This section and other parts of this quarterly report on Form 10-Q contain forward-looking statements regarding future events and our future results. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the result discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Item 1A - Risk Factors" below. The following discussion should be read in conjunction with the consolidated financial statement and notes thereto included in Item 1 of this report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Overview

We are a leading developer and supplier of critical subsystems, producing primarily gas delivery systems, chemical mechanical planarization ("CMP") subsystems, chemical delivery modules, frame and top plate assemblies and process modules. We serve the semiconductor capital equipment, medical device, research, flat panel and solar industries. We develop, design, prototype, engineer, manufacture and test subsystems which are highly specialized and tailored to specific steps in the semiconductor manufacturing process as well as the manufacturing process in the other industries we serve.

The recent weakened global economy contributed to slowdowns in the markets we serve and led our customers to push out, cancel, or refrain from placing orders with us, which in turn reduced our sales and negatively impacted our cash flow as reflected in our financial results for fiscal 2008 and going into the second quarter of 2009. Our second quarter results reflected a degree of stabilization in the semiconductor capital equipment industry while our third quarter results reflect an increase in demand in most of the markets we serve, in particular the semiconductor capital equipment industry. However, third quarter and year-to-date 2009 financial results are still down significantly from fiscal 2008 levels.

Sales for the three months ended October 2, 2009 were $41.3 million, a decrease of $18.8 million, or 31.3%, from the same quarter of 2008. Gross profit in the third quarter of 2009 decreased $2.2 million, or 40.0%, to $3.3 million, or 7.9% of sales, from $5.5 million, or 9.1% of sales, in the third quarter of 2008. Total operating expenses in the third quarter of 2009 decreased to $5.0 million, or 12.2% of sales, from $7.8 million, or 12.9% of sales, compared to the third quarter of 2008. We incurred a net loss during the third quarter of 2009 of $1.4 million compared to a net loss of $1.9 million for the same period in 2008 as a result of decreased sales and gross profits offset by lower operating expenses incurred during the current quarter.

For the periods indicated, the following table sets forth certain costs and expenses and other income items as a percentage of sales. The table and subsequent discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in our quarterly report.

                                               Three months ended                                    Nine months ended
                                   October 2, 2009          September 26, 2008          October 2, 2009          September 26, 2008
Sales                                        100.0 %                     100.0 %                  100.0 %                     100.0 %
Cost of goods sold                            92.1 %                      90.9 %                  100.5 %                      88.6 %

Gross profit (loss)                            7.9 %                       9.1 %                   (0.5 )%                     11.4 %
Operating expenses:
Research and development                       1.9 %                       0.8 %                    2.8 %                       0.9 %
Sales and marketing                            2.4 %                       2.4 %                    3.7 %                       2.0 %
General and administrative                     7.9 %                       9.7 %                   13.9 %                       8.5 %

Total operating expenses                      12.2 %                      12.9 %                   20.4 %                      11.4 %

Income (loss) from
operations                                    (4.3 )%                     (3.8 )%                 (20.9 )%                      0.0 %

Interest and other income
(expense), net                                (0.4 )%                     (0.4 )%                  (0.7 )%                     (0.4 )%

Loss before provision
(benefit) for income taxes                    (4.7 )%                     (4.2 )%                 (21.6 )%                     (0.4 )%

Income tax provision
(benefit)                                     (1.3 )%                     (1.0 )%                   4.3 %                      (0.3 )%
Net Loss                                      (3.4 )%                     (3.2 )%                 (25.9 )%                     (0.1 )%

Results of Operations

Sales

Sales in the third quarter of 2009 decreased $18.8 million, or 31.3%, to $41.3 million from $60.1 million in the third quarter of 2008. Sales for the first nine months of 2009 decreased $132.9 million, or 60.4%, to $87.0 million from $219.8 million for the first nine months of 2008. The decrease in sales for the three and nine month periods reflects a decrease in semiconductor equipment demand as a result of the overall slowdown in the industry. We expect sales to increase in the fourth quarter of 2009.

Gross Profit (loss)

Cost of goods sold consists primarily of purchased materials, labor and overhead, including depreciation related to certain capital assets associated with the design and manufacture of products sold. Gross profit for the three months ended October 2, 2009 decreased to $3.3 million, or 7.9% of sales, from a gross profit of $5.5 million, or 9.1% of sales, for the same period in 2008. Gross profit (loss) for the first nine months of 2009 decreased $25.5 million to ($0.4) million, or (0.5)% of sales, from $25.1, or 11.4% of sales for the same period in 2008. Our gross margin for the three and nine month periods ended October 2, 2009 decreased from the comparable period in 2008 due primarily to declining unit volume and lower factory utilization.

Research and Development Expense

Research and development expense consists primarily of activities related to new component testing and evaluation, test equipment and fixture development, product design, and other product development activities. Research and development expense for the third quarter of 2009 increased $0.3 million, or 59.3%, to $0.8 million, or 1.9% of sales, compared to $0.5 million, or 0.8% of sales in the same quarter in 2008. Research and development expense for the first nine months of 2009 increased $0.6 million, or 29.9 %, to $2.4 million, or 2.8% of sales, compared to $1.9 million, or 0.9% of sales for the same period in 2008. The increase in expense for both comparable periods of 2009 is primarily due to the reassignment of existing resources to new product development activities.

Sales and Marketing Expense

Sales and marketing expense consists primarily of salaries and commissions paid to our sales and service employees and other costs related to the sales of our products. Sales and marketing expense for the third quarter of 2009 was $1.0 million, or 2.4% of sales, compared to $1.5 million, or 2.4% of sales, in the same quarter of 2008. Sales and marketing expense for the first nine months of 2009 was $3.2 million, or 3.7% of sales, compared to $4.4 million, or 2.0% of sales, for the same period in 2008. The increase in percent of sales for both the three and nine month periods of 2009 is due to a decrease in sales during third quarter and first nine months of 2009 compare to the respective periods in 2008. The decrease in dollars is due to primarily to reduced payroll and related benefit costs due to decreases in headcount and salary reductions as well as a decrease in depreciation expense associated with the impairment of long-term assets the Company took in the fourth quarter of fiscal 2008.

General and Administrative Expense

General and administrative expense consists primarily of salaries and overhead associated with our administrative staff and professional fees. General and administrative expense decreased approximately $2.6 million, or 44.2% in the third quarter of 2009 to $3.3 million, or 7.9% of sales, compared with $5.8 million, or 9.7% of sales, in the same quarter of 2008. General and administrative expense decreased approximately $6.6 million, or 35.3% during the first nine months of 2009 to $12.1 million, or 13.9% of sales, compared to $18.7 million, or 8.5% of sales, for the same period of 2008. The increase in percent of sales for both the three and nine month periods of 2009 is due to a decrease in sales during the third quarter and first nine months of 2009 compared to the respective periods in 2008. The decrease in dollars is due to primarily to reduced payroll and related benefit costs due to decreases in headcount and salary reductions.

Interest and Other Income (Expense), net

Interest and other income (expense), net consists primarily of interest expense on the Company's debt, and for the third quarter and first nine months of 2009 was $189,000 and $236,000, respectively, compared to $612,000 and $826,000 for the respective periods of 2008. As a result of a new loan agreement with our credit facility in the first quarter of 2009, the average interest rates on our debt have remained flat during the current nine month period and are relative to interest rates applied on our debt facilities during the same period in the prior year. Interest expense was lower for the three and nine months ended October 2, 2009 compared to the same periods of 2008 due to primarily to lower respective average debt balances.

Income Tax Provision

Our tax provision (benefit) as a percentage of pre-tax income for the first nine months of 2009 was 19.7% compared to (17.3%) for the year ended December 28, 2008. The change in rate from the prior year reflects, primarily, a tax valuation allowance recorded in the second quarter of 2009, a change in the geographic mix of worldwide earnings and financial results for 2009 compared with the fiscal year 2008. Excluding the tax valuation allowance, our current year tax rate is (37%) compared to the federal statutory rate of (35%), primarily as a result of state and foreign taxes.

Liquidity and Capital Resources

We have funded our operations through financing activities and operations and we require capital principally to fund our working capital needs, satisfy our debt obligations, maintain our equipment and purchase new capital equipment. As of October 2, 2009, we had cash of $30.7 million compared to $29.6 million as of January 2, 2009.

For the quarter ended October 2, 2009 we generated cash from operating activities of $4.1 million compared to $6.3 million of cash generated in operating activities for the same period in the prior year. Operating cash flows were favorably impacted by net non-cash activity of $11.3 million, including deferred income taxes of $7.4 million, depreciation and amortization of $1.8 million and stock-based compensation of $2.1 million, decreases in inventory and prepaid and other of $3.2 million and $3.2 million respectively and an $11.8 million increase in accounts payable, and were unfavorably impacted by a decrease in accounts receivable and accrued compensation and related benefits of $1.7 million and $1.2 million, respectively.

Net cash used in investing activities were $0.2 million for the first nine months of 2009, representing a decrease of $8.9 million when compared to the same period in 2008, due primarily to a reduction in capital spending on our new facility in Hayward, CA.

Net cash used in financing activities for the first nine months of fiscal 2009 increased $0.6 million to $2.8 million from $2.2 million for the same period of the prior year. Our use of cash in financing activities for the first nine months of 2009 was primarily due to payments on short-term and long-term debt of $4.7 million and $3.7 million, respectively, offset by proceeds from bank borrowings of $5.5 million.

During fiscal 2008 and into the third quarter of fiscal 2009, we took steps to reduce our operating costs in line with our revenues in the form of factory shutdowns, reductions in headcount and other cost-cutting measures. As a result of these particular actions and our ability to effectively manage our inventory down while revenues were decreasing, we have consistently grown cash as well as our net liquidity quarter to quarter since the third quarter of 2008. We anticipate that our existing cash balances and operating cash flow, together with available borrowings under our credit facility as amended on February 4, 2009 (see "Borrowing Arrangements" above) will be sufficient to meet our working capital requirements and technology development projects for at least the next twelve months. The adequacy of these resources to meet our liquidity needs beyond that period will depend on our growth, the state of the worldwide economy, the cyclical expansion or contraction of the semiconductor capital equipment industry and the other industries we serve and capital expenditures required to meet possible increased demand for our products.

Contractual Obligations and Contingent Liabilities and Commitments

Other than operating leases for certain equipment and facilities, we have no significant off-balance sheet transactions, unconditional purchase obligations or similar instruments and, other than with respect to the revolving credit facility described above, are not a guarantor of any other entities' debt or other financial obligations.

The following table summarizes our future minimum lease payments and principal payments under debt obligations, in thousands, as of October 2, 2009. Of the $13.6 million in operating leases, $143,000, which is net of estimated sublease income of $107,000, is included in other accrued liabilities, as of October 2, 2009.

                           2009      2010      2011       2012      2013      Thereafter     Total
 Capital lease            $     2   $     6   $     6   $      6   $     7   $          4   $     31
 Operating lease (1)          881     3,386     2,754      2,211     2,014          2,333     13,579
 Borrowing arrangements       490     2,008     1,443     11,649        -              -      15,590

 Total (2)                $ 1,373   $ 5,400   $ 4,203   $ 13,866   $ 2,021   $      2,337   $ 29,200

(1) Operating lease expense reflects (a) the lease for our headquarters facility in Hayward, California; (b) the lease for a manufacturing facility in Portland, Oregon that expires on October 31, 2010 net of estimated sublease rental income; (c) the leases for manufacturing facilities in South San Francisco that expire in the fourth quarter of 2009 and from 2010 through 2013; (d) the leases for manufacturing facilities in Austin, Texas that expire in 2010 and 2011.

(2) As a result of the implementation of FASB's guidance regarding accounting for uncertainty in income taxes, we have recorded an additional tax liability to offset the recognition of previously recorded excess tax benefits. Because of the uncertainty surrounding the future payment of these liabilities, the amount has been excluded from the table above.

Critical Accounting Policies, Significant Judgments and Estimates

Our condensed consolidated financial statements have been prepared in accordance with GAAP, which requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure at the date of our financial statements. Estimates and judgments are reviewed on an on-going basis, including those related to sales, inventories, intangible assets, stock compensation and income taxes. The estimates and judgments are based on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis of the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We consider certain accounting policies related to the purchase accounting, revenue recognition, inventory valuation, accounting for income taxes, valuation of intangible assets and goodwill and equity incentives to employees to be critical policies due to the estimates and judgments involved in each. Our significant accounting policies and critical estimates are disclosed in our 2008 Annual Report on Form 10-K as filed with the SEC on March 19, 2009. No material changes to our significant accounting policies and critical estimates have occurred subsequent to January 3, 2009.

Accounting for Income Taxes

The determination of our tax provision is subject to judgments and estimates. The FASB's guidance regarding accounting for income taxes states that a deferred tax asset should be reduced by a valuation allowance if, based on the weight of all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. In determining whether the Company's deferred tax asset is realizable, the Company weighed all available evidence, including both positive and negative evidence. The realization of deferred tax assets depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The Company has considered all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, future taxable income exclusive of reversing temporary differences and carry forwards, taxable income in carry back years and tax-planning strategies.

Based on our recent historical operating results and our outlook for 2009, we determined it is more likely than not that our deferred tax assets will not be realized. As such, in the second quarter of 2009, we recorded a tax valuation allowance reducing our deferred tax asset value of $7.0 million to zero with a corresponding non-cash charge.

Recently Issued Accounting Standards

See Recently Issued Accounting Standards in Note 1 of Notes to Condensed Consolidated Financial Statements.