This quarterly report on Form 10-Q contains forward-looking statements, which are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industry. Our forward-looking statements may include statements that relate to our future revenue, gross margin, earnings, cash flow and cash position, customer demand, market share, competitiveness, margins, product development plans and levels of research and development (R&D) activity, outsourcing plans and operating expenses, tax expenses, the expected effects, cost and timing of restructurings, excess inventory reserves, the level of our vendor commitments as compared to our requirements, cost-saving initiatives, and consolidation of operations and facilities, economic conditions in general and in our industry, and the sufficiency of our financial resources to support future operations and capital expenditures. Forward-looking statements typically are identified by use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes," and similar expressions, although some forward-looking statements are expressed differently. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties, and assumptions that are difficult to predict. Such risks and uncertainties include those set forth in Part II, Item 1A under "Risk Factors" and Part I, Item 2 under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our actual results could differ materially from those anticipated by these forward-looking statements. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or for any other reason.

Documents to Review In Connection With Management's Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes in our last filed Annual Report on Form 10-K, for the year ended December 31, 2008 (our 2008 Form 10-K).

Overview

We are a supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits (ICs). Our manufacturing equipment is used for transistor level, or front-end-of-line manufacturing, and also in specialized applications for processing the interconnect layer, or back-end-of-line processing. Our manufacturing equipment utilizes innovative technology to deliver advanced processing capabilities and high productivity for the fabrication of current and next-generation ICs.

Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. Because the demand for semiconductor devices is highly cyclical, the demand for wafer processing equipment is also highly cyclical.

The semiconductor equipment industry is a cyclical market, typically experiencing wide swings in quarterly results as the industry moves through its cycle. The current downturn, which began in the second half of fiscal 2007 and expected to continue through the remainder of 2009 and perhaps into the first half of 2010, has been unusually severe and extreme. The market decline was worsened by the global economic crisis of 2008, which extended well into 2009. However, estimates from market research firms indicate that we are in the beginning stages of a cyclical recovery that is forecasted to continue to gather momentum in 2010 and may extend into the next several years. During the third quarter of 2009, we continued to see sequential improvement in our business when compared to the first quarter's cyclical trough. We are now seeing specific capacity adds from several key customers leading us to believe that a recovery in the memory segment is likely. In addition, we saw strengthening in our spares and service business as fab utilization levels continue to improve. We are encouraged by these optimistic signs, but the timing of a sustainable industry recovery, characterized by large scale capacity buys across the entire memory market, is largely dependent on the ability of our customers to commit funding for additional growth.

Until a widespread recovery in both the global economic and industry specific market occurs, we will continue to focus on cash preservation, cost reduction and protecting the investment in our new products to position us for success in the future. Since the second quarter of 2008, we have implemented strict cost reduction initiatives including reductions of our global headcount and salary reductions for all employees. We have optimized our

Going forward, the success of our business will be dependent on numerous factors, including, but not limited to, the market demand for semiconductors and semiconductor wafer processing equipment, and our ability to (a) significantly grow the Company, either organically or through acquisitions, in order to enhance our competitiveness and profitability, (b) develop and bring to market new products that address our customers' needs, (c) grow customer loyalty through collaboration with and support of our customers (d) maintain a cost structure that will enable us to operate effectively and profitably throughout changing industry cycles and (e) generate the gross margins necessary to enable us to make the necessary investments in our business.

Results of Operations

The following table sets forth our condensed consolidated results of operations
for the periods indicated, along with comparative information regarding the
absolute and percentage changes in these amounts:

                                        Three Months Ended
                                  -------------------------------
                                  September 27,    September 28,
                                      2009             2008          Increase (Decrease)
                                  ------------     ------------     ---------------------
                                  (thousands)      (thousands)      (thousands)      %
Net sales                            $ 11,187         $ 30,041       $ (18,854)    (62.8)
Cost of sales                           8,722           22,371         (13,649)    (61.0)
                                  ------------     ------------     -----------
      Gross margin                      2,465            7,670          (5,205)    (67.9)
                                  ------------     ------------     -----------

Operating expenses:
   Research, development and
engineering                             5,818           10,397          (4,579)    (44.0)
   Selling, general and
administrative                         11,611           16,448          (4,837)    (29.4)
   Amortization of intangibles             -               128            (128)   n/m (1)
   Restructuring charges                1,738            1,867            (129)     (6.9)
                                  ------------     ------------     -----------
      Total operating expenses         19,167           28,840          (9,673)    (33.5)
                                  ------------     ------------     -----------

Loss from operations                  (16,702)         (21,170)          4,468     (21.1)

Interest income                           139              739            (600)    (81.2)
Interest expense                          (30)             (37)              7     (18.9)
Other income (expense), net              (357)            (139)           (218)   n/m (1)
                                  ------------     ------------     -----------
Loss before income taxes              (16,950)         (20,607)          3,657     (17.7)

Provision for (benefit from)           (8,393)             130          (8,523)   n/m (1)
income taxes                      ------------     ------------     -----------

Net loss                             $ (8,557)       $ (20,737)       $ 12,180     (58.7)
                                  ------------     ------------     -----------


_________________
(1) Not meaningful

                                         Nine Months Ended
                                  -------------------------------
                                  September 27,    September 28,
                                      2009             2008          Increase (Decrease)
                                  ------------     ------------     ---------------------
                                  (thousands)      (thousands)      (thousands)      %
Net sales                            $ 24,827        $ 120,486       $ (95,659)    (79.4)
Cost of sales                          31,886           73,537         (41,651)    (56.6)
                                  ------------     ------------     -----------
      Gross margin                     (7,059)          46,949         (54,008)   n/m (1)
                                  ------------     ------------     -----------

Operating expenses:
   Research, development and
engineering                            19,277           27,458          (8,181)    (29.8)
   Selling, general and
administrative                         35,970           48,815         (12,845)    (26.3)
   Amortization of intangibles             -               384            (384)   n/m (1)
   Restructuring charges                2,556            2,615             (59)     (2.3)
                                  ------------     ------------     -----------
      Total operating expenses         57,803           79,272         (21,469)    (27.1)
                                  ------------     ------------     -----------

Loss from operations                  (64,862)         (32,323)        (32,539)   n/m (1)

Interest income                           572            2,801          (2,229)    (79.6)
Interest expense                          (86)            (113)             27     (23.9)
Other income (expense), net               719           (1,386)          2,105    n/m (1)
                                  ------------     ------------     -----------
Loss before income taxes              (63,657)         (31,021)        (32,636)   n/m (1)

Provision for (benefit from)           (7,977)             686          (8,663)   n/m (1)
income taxes                      ------------     ------------     -----------

Net loss                            $ (55,680)       $ (31,707)      $ (23,973)     75.6
                                  ------------     ------------     -----------


_________________
(1) Not meaningful

Net sales decreased 63 percent to $11.2 million for the three months ended September 27, 2009, compared to $30.0 million for the same period in 2008. Net sales decreased 79 percent to $24.8 million for the nine months ended September 27, 2009 compared to $120.5 million for the same period in 2008. The decline in net sales was primarily due to the severity of the continued downturn in the overall wafer fabrication equipment market, the industry's reduced capital spending, and excess supplies at our customers' fabs. Although we witnessed some improvements in utilization rates and some capacity adds during the third quarter of fiscal 2009 when compared to the previous quarter, our customers are still exercising caution in their capital investments, which is adversely impacting our shipments of new tools and sales of spare parts and services.

Gross margin was $2.5 million for the three months ended September 27, 2009, a decrease of $5.2 million when compared to $7.7 million for the same period in 2008. The decrease in gross margin was primarily caused by the 63 percent decrease in net sales in the third quarter of fiscal 2009 compared to the same period in 2008. The decrease in gross margin is also attributed to under absorption of fixed manufacturing overhead costs due to lower revenue volumes and an increase in our reserves for excess inventory and vendor commitments of $0.8 million during the third quarter of 2009.

Gross margin was a negative $7.1 million for the nine months ended September 27, 2009, a decrease of $54.0 million when compared to $46.9 million for the same period in 2008. The decrease in gross margin was primarily caused by the 79 percent decrease in net sales during the nine months ended September 27, 2009 compared to the same period in 2008. The decrease in gross margin is also attributed to under absorption of fixed manufacturing overhead costs due to the decrease in our manufacturing activities, and an increase in our reserves for excess inventory and vendor commitments of $13.9 million in 2009 compared to $2.7 million for the same period in 2008.

Research, development and engineering ("RD&E") expenses were $5.8 million for the three months ended September 27, 2009, a decrease of $4.6 million or 44 percent when compared to $10.4 million for the same period in 2008. The decrease in RD&E expenses was primarily due to restructuring activities implemented in fiscal 2008 and 2009 as well as planned shutdowns in fiscal 2009, which resulted in a $1.7 million reduction in salary related expenses, a $1.5 million reduction in project material expenditures, a $0.7 million reduction in travel and outside service expenses, a $0.5 million decrease in amortization expenses for lab tools and a $0.2 million decrease in other expenses.

RD&E expenses were $19.3 million for the nine months ended September 27, 2009, a decrease of $8.2 million or 30 percent when compared to $27.5 million for the same period in 2008. The decrease in RD&E expenses was primarily due to restructuring activities implemented in fiscal 2008 and 2009 as well as planned shutdowns in fiscal 2009, which resulted in a $4.5 million reduction in salary related expenses, a $1.4 million reduction in travel and outside service expenses, a $1.8 million reduction in project material expenditures, a $0.3 million reduction in facilities and computer related costs, and a $0.2 million decrease in other expenses.

Selling, General and Administrative ("SG&A") expenses were $11.6 million for the three months ended September 27, 2009, a decrease of $4.8 million or 29 percent when compared to $16.4 million for the same period in 2008. The decrease in SG&A expenses was primarily due to restructuring activities implemented in fiscal 2008 and 2009 as well as planned shutdowns in fiscal 2009, which resulted in a $2.4 million reduction in employee related costs. The decrease in SG&A expenses was also attributed to the overall decline in our sales-related activities, resulting in a $1.3 million reduction in travel and outside service expense, a $0.6 million reduction in freight costs and a decrease of approximately $0.7 million in other SG&A expenses. In addition, we released $0.6 million of bad debt reserves upon receipt of payments from the customers. These expense reductions were partially offset by an increase of $0.8 million in amortization expenses for evaluation tools.

SG&A expenses were $36.0 million for the nine months ended September 27, 2009, a decrease of $12.8 million or 26 percent when compared to $48.8 million for the same period in 2008. The decrease in SG&A expenses was primarily due to restructuring initiatives implemented in fiscal 2008 and 2009 as well as planned shutdowns in fiscal 2009, which resulted in a $6.4 million reduction in employee related costs. The decrease in SG&A expenses was also attributed to the overall decline in our sales-related activities, resulting in a $4.9 million reduction in travel and outside service expenses, a $1.9 million reduction in freight costs and a combined decrease of approximately $0.9 million in other SG&A expenses. We also released $1.7 million of bad debt reserves upon receipt of payments from the customers. These expense reductions were partially offset by an increase of $3.0 million in amortization expenses for evaluation tools.

Beginning in the second quarter of fiscal 2008, we implemented several restructuring plans in response to the weakness in the overall semiconductor industry

In July 2009, we implemented a restructuring plan, resulting in a restructuring charge of $1.7 million, comprised of employee severance costs. During the three months ended September 27, 2009, we paid $1.7 million against the restructuring reserves related to the third quarter 2009 plan. As of September 27, 2009, we had no remaining restructuring reserves related to this plan.

In connection with the restructuring plans implemented in fiscal 2008, we recorded restructuring charges of $6.0 million, consisting of employee severance benefits and lease contract termination costs. As of December 31, 2008, we had a restructuring reserves balance of $3.9 million related to the fiscal 2008 plans, consisting of severance costs of $3.5 million and lease termination costs of $0.4 million. During the three months ended September 27, 2009, we paid $0.2 million against the restructuring reserves for the fiscal 2008 plans. During the nine months ended September 27, 2009, we recorded additional restructuring accruals of $1.3 million, paid $4.1 million against the reserves, and recorded adjustments to decrease the reserves totaling $0.4 million. As of September 27, 2009, we had a restructuring reserves balance of $0.7 million related to the fiscal 2008 plans. Of this amount, $0.1 million was comprised of accrued severance costs and $0.6 million was comprised of accrued lease termination costs. We anticipate that severance payments against the reserves will be substantially completed by the end of the 2009 fiscal year. The payment of the lease termination expense is dependent on the timing of a final agreement with a landlord, which is anticipated to occur by the end of the 2009 fiscal year.

In summary, the restructuring initiatives implemented in fiscal 2008 and 2009 have resulted in a combined headcount reduction of approximately 40 percent and a combined expected annualized cost-savings of approximately $24 million. During the three months ended September 27, 2009, we recorded restructuring accruals totaling $1.7 million and paid $1.9 million against the restructuring reserves for the 2008 and 2009 plans. The $1.7 million restructuring charge was comprised of employee severance costs. During the nine months ended September 27, 2009 , we recorded restructuring accruals totaling $3.0 million, paid $5.8 million against the restructuring reserves and recorded adjustments to decrease the reserves totaling $0.4 million for the 2008 and 2009 plans. The $3.0 million restructuring charge was comprised of $2.8 million in severance costs and $0.2 million in lease termination costs. As of September 27, 2009, we had a total restructuring reserves balance of $0.7 million for the 2008 and 2009 plans, comprised of severance costs of $0.1 million and lease termination costs of $0.6 million.

Interest income was $0.1 million for the three months ended September 27, 2009, a decrease of $0.6 million when compared to $0.7 million for the same period in 2008. Interest income was $0.6 million for the nine months ended September 27, 2009, a decrease of $2.2 million when compared to $2.8 million for the same period in 2008. The decrease in interest income was primarily due to lower cash investment balances and lower average interest rate yields during fiscal 2009. Our average interest yield was 0.8 percentage points when compared to 2.8 percentage points during the same nine-month period in fiscal 2008.

The change in other income, net for the three months ended September 27, 2009 when compared to the three months ended September 28, 2008 was insignificant. Other income, net was $0.7 million for the nine months ended September 27, 2009, an increase of $2.1 million when compared to an expense of $1.4 million for the same period in 2008. The increase in other income, net is primarily due to a net foreign currency exchange gain of $0.3 million and other income of $0.4 million for the nine months ended September 27, 2009, when compared to a foreign currency exchange loss of $0.7 million and other expense of $0.7 million for the same period in 2008. The increase in foreign currency gain was due to the significant fluctuation of the U.S. dollar against certain of the foreign currencies in which we had outstanding accounts receivable and/or accounts payable balances as of September 27, 2009.

The provision for income taxes for the nine months ended September 27, 2009 primarily consisted of $8.5 million discrete benefit from the settlement of a tax audit for the tax years ending 2001 to 2004, offset by provision for foreign taxes of $0.5 million, resulting in a overall benefit of $8.0 million. The $8.5 million discrete benefit consists of a benefit of $9.8 million from the release of tax reserves and associated accrued interest resulting from a tax audit settlement for a foreign subsidiary, offset by an expense of $1.4 million from reduction of tax assets. We did not record Federal or state tax provisions for the nine months ended September 27, 2009 primarily due to projected losses incurred in the United States.

The provision for income taxes for the nine months ended September 28, 2008 was $0.7 million, primarily consisting of a $1.1 million provision for foreign taxes, partially reduced by a discrete item resulting in a foreign tax benefit of $0.4 million. We recorded no Federal or state tax provisions for the first and second quarter of 2008 primarily due to projected losses incurred in the United States.

Our valuation allowance as of September 27, 2009 was primarily attributable to Federal and state deferred tax assets, as well as certain foreign deferred tax assets. We believe that sufficient uncertainty exists with regard to the realizability of these tax assets such that a valuation allowance is necessary. Factors considered in providing a valuation allowance include the lack of a significant history of consistent profits and a lack of carry-back capacity resulting in the inability to realize these assets. Based on the absence of objective evidence, we are unable to assert that it is more likely than not that we will generate sufficient taxable income to realize these remaining net deferred tax assets.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, we evaluate our estimates and judgments, including those related to reserves for excess and obsolete inventory, warranty obligations, bad debts, intangible assets, income taxes, restructuring costs, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. These form the basis for making judgment 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.

Consistent with our 2008 Form 10-K, we consider certain accounting policies for the following areas as critical to our business operations and an understanding of our results of operations:

º Revenue Recognition
º Allowance For Doubtful Accounts
º Warranty
º Inventories and Inventory Valuation
º Fair Value Measurement of Assets and Liabilities
º Impairment of Long-Lived Assets
º Restructuring
º Income Taxes
º Stock-based Compensation

There have been no material changes from the methodology applied by management for critical accounting estimates previously disclosed in our 2008 Form 10-K.

Liquidity and Capital Resources

Our cash, cash equivalents, short-term investments and restricted cash were $67.8 million as of September 27, 2009, a decrease of $35.6 million from $103.4 million as of December 31, 2008. We had restricted cash of $2.0 million as of September 27, 2009, which secures letters of credit provided to landlords. Stockholders' equity as of September 27, 2009 was $106.1 million compared to $156.8 million as of December 31, 2008. Working capital as of September 27, 2009 was $86.5 million compared to $140.5 million as of December 31, 2008.

In June 2009, our $10 million revolving line of credit expired. This line of credit was collateralized by a blanket lien on all of our domestic assets excluding intellectual property. We did not borrow or have outstanding borrowings under this line of credit at any time during its term. We used this credit line solely to secure letters of credit provided primarily to landlords, totaling approximately $1.6 million. As a replacement for the security that was . . .