates have had, and will continue to have, an impact on our interest income.

Provision (benefit) for Income Taxes

For the three- and nine-month periods ended October 3, 2009, we recorded an income tax benefit of $1,000 and $37,000, respectively, as compared to an income tax provision of $1,000 and $0.3 million for the comparable periods in 2008. The income tax benefit recognized for the three- and nine-month periods ended October 3, 2009 resulted primarily from the federal refundable tax credit offset by foreign income taxes.

Income tax estimates can be affected by whether and within which jurisdictions future earnings will occur and how and when cash is repatriated to the United States, as well as other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate resolution.

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 our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. We closely monitor available evidence, and may release some or all of the valuation allowance in future periods.

In accordance with ASC 740 we had unrecognized tax benefits of $3.4 million as of January 1, 2009. We continue to recognize interest and penalties as a component of income tax provision and accrued $34,000 for these items as of January 1, 2009.

If we are able to eventually recognize these uncertain tax positions, $3.0 million of the unrecognized benefit would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future. Over the next twelve months, we expect an immaterial decline in liabilities associated with our uncertain tax positions as a result of expiring statutes of limitations.

We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2001 and forward. There are no tax examinations currently in progress.

Outlook

The anticipated timing of orders, shipments and customer acceptances usually requires that we fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect net sales for the fourth quarter of 2009 to be higher than the net sales reported in the third quarter of 2009. For the full fiscal year of 2009, we believe that total net sales will decrease from the amount reported for 2008.

Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser processing product line, delays in customer acceptance, intense competition in the capital equipment industry, uncertainty relating to

the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry and the other risks described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2008, we may not exceed or even maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market acceptance and volume production of our advanced packaging systems, laser . . .