Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations of earnings, revenues, gross margins, operating and non-operating expense, income tax expense, tax rates, net income, inventory turnover rates, cash resources, credit lines or other financial items, as well as backlog, order levels and activity of our company as a whole or our particular markets or segments; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing initiatives; factors that may affect our 2009 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, our competitive position, hiring levels, sales and bookings or anticipated performance of products or services; any statements related to future capital expenditures and investments; any statements related to the needs or expected growth of our target markets; any statement related to our ability to recognize value from the auction rate securities we hold; any statements relating to the credit worthiness of our derivative counterparties and lenders; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing; and statements made under the heading "Outlook for the Remainder of 2009." You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "appear" and other words and terms of similar meaning. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. You also should read Item 1A. "Risk Factors" included in Part II of this report for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.

Summary of Products and Segments

We are a leading supplier of instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the Electronics market, the Research and Industry market, the Life Sciences market and the Service and Components market.

Our products include focused ion beam systems, or FIBs; scanning electron microscopes, or SEMs; transmission electron microscopes, or TEMs; and DualBeam systems, which combine a FIB and SEM on a single platform.

Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor and data storage manufacturers ("wafer-level DualBeam systems") and models that have small stages and are sold to customers in several markets ("small-stage DualBeam systems").

The Electronics market consists of customers in the semiconductor, data storage and related industries such as printers and light-emitting diodes ("LEDs"). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 65 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures. In the data storage market, our products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our business include the transition from longitudinal to perpendicular recording heads, rapidly increasing storage densities that require smaller recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, forensics, metals, mining and petrochemicals. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are also used in mineral concentration analysis, root cause failure analysis and quality control applications.

The Life Sciences market includes universities and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products' ultra-high resolution imaging allows cell biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

Overview

Net sales increased to $140.8 million in the third quarter of 2009 compared to $140.3 million in the second quarter of 2009 and decreased compared to $141.8 million in the third quarter of 2008. Net sales for the third quarter of 2009 increased $4.0 million compared to the second quarter of 2009 as a result of the weakening of the U.S. dollar against foreign currencies, primarily the euro. Foreign currency movements reduced net sales in the third quarter of 2009 by $1.4 million when compared to the third quarter of 2008. The increase in the third quarter of 2009 compared to the second quarter of 2009 also resulted from increased sales in our Research and Industry and Service and Components market segments, partially offset by declines in Electronics and Life Sciences.

Orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog. We only recognize backlog for purchase commitments for which the terms of the sale have been agreed upon, including price, configuration, options and payment terms. Product backlog consists of all open orders meeting these criteria. Service and Components backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts. In addition, some of the U.S. government backlog represents uncommitted funds. At October 4, 2009, our total backlog was $343.9 million, compared to $330.5 million at December 31, 2008. At October 4, 2009, our backlog consisted of product and service and components unfilled orders of $279.6 million and $64.3 million, respectively, compared to $273.5 million and $57.0 million, respectively, at December 31, 2008.

Of our total backlog at October 4, 2009, approximately 90% is expected to be shippable within 12 months and approximately 10% requires some incremental development. Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been minor. However, the global markets are in a period of extraordinary financial uncertainty and historic cancellation rates may increase in the future. During the first three quarters of 2009 and in all of 2008, we experienced cancellations or de-bookings of $4.3 million and $7.6 million, respectively. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in securing electronic components from a certain vendor. In addition, product shipments have been extended due to delays in completing certain application development, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. In the last several quarters, the period between order placement and scheduled shipment has grown somewhat compared to prior years. A significant portion of our backlog is denominated in currencies other than the U.S. dollar and, therefore, our reported backlog fluctuates, to an extent, as a result of foreign currency exchange rate movements. For these reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

Outlook for the Remainder of 2009

In the past, we have experienced an increase in revenues in the fourth quarter of each year and we are expecting a similar increase in revenues to happen in the fourth quarter of this year as well. Our total backlog of unfilled orders has increased by $15.2 million since the beginning of 2009. We experienced an increase in orders in the third quarter of 2009 in our Research and Industry segment and these orders are expected to positively affect sales in the fourth quarter of 2009. Between 10% and 15% of our third quarter 2009 bookings were based on funds from the American Recovery and Reinvestment Act ("ARRA" or stimulus), and we expect a generally similar level of bookings based on such funds in the fourth quarter of 2009. Most of those orders will ship in 2010. The Electronics and Life Sciences segments generally experience a more variable order pattern and bookings in both of these segments were relatively weak in the third quarter of 2009 compared to our Research an Industry segment. However, both the Electronics and Life Sciences segments are expected to improve in the fourth quarter of 2009, contributing to historical seasonal strength in our bookings in these segments.

We also expect a slight improvement in gross margins during the fourth quarter of 2009 due to higher shipment volume and more favorable pricing on shipments that are currently in backlog. Operating expenses, which declined significantly from the second to the third quarter of 2009, are expected to increase modestly in the fourth quarter of 2009 due to higher agent commissions and the impact of a stronger euro on our European-based expenses. Restructuring expense is also expected to increase in the fourth quarter of 2009 due to added severance expense.

The anticipated combination of higher revenue, slightly improved gross margins and modestly higher operating expenses is expected to result in higher operating income in the fourth quarter of 2009 compared to the third quarter of 2009. Non-operating expense, which can vary significantly depending on the volatility of foreign exchange rates and on the effectiveness of our hedging programs, is expected to be somewhat higher in the fourth quarter of 2009 compared to the third quarter of 2009. The tax rate in the third quarter of 2009 reflected the impact of effective settlements with tax authorities and, as a result, the tax rate is expected to increase in the fourth quarter of 2009 from the third quarter of 2009. Overall, we expect increased revenue and gross margins to more than offset increases in the tax rate and non-operating expenses, thereby resulting in modestly improved net income in the fourth quarter of 2009 as compared to the third quarter of 2009.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management's Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2008 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management's estimates. Other than Note 22 to the Consolidated Financial Statements in this Form 10-Q and additional detail added regarding the valuation of excess and obsolete inventory as discussed below, during the first three quarters of 2009, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 20, 2009, as updated by our Current Report on Form 8-K, filed with the SEC on October 8, 2009.

Valuation of Excess and Obsolete Inventory

Inventory is stated at the lower of cost or market, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead.

Manufacturing inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned changes to products and known trends in markets and technology. Changes in support plans or technology could have a significant impact on obsolescence.

To support our world-wide service operations, we maintain service spare parts inventory, which consists of both consumable and repairable spare parts. Consumable service spare parts are used within our service business to replace worn or damaged parts in a system during a service call and are generally classified in current inventory as our stock of this inventory turns relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part is still necessary to support systems under service contracts, the part is considered to be non-current and included within non-current inventories within our consolidated balance sheet. Consumables are charged to cost of goods sold when issued during the service call.

We also maintain a substantial supply of repairable and reusable spare parts for possible use in future repairs and customer field service of our install base. We have classified this inventory as a long-term asset given these parts can be repaired and reused in the service business over many years. As these service parts age over the related product group's post-production service life, we ratably reduce the net carrying value of our repairable spare part inventory on the consolidated balance sheet to account for the excess that builds over the service life. The post-production service life of our systems is generally seven years and, at the end of seven years, the carrying value for these parts in our consolidated balance sheet is reduced to zero. We also perform periodic monitoring of our installed base for premature end of service life events and expense, through cost of sales, the remaining net carrying value of any related spare parts inventory in the period incurred.

Provision for manufacturing inventory valuation adjustments totaled $0.5 million and $2.3 million, respectively, in the thirteen and thirty-nine week periods ended October 4, 2009 and $0.7 million and $1.2 million, respectively, in the comparable periods of 2008. Provision for service spare parts inventory valuation adjustments totaled $1.1 million and $3.6 million, respectively, in the thirteen and thirty-nine week periods ended October 4, 2009 and $1.2 million and $3.4 million, respectively, in the comparable periods of 2008.

Results of Operations

The following tables set forth our statement of operations data, both in
absolute dollars and as a percentage of net sales (dollars in thousands).



                                           Thirteen Weeks Ended (1)               Thirteen Weeks Ended (1)
                                                October 4, 2009                      September 28, 2008
Net sales                               $       140,799           100.0 %    $         141,768            100.0 %
Cost of sales                                    85,418            60.7                 85,066             60.0

Gross profit                                     55,381            39.3                 56,702             40.0
Research and development                         16,705            11.9                 17,168             12.1
Selling, general and administrative              30,176            21.4                 32,140             22.7
Restructuring, reorganization,
relocation and severance                            601             0.4                  1,176              0.8

Operating income                                  7,899             5.6                  6,218              4.4
Other (expense) income, net                        (809 )          (0.6 )                 (591 )           (0.4 )

Income before income taxes                        7,090             5.0                  5,627              4.0
Income tax expense                                1,030             0.7                  1,679              1.2

Net income                              $         6,060             4.3 %    $           3,948              2.8 %


                                          Thirty-Nine Weeks Ended (1)          Thirty-Nine Weeks Ended (1)(2)
                                                October 4, 2009                      September 28, 2008
Net sales                               $       422,895           100.0 %    $         447,453            100.0 %
Cost of sales                                   252,661            59.7                272,906             61.0

Gross profit                                    170,234            40.3                174,547             39.0
Research and development                         50,142            11.9                 53,471             12.0
Selling, general and administrative              94,827            22.4                 97,671             21.8
Restructuring, reorganization,
relocation and severance                          2,630             0.6                  3,447              0.8

Operating income                                 22,635             5.4                 19,958              4.5
Other income, net                                (2,630 )          (0.6 )               (3,509 )           (0.8 )

Income before income taxes                       20,005             4.7                 16,449              3.7
Income tax expense                                3,947             0.9                  5,810              1.3

Net income                              $        16,058             3.8 %    $          10,639              2.4 %

(1) Percentages may not add due to rounding.

(2) As adjusted for the effects of the adoption of provisions of ASC 470-20, "Debt with Conversion and Other Options," regarding debt instruments that may be settled in cash upon conversion. See Note 20 of the Condensed Notes to the Consolidated Financial Statements.

Net sales decreased $1.0 million, or 0.7%, to $140.8 million, in the thirteen weeks ended October 4, 2009 (the third quarter of 2009) compared to $141.8 million in the thirteen weeks ended September 28, 2008 (the third quarter of 2008). Net sales decreased $24.6 million, or 5.5%, to $422.9 million in the thirty-nine week period ended October 4, 2009 compared to $447.5 million in the thirty-nine week period ended September 28, 2008. These decreases primarily reflect decreases in Electronics and Life Sciences in the thirteen week period and in Electronics in the thirty nine week period, partially offset by increases in Research and Industry in both periods, as described more fully below.

As compared to 2008 exchange rates, currency movements decreased net sales by approximately $1.4 million and $17.2 million during the thirteen and thirty-nine week periods ended October 4, 2009 as approximately 34% and 33%, respectively, of our net sales were denominated in foreign currencies that declined in strength against the U.S. dollar during the periods. A significant portion of our revenue is denominated in foreign currencies, especially the euro. As the U.S. dollar strengthens against the euro, this generally has the effect of reducing net sales and backlog.

Net Sales by Segment

Net sales by market segment (in thousands) and as a percentage of net sales were
as follows:



                                               Thirteen Weeks Ended
                                        October 4,            September 28,
                                           2009                   2008
            Electronics              $  31,729    22.5 %    $  35,427    25.0 %
            Research and Industry       61,581    43.8 %       47,763    33.7 %
            Life Sciences               12,252     8.7 %       23,441    16.5 %
            Service and Components      35,237    25.0 %       35,137    24.8 %

                                     $ 140,799   100.0 %    $ 141,768   100.0 %


                                             Thirty-Nine Weeks Ended
                                        October 4,            September 28,
                                           2009                   2008
            Electronics              $  93,417    22.1 %    $ 119,677    26.7 %
            Research and Industry      175,140    41.4 %      171,353    38.3 %
            Life Sciences               52,729    12.5 %       52,573    11.8 %
            Service and Components     101,609    24.0 %      103,850    23.2 %

                                     $ 422,895   100.0 %    $ 447,453   100.0 %

Electronics

The $3.7 million, or 10.4%, decrease and the $26.3 million, or 21.9%, decrease, respectively, in Electronics sales in the thirteen and thirty-nine week periods ended October 4, 2009 compared to the same periods of 2008 were primarily due to decreases in volume as a result of the cyclical downturn in the semiconductor industry. In addition, currency fluctuations increased Electronics sales by $0.2 million and decreased Electronics sales by $1.2 million, respectively, in the thirteen and thirty-nine week periods ended October 4, 2009 compared to the same periods of 2008. Currently, a majority of our Electronics revenue comes from the larger semiconductor and data storage companies that are working to develop next generation devices.

Research and Industry

The $13.8 million, or 28.9%, increase and the $3.8 million, or 2.2%, increase, respectively, in Research and Industry sales in the thirteen and thirty-nine week periods ended October 4, 2009 compared to the same periods of 2008 were due primarily ongoing foreign and domestic government investment, including U.S. and international stimulus spending, in advanced materials research. In addition, we realized an increase in the average price per unit sold for our TEMs and SEMs due to shifts in product mix. We expect that federal stimulus funding will positively affect Research and Industry sales in future quarters. These factors were offset in the thirteen and thirty-nine week periods ended October 4, 2009 by a $1.0 million and a $9.6 million decrease, respectively, related to currency movements.

Life Sciences

The $11.2 million, or 47.7%, decrease and the $0.2 million, or 0.3%, increase, respectively, in Life Sciences sales in the thirteen and thirty-nine week periods ended October 4, 2009 compared to the same periods of 2008 were due primarily to the timing of individual shipments. While we expect long-term growth, Life Sciences is an emerging market with a relatively small number of high dollar unit sales and, accordingly, sales from this segment will be variable from quarter to quarter. Life Science sales were negatively affected in the thirteen and thirty-nine week periods ended October 4, 2009 by a $0.2 million and a $3.0 million decrease, respectively, related to currency movements.

Service and Components

The $0.1 million, or 0.3%, increase and the $2.2 million, or 2.2%, decrease, respectively, in Service and Components sales in the thirteen and thirty-nine week periods ended October 4, 2009 compared to the same periods of 2008 were due primarily to a $0.4 million and a $3.4 million decrease, respectively, related to currency movements and decreased sales of our components as a result of industry-wide reductions in semiconductor capital equipment spending. These factors were partially offset by an increase in service due to a larger install base. Some customers, however, have deferred renewing certain service contracts due to idle machinery as a result of over-capacity in the semiconductor industry.

Sales by Geographic Region

A significant portion of our revenue has been derived from customers outside of
the United States, and we expect this to continue. The following table shows our
net sales by geographic location (dollars in thousands):



                                          Thirteen Weeks Ended                        Thirty-Nine Weeks Ended
                                   October 4,            September 28,           October 4,            September 28,
                                      2009                   2008                   2009                   2008
U.S. and Canada                 $  46,438    33.0 %    $  52,598    37.1 %    $ 142,330    33.7 %    $ 161,124    36.0 %
Europe                             48,296    34.3 %       48,532    34.2 %      137,961    32.6 %      144,435    32.3 %
Asia-Pacific Region and Rest
of World                           46,065    32.7 %       40,638    28.7 %      142,604    33.7 %      141,894    31.7 %

                                $ 140,799   100.0 %    $ 141,768   100.0 %    $ 422,895   100.0 %    $ 447,453   100.0 %

U.S. and Canada

The $6.2 million, or 11.7%, decrease and the $18.8 million, or 11.7%, decrease, respectively, in sales to the U.S. and Canada in the thirteen and thirty-nine week periods ended October 4, 2009 compared to the same periods of 2008 were primarily due to lower Electronics sales due to the continued effects of the downturn in capital spending in the semiconductor industry.

Europe

Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East, eastern Europe and Russia. The $0.2 million, or 0.5%, decrease and the $6.5 million, or 4.5%, decrease, . . .