Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking including, among others, statements regarding: industry prospects; future results of operations, including estimated revenue for the quarter ending June 30, 2012 or future financial position; our expectations and beliefs regarding future revenue growth and the results of our restructuring efforts; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; our accounting and tax policies; our dividend policies and share repurchase program; and our future capital requirements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology, including "intend," "could," "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential," "future," or "continue," the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including: changes in demand for our products; changes in product mix; the timing of shipments and customer orders; constraints on supplies of components; excess or shortage of production capacity; potential failure of expected market opportunities to materialize; changes in foreign exchange rates; and other risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 5, 2012.

General

We design, develop, manufacture and market advanced wafer probing solutions for the electrical measurement and testing of high performance semiconductor chips. Our products enable precision on-wafer measurement of integrated circuits. We design, manufacture and assemble our products in Beaverton, Oregon and Dresden, Germany and maintain global sales, service and support centers in North America, Germany, Japan, Taiwan, China and Singapore.

We operate in two business segments: Systems and Probes. Sales of our probe stations are included in the Systems segment and sales of our analytical probes and production probe cards are included in the Probes segment.

Probe stations provide precise and accurate measurement of semiconductor electrical characteristics during chip design or when optimizing the chip fabrication process. Our probe stations are highly configurable and are typically sold with various accessories, including our analytical probes, as well as accessories from third parties. In addition, we design and build custom probe stations to address the specific requirements of our customers and generate revenue through the sales of service contracts.

Our analytical probes are sold to serve as components of our probe stations, or less often, to serve as components of test equipment manufactured by third parties. Our production probe cards are designed and sold for high-volume production test applications, ranging from very low current parametric testing to sophisticated, high speed radio frequency testing.

Overview

Revenue in the first quarter of 2012 increased $0.5 million, or 2.0%, to $27.5 million compared to revenue of $27.0 million in the first quarter of 2011 primarily as a result of increased sales in our Probes segment, partially offset by lower revenue from our Systems segment. Income from continuing operations in the first quarter of 2012 was $0.7 million compared to $0.2 million in the first quarter of 2011, primarily due to the increase in revenue and an increase in gross profit.

Outlook

Based on our current backlog, projected bookings and scheduled shipments, we anticipate revenues will be in the range of $26 million to $29 million for the second quarter of 2012.

Critical Accounting Policies and the Use of Estimates

Management's discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of condensed consolidated financial statements 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. On an on-going basis we evaluate our estimates, including those related to revenue recognition, bad debts, inventory, lives and recoverability of equipment and other long-lived assets, warranty obligations, deferred income tax assets, unrecognized income tax benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on March 5, 2012.

Discontinued Operations

On September 22, 2011, we sold substantially all of the assets and liabilities related to our Sockets operations to R&D Sockets, Inc. for $525,000 in cash and a note receivable from the buyer for $25,000 due September 23, 2012. In connection with the transaction, the buyer assumed all of our obligations under the lease agreement covering administrative offices and a manufacturing facility related to our Sockets business. Prior period financial results have been reclassified to present the results of operations related to our Sockets business as discontinued operations.

Results of Continuing Operations

The following table sets forth our consolidated statement of operations data for
the periods indicated as a percentage of revenue.(1)



                                                            For the Three Months
                                                               Ended March 31,
                                                             2012            2011
  Revenue                                                      100.0 %        100.0 %
  Cost of sales                                                 56.6           60.0

  Gross profit                                                  43.4           40.0
  Operating expenses:
  Research and development                                      10.1           11.4
  Selling, general and administrative                           28.7           27.4

  Total operating expenses                                      38.8           38.8

  Income from operations                                         4.6            1.2
  Other income (expense), net                                   (1.4 )          0.0

  Income from continuing operations before income taxes          3.1            1.2
  Income tax expense                                             0.5            0.4

  Income from continuing operations                              2.7            0.8
  Loss from discontinued operations, net of tax                   -            (0.4 )

  Net income                                                     2.7 %          0.4 %

(1) Percentages may not add due to rounding.

Revenue and operating income information by segment was as follows (dollars in thousands):

                                                                  Corporate
                                     Systems       Probes        Unallocated        Total
 Three Months Ended March 31, 2012
 Revenue                             $ 18,226      $ 9,317      $          -       $ 27,543
 Gross profit                        $  7,220      $ 4,731      $          -       $ 11,951
 Gross margin                            39.6 %       50.8 %               -           43.4 %
 Income (loss) from operations       $  2,785      $ 1,875      $      (3,399 )    $  1,261
 Three Months Ended March 31, 2011
 Revenue                             $ 19,532      $ 7,481      $          -       $ 27,013
 Gross profit                        $  7,269      $ 3,526      $          -       $ 10,795
 Gross margin                            37.2 %       47.1 %               -           40.0 %
 Income (loss) from operations       $  3,190      $  (111 )    $      (2,762 )    $    317

Revenue

Revenue information was as follows (dollars in thousands):



                      Three Months Ended March 31,          Dollar
         Revenue        2012                 2011           Change        % Change
         Systems   $       18,226       $       19,532     $ (1,306 )          (6.7 )%
         Probes             9,317                7,481        1,836            24.5 %

         Total     $       27,543       $       27,013     $    530             2.0 %

Systems

Certain financial information which contributed to the Systems revenue results
was as follows:



                                                         First quarter of 2012
                                                           compared to first
                                                            quarter of 2011
    Percentage change in station unit sales                      None
    Percentage decrease in average sales price ("ASP")          (10.6)%

The decrease in Systems revenue in the first quarter of 2012 compared to the first quarter of 2011 was primarily due to the decrease in ASP. ASP in the first quarter of 2012 compared to the first quarter of 2011 was negatively affected by sales mix, as fewer higher-end 300mm and special application systems were sold.

Probes

The increase in Probes revenue in the first quarter of 2012 compared to the first quarter of 2011 was primarily the result of increased unit sales of our engineering probes and production probe cards due to customer demand.

Cost of Sales and Gross Margin

Cost of sales includes purchased materials, fabrication, assembly, test,
installation labor, overhead, customer-specific engineering costs, warranty
costs, royalties and provision for inventory valuation reserves.

Cost of sales information was as follows (dollars in thousands):



                         Three Months Ended March 31,          Dollar
      Cost of Sales        2012                 2011           Change        % Change
      Systems         $       11,006       $       12,263     $ (1,257 )         (10.3 )%
      Probes                   4,586                3,955          631            16.0 %

      Total           $       15,592       $       16,218     $   (626 )          (3.9 )%

Cost of sales was affected by changes in sales as discussed above combined with the factors that caused fluctuations in our gross margin (gross profit as a percentage of revenue), as discussed below.

Gross margins were as follows:

                                    Three Months Ended March 31,
                Gross Margins       2012                    2011
                Systems                  39.6 %                  37.2 %
                Probes                   50.8 %                  47.1 %
                Overall                  43.4 %                  40.0 %

Systems

The increase in Systems gross margins in the first quarter of 2012 compared to the first quarter of 2011 was primarily due to decreased factory costs following our factory consolidation and restructuring activities during the second and third quarters of 2011.

Probes

The increase in Probes gross margins in the first quarter of 2012 compared to the first quarter of 2011 was primarily due to higher sales volumes, which resulted in lower unallocated fixed overhead costs recorded as period expenses in cost of sales.

Overall

The overall increase in gross margins in the first quarter of 2012 compared to the first quarter of 2011 is attributable to the increases in gross margin of both operating segments.

Research and Development

Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead.

Information regarding our research and development expense was as follows (dollars in thousands):

Three Months Ended March 31, Dollar 2012 2011 Change % Change Research and development $ 2,779 $ 3,075 $ (296 ) (9.6 )%

The decrease in research and development in the first quarter of 2012 compared to the first quarter of 2011 was primarily due to a decrease in project-related costs.

Selling, General and Administrative

Selling, general and administrative, or SG&A, expense includes compensation and related expenses for personnel, travel, outside services, manufacturers' representative commissions, purchased intangible asset amortization and overhead incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions, as well as costs to operate as a public company.

Information regarding our SG&A expense was as follows (dollars in thousands):

Three Months Ended March 31, Dollar 2012 2011 Change % Change Selling, general and administrative $ 7,911 $ 7,403 $ 508 6.9 %

SG&A in the first quarter of 2011 included a $0.2 million benefit related to the reversal of restructuring charges. In addition, sales demo expenses increased by $0.2 million and depreciation expense increased by $0.1 million in the first quarter of 2012 compared to the first quarter of 2011.

Other Income (Expense)

Other income (expense) typically includes interest income, interest expense, gains and losses on foreign currency forward contracts and foreign currency gains and losses. Other income (expense) may also include other miscellaneous non-operating gains and losses.

Other income (expense), net was comprised of the following (in thousands):

                                                          Three Months Ended March 31,
                                                          2012                      2011
Interest income, net                                 $           10              $        19
Foreign currency gains (losses)                                (457 )                     29
Gains (losses) on foreign currency forward
contracts                                                        62                      (59 )
Other                                                           (12 )                     13

                                                     $         (397 )            $         2

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities. The decrease is primarily attributable to lower yields on investments.

Foreign currency gains and losses primarily result from a combination of changes in foreign currency exchange rates and the net value of monetary assets and liabilities denominated in yen, euro and other foreign currencies.

Income Taxes

Information regarding our income tax expense was as follows:



                                                           Three Months Ended March 31,
                                                         2012                       2011
Income tax provision related to continuing
operations                                           $         124              $         103
Income tax provision as a percentage of
income from continuing operations                             14.4 %                     32.3 %

Our income tax expense in the first quarters of 2012 and 2011 primarily related to estimated tax expense on income in foreign tax jurisdictions.

Liquidity and Capital Resources

Net cash provided by operating activities in the first quarter of 2012 was $4.4 million and consisted of our net income of $0.7 million, net non-cash expenses of $1.6 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net decreased by $4.4 million to $19.5 million at March 31, 2012, compared to $23.9 million at December 31, 2011. The decrease in accounts receivable was primarily due to improved collections of customer receivables.

Inventories increased by $1.7 million to $25.3 million at March 31, 2012, compared to $23.6 million at December 31, 2011. The increase in inventory was primarily due to increased purchases of raw materials in preparation for orders expected to ship in the remainder of 2012. This increase was partially offset by inventory reserve charges of $0.5 million in the first quarter of 2012 as compared to $0.3 million of inventory reserve charges in the first quarter of 2011. If our actual results are significantly different than our current expectations for 2012, we may incur additional charges to write down inventory in future periods.

Prepaid expenses and other assets decreased by $0.4 million to $4.5 million at March 31, 2012, compared to $4.1 million at December 31, 2011 primarily due to collection of VAT receivable.

Accrued liabilities increased by $0.4 million to $8.2 million at March 31, 2012, compared to $7.8 million at December 31, 2011 primarily due to an increase in accrued sales taxes and VAT payable of $0.6 million, an increase in accrued income taxes of $0.1 million and a decrease in accrued compensation and benefits of $0.3 million.

Deferred revenue decreased by $1.0 million to $4.5 million at March 31, 2012, compared to $5.5 million at December 31, 2011 primarily due to a decrease in customer deposits.

Other long-term liabilities decreased by $0.3 million to $3.9 million at March 31, 2012, compared to $4.2 million at December 31, 2011 primarily due to the decrease in accrued lease abandonment costs.

Fixed asset purchases of $0.1 million in the first quarter of 2012 primarily related to improvements to our research and development tools. We anticipate fixed asset additions for all of 2012 to be approximately $2.5 million, primarily for production-related equipment, facility improvements, research and development tools, business information systems and information technology equipment.

In February 2012, our board of directors authorized a stock repurchase program under which up to $1.0 million of our common stock could be repurchased from time to time in the open market or in privately negotiated transactions during the period through June 30, 2012. As of March 31, 2012, a total of 21,959 shares had been repurchased at an average price of $4.44 per share, for a total purchase price of $97,000. As of May 8, 2012, a total of 119,426 shares had been repurchased at an average price of $4.76, for a total purchase price of $568,000.

Changes in our assets and liabilities as presented on our Condensed Consolidated Statements of Cash Flows do not equal the changes in such assets and liabilities as calculated for our Condensed Consolidated Balance Sheets due to the effects of fluctuating foreign exchange rates.

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and cash equivalents and short-term marketable securities, which totaled $19.9 million at March 31, 2012.

We continue to evaluate opportunities for acquisition and expansion and any such transactions, if consummated, may use a portion of our cash and marketable securities.

Recent Accounting Guidance

See Note 13 of Notes to Condensed Consolidated Financial Statements.

Contractual Commitments

The following is a summary of our contractual commitments and obligations as of
March 31, 2012 (in thousands):



                                                                Payments Due By Period
                                                      Remainder of       2013 and       2015 and      2017 and
Contractual Obligation                   Total            2012             2014           2016         beyond
Operating leases                        $ 11,588     $        2,498     $    6,585     $    2,163     $     342
Capital leases                                14                 11              3             -             -
Purchase order commitments(1)              7,796              7,552            244             -             -
Forward contracts                          1,509              1,509             -              -             -

                                        $ 20,907     $       11,570     $    6,832     $    2,163     $     342

(1) Purchase order commitments primarily represent open orders for inventory.

Seasonality

Typically, our first quarter revenues are lower than our revenues from the preceding fourth quarter. In addition, as is typical in our industry, we recognize a large percentage of our quarterly revenue in the last month of the quarter. However, our seasonality can be affected by general economic trends and it should not be expected that historical revenue patterns will continue.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.