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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended December 27, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number: 0-12853

ELECTRO SCIENTIFIC INDUSTRIES, INC.



|                                                              |  |                                     
|------------------------------------------------------------- |  | ------------------------------------
|Oregon                                                        |  | 93-0370304                          
|(State or other jurisdiction of incorporationor organization) |  | (I.R.S. Employer Identification No.)
|                                                              | 
|13900 N.W. Science Park Drive, Portland, Oregon               |  | 97229                               
|(Address of principal executive offices)                      |  | (Zip Code)                          

Registrants telephone number: (503) 641-4141

Registrants web address: www.esi.com

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer, non-accelerate filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                             
|-------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x        
|Non-accelerated filer   ̈   |  | Smaller Reporting Company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

The number of shares outstanding of the Registrants Common Stock at January 30, 2009 was 27,090,487 shares.









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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                                  |  |                                                                                                                                                                                                                          |  |         
|--------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------
|                                  |  |                                                                                                                                                                                                                          |  | PAGE NO.
|                                  | 
|PART I.     FINANCIAL INFORMATION |  |                                                                                                                                                                                                                         
|                                  |  |                                                                                                                                                                                                                         
|Item 1.                           |  | Financial Statements.                                                                                                                                                                                                    |  |         
|                                  |  |                                                                                                                                                                                                                         
|                                  |  | Condensed Consolidated Balance Sheets (Unaudited) - at December 27, 2008 and March 29, 2008                                                                                                                              |  | 1       
|                                  |  |                                                                                                                                                                                                                         
|                                  |  | Condensed Consolidated Statements of Operations (Unaudited) - for the three months ended December 27, 2008 and December 29,
 2007, the nine months ended December 27, 2008, and the seven months ended December 29, 2007 |  | 2       
|                                  |  |                                                                                                                                                                                                                         
|                                  |  | Condensed Consolidated Statements of Cash Flows (Unaudited) - for the three months ended December 27, 2008 and December 29,
 2007, the nine months ended December 27, 2008, and the seven months ended December 29, 2007 |  | 3       
|                                  |  |                                                                                                                                                                                                                         
|                                  |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                                                                                         |  | 4       
|                                  |  |                                                                                                                                                                                                                         
|Item 2.                           |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                                                                                                                                   |  | 16      
|                                  |  |                                                                                                                                                                                                                         
|Item 3.                           |  | Quantitative and Qualitative Disclosures About Market Risk.                                                                                                                                                              |  | 32      
|                                  |  |                                                                                                                                                                                                                         
|Item 4.                           |  | Controls and Procedures.                                                                                                                                                                                                 |  | 32      
|                                  | 
|PART II.     OTHER INFORMATION    |  |                                                                                                                                                                                                                         
|                                  |  |                                                                                                                                                                                                                         
|Item 1.                           |  | Legal Proceedings.                                                                                                                                                                                                       |  | 32      
|                                  |  |                                                                                                                                                                                                                         
|Item 1A.                          |  | Risk Factors.                                                                                                                                                                                                            |  | 33      
|                                  |  |                                                                                                                                                                                                                         
|Item 2.                           |  | Unregistered Sales of Equity Securities and Use of Proceeds.                                                                                                                                                             |  | 41      
|                                  |  |                                                                                                                                                                                                                         
|Item 6.                           |  | Exhibits.                                                                                                                                                                                                                |  | 42      
|                                  | 
|SIGNATURES                        |  | 44                                                                                                                                                                                                                      



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                     |  |               |         |   |               |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|(In thousands)                                                                                       |  | Dec. 27, 2008 |         |   | Mar. 29, 2008 |  
|ASSETS                                                                                               |  |               |         |   |               |   |         |  
|Current assets:                                                                                      |  |               |         |   |               |   |         |  
|Cash and cash equivalents                                                                            |  | $             | 138,791 |   |               | $ | 141,059 |  
|Investments                                                                                          |  |               | 19,846  |   |               |   | 2,011   |  
|                                                                                                     |  |               |         |   |               |   |         |  
|Total cash and investments                                                                           |  |               | 158,637 |   |               |   | 143,070 |  
|Trade receivables, net of allowances of $1,622 and $1,025                                            |  |               | 23,838  |   |               |   | 60,272  |  
|Inventories                                                                                          |  |               | 90,143  |   |               |   | 101,501 |  
|Shipped systems pending acceptance                                                                   |  |               | 1,976   |   |               |   | 2,583   |  
|Deferred income taxes, net                                                                           |  |               | 20,050  |   |               |   | 14,906  |  
|Other current assets                                                                                 |  |               | 15,593  |   |               |   | 7,822   |  
|                                                                                                     |  |               |         |   |               |   |         |  
|Total current assets                                                                                 |  |               | 310,237 |   |               |   | 330,154 |  
|Non-current investments                                                                              |  |               | 7,103   |   |               |   | 17,835  |  
|Property, plant and equipment, net of accumulated depreciation of $72,248 and $68,252                |  |               | 44,249  |   |               |   | 47,962  |  
|Deferred income taxes, net                                                                           |  |               | 4,744   |   |               |   | 1,026   |  
|Goodwill                                                                                             |  |               |        |   |               |   | 12,267  |  
|Acquired intangible assets, net of accumulated amortization of $3,872 and $2,050                     |  |               | 8,439   |   |               |   | 10,261  |  
|Other assets                                                                                         |  |               | 27,207  |   |               |   | 36,107  |  
|                                                                                                     |  |               |         |   |               |   |         |  
|Total assets                                                                                         |  | $             | 401,979 |   |               | $ | 455,612 |  
|                                                                                                     |  |               |         |   |               |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                 |  |               |         |   |               |   |         |  
|Current liabilities:                                                                                 |  |               |         |   |               |   |         |  
|Accounts payable                                                                                     |  | $             | 5,854   |   |               | $ | 17,604  |  
|Accrued liabilities                                                                                  |  |               | 17,919  |   |               |   | 25,300  |  
|Deferred revenue                                                                                     |  |               | 11,878  |   |               |   | 12,583  |  
|                                                                                                     |  |               |         |   |               |   |         |  
|Total current liabilities                                                                            |  |               | 35,651  |   |               |   | 55,487  |  
|Non-current liabilities:                                                                             |  |               |         |   |               |   |         |  
|Income taxes payable                                                                                 |  |               | 8,986   |   |               |   | 7,885   |  
|Commitments and Contingencies                                                                        |  |               |         |   |               |   |         |  
|Shareholders equity:                                                                                |  |               |         |   |               |   |         |  
|Preferred stock, without par value; 1,000 shares authorized; no shares issued                        |  |               |        |   |               |   |        |  
|Common stock, without par value; 100,000 shares authorized; 27,087 and 27,112 issued and outstanding |  |               | 132,348 |   |               |   | 131,417 |  
|Retained earnings                                                                                    |  |               | 226,010 |   |               |   | 262,135 |  
|Accumulated other comprehensive loss                                                                 |  |               | (1,016  | ) |               |   | (1,312  | )
|                                                                                                     |  |               |         |   |               |   |         |  
|Total shareholders equity                                                                           |  |               | 357,342 |   |               |   | 392,240 |  
|                                                                                                     |  |               |         |   |               |   |         |  
|Total liabilities and shareholders equity                                                           |  | $             | 401,979 |   |               | $ | 455,612 |  
|                                                                                                     |  |               |         |   |               |   |         |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



1



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|----------------------------------------------------------- |  | ------------------ | ------- | ----------------------------- | ------------- | - | ------------------------------ |  | - | ------- | - |  | - | -------
|                                                            |  | Three months ended |         | Nine monthsendedDec. 27, 2008 |               |   | Seven monthsendedDec. 29, 2007
|(In thousands, except per share amounts)                    |  | Dec. 27, 2008      |         |                               | Dec. 29, 2007 |   |                               
|Net sales                                                   |  | $                  | 25,618  |                               |               | $ | 77,286                         |  | $ | 139,252 |   |  | $ | 176,565
|Cost of sales                                               |  |                    | 18,200  |                               |               |   | 41,602                         |  |   | 85,471  |   |  |   | 95,997 
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Gross profit                                                |  |                    | 7,418   |                               |               |   | 35,684                         |  |   | 53,781  |   |  |   | 80,568 
|Operating expenses:                                         |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Selling, service and administration                         |  |                    | 12,224  |                               |               |   | 15,978                         |  |   | 42,547  |   |  |   | 35,103 
|Research, development and engineering                       |  |                    | 7,889   |                               |               |   | 11,508                         |  |   | 26,439  |   |  |   | 25,487 
|Write-off of acquired in-process research and development   |  |                    |        |                               |               |   |                               |  |   |        |   |  |   | 2,800  
|Goodwill impairment charge                                  |  |                    | 17,396  |                               |               |   |                               |  |   | 17,396  |   |  |   |       
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Total operating expenses                                    |  |                    | 37,509  |                               |               |   | 27,486                         |  |   | 86,382  |   |  |   | 63,390 
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Operating (loss) income                                     |  |                    | (30,091 | )                             |               |   | 8,198                          |  |   | (32,601 | ) |  |   | 17,178 
|Other-than-temporary impairment of auction rate investments |  |                    | (2,022  | )                             |               |   |                               |  |   | (12,497 | ) |  |   |       
|Interest and other income, net                              |  |                    | 1,021   |                               |               |   | 1,856                          |  |   | 2,998   |   |  |   | 4,732  
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|(Loss) income before income taxes                           |  |                    | (31,092 | )                             |               |   | 10,054                         |  |   | (42,100 | ) |  |   | 21,910 
|(Benefit from) provision for income taxes                   |  |                    | (1,834  | )                             |               |   | 3,392                          |  |   | (5,975  | ) |  |   | 8,300  
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Net (loss) income                                           |  | $                  | (29,258 | )                             |               | $ | 6,662                          |  | $ | (36,125 | ) |  | $ | 13,610 
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Earnings per share:                                         |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Net (loss) income per share  basic                         |  | $                  | (1.08   | )                             |               | $ | 0.24                           |  | $ | (1.33   | ) |  | $ | 0.48   
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Net (loss) income per share  diluted                       |  | $                  | (1.08   | )                             |               | $ | 0.24                           |  | $ | (1.33   | ) |  | $ | 0.48   
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Weighted average number of shares  basic                   |  |                    | 27,040  |                               |               |   | 27,817                         |  |   | 27,061  |   |  |   | 28,073 
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        
|Weighted average number of shares  diluted                 |  |                    | 27,040  |                               |               |   | 28,238                         |  |   | 27,061  |   |  |   | 28,531 
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------ |  | ------------------ | -------- | - | ----------------------------- | - | -------- | ------------------------------ |  | - | -------- | - |  | - | -------- | -
|                                                                                     |  | Three months ended |          |   | Nine monthsendedDec. 27, 2008 |   |          | Seven monthsendedDec. 29, 2007 | 
|(In thousands)                                                                       |  | Dec. 27, 2008      |          |   | Dec. 29, 2007                 |   |          |                               
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Net (loss) income                                                                    |  | $                  | (29,258  | ) |                               | $ | 6,662    |                                |  | $ | (36,125  | ) |  | $ | 13,610   |  
|Adjustments to reconcile net (loss) income to cash provided by operating activities: |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Depreciation and amortization                                                        |  |                    | 2,502    |   |                               |   | 2,591    |                                |  |   | 7,636    |   |  |   | 5,625    |  
|Amortization of intangible assets                                                    |  |                    | 511      |   |                               |   | 743      |                                |  |   | 1,819    |   |  |   | 1,310    |  
|Write-off of in-process research and development                                     |  |                    |         |   |                               |   |         |                                |  |   |         |   |  |   | 2,800    |  
|Share-based compensation expense                                                     |  |                    | 806      |   |                               |   | 1,138    |                                |  |   | 3,385    |   |  |   | 2,377    |  
|Provision for doubtful accounts                                                      |  |                    | 425      |   |                               |   |         |                                |  |   | 491      |   |  |   |         |  
|Loss on disposal of property and equipment                                           |  |                    |         |   |                               |   | 32       |                                |  |   | 92       |   |  |   | 35       |  
|Other-than-temporary impairment of auction rate investments                          |  |                    | 2,022    |   |                               |   |         |                                |  |   | 12,497   |   |  |   |         |  
|Deferred income taxes                                                                |  |                    | (1,093   | ) |                               |   | 19       |                                |  |   | (7,330   | ) |  |   | (54      | )
|Goodwill impairment charge                                                           |  |                    | 17,396   |   |                               |   |         |                                |  |   | 17,396   |   |  |   |         |  
|Changes in operating assets and liabilities:                                         |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Decrease (increase) in trade receivables, net                                        |  |                    | 24,999   |   |                               |   | (3,745   | )                              |  |   | 34,285   |   |  |   | 1,346    |  
|Decrease (increase) in inventories                                                   |  |                    | 698      |   |                               |   | (189     | )                              |  |   | 9,268    |   |  |   | (4,797   | )
|(Increase) decrease in shipped systems pending acceptance                            |  |                    | (591     | ) |                               |   | (3,654   | )                              |  |   | 607      |   |  |   | (8,551   | )
|(Increase) decrease in other current assets                                          |  |                    | (1,551   | ) |                               |   | 299      |                                |  |   | (1,802   | ) |  |   | 857      |  
|Decrease in accounts payable and accrued liabilities                                 |  |                    | (8,666   | ) |                               |   | (3,368   | )                              |  |   | (16,782  | ) |  |   | (8,030   | )
|Increase (decrease) in deferred revenue                                              |  |                    | 659      |   |                               |   | 5,386    |                                |  |   | (705     | ) |  |   | 10,858   |  
|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Net cash provided by operating activities                                            |  |                    | 8,859    |   |                               |   | 5,914    |                                |  |   | 24,732   |   |  |   | 17,386   |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Purchase of property and equipment                                                   |  |                    | (418     | ) |                               |   | (1,378   | )                              |  |   | (2,975   | ) |  |   | (3,851   | )
|Zygo acquisition transaction costs                                                   |  |                    | (1,440   | ) |                               |   |         |                                |  |   | (1,440   | ) |  |   |         |  
|Proceeds from sales of property and equipment                                        |  |                    |         |   |                               |   | 1        |                                |  |   | 4        |   |  |   | 1        |  
|Purchases of securities                                                              |  |                    | (221,046 | ) |                               |   | (143,268 | )                              |  |   | (805,141 | ) |  |   | (310,750 | )
|Proceeds from sales and maturities of securities                                     |  |                    | 206,391  |   |                               |   | 190,370  |                                |  |   | 788,035  |   |  |   | 409,580  |  
|Cash paid for acquisition of NWR, net                                                |  |                    |         |   |                               |   |         |                                |  |   |         |   |  |   | (36,159  | )
|Minority equity investment                                                           |  |                    |         |   |                               |   |         |                                |  |   | (876     | ) |  |   |         |  
|(Increase) decrease in other assets                                                  |  |                    | (217     | ) |                               |   | (101     | )                              |  |   | 942      |   |  |   | (1,178   | )
|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Net cash (used in) provided by investing activities                                  |  |                    | (16,730  | ) |                               |   | 45,624   |                                |  |   | (21,451  | ) |  |   | 57,643   |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Proceeds from exercise of stock options and stock plans                              |  |                    | 496      |   |                               |   | 1,336    |                                |  |   | 2,367    |   |  |   | 3,520    |  
|Excess tax benefit of share-based compensation                                       |  |                    |         |   |                               |   | 28       |                                |  |   |         |   |  |   | 710      |  
|Share repurchases                                                                    |  |                    |         |   |                               |   | (2,674   | )                              |  |   | (4,724   | ) |  |   | (27,540  | )
|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Net cash provided by (used in) financing activities                                  |  |                    | 496      |   |                               |   | (1,310   | )                              |  |   | (2,357   | ) |  |   | (23,310  | )
|Effect of exchange rate changes on cash                                              |  |                    | (877     | ) |                               |   | (26      | )                              |  |   | (3,192   | ) |  |   | 816      |  
|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                              |  |                    | (8,252   | ) |                               |   | 50,202   |                                |  |   | (2,268   | ) |  |   | 52,535   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     |  |                    | 147,043  |   |                               |   | 102,795  |                                |  |   | 141,059  |   |  |   | 100,462  |  
|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                           |  | $                  | 138,791  |   |                               | $ | 152,997  |                                |  | $ | 138,791  |   |  | $ | 152,997  |  
|                                                                                     |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                   |  |                    |          |   |                               |   |          |                                |  |   |          |   |  |   |          |  
|Cash paid for interest                                                               |  | $                  |         |   |                               | $ | (1       | )                              |  | $ |         |   |  | $ | (1       | )
|Income tax refunds received                                                          |  |                    | 477      |   |                               |   | 115      |                                |  |   | 1,028    |   |  |   | 133      |  
|Cash paid for income taxes                                                           |  |                    | (1,337   | ) |                               |   | (3,767   | )                              |  |   | (2,782   | ) |  |   | (7,940   | )

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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##### Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in these interim statements. Accordingly, these
condensed consolidated financial statements are to be read in conjunction with the financial statements and notes included in the Companys Transition Report on Form 10-K. These interim statements include all adjustments (consisting of only
normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. The results for interim periods are not necessarily indicative of the results of operations for the entire year.

With the exception of the adoption of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements (SFAS 157) in the first quarter of 2009, and FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS
157-3) issued on October 10, 2008, there have been no significant changes to the Companys significant accounting policies from those presented in Note 1 Summary of Significant Accounting Policies to the consolidated financial
statements included in the Companys Transition Report on Form 10-K filed for the fiscal year ended March 29, 2008.

The preparation of financial
statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. Management believes that the estimates used are reasonable. Significant estimates made by
management include: revenue recognition; inventory valuation; product warranty reserves; allowances for doubtful accounts; share-based compensation; income taxes, including the valuation of deferred tax assets; valuation of cost method equity
investments; long-lived asset valuations; valuation of auction rate securities and goodwill and intangible assets valuation.

Certain reclassifications
have been made in the accompanying consolidated condensed financial statements for prior periods to conform to the current presentation.

On July 3,
2007, the Companys Board of Directors approved a change in the Companys reporting periods that results in a fiscal year end on the Saturday nearest March 31. Accordingly, the Companys fiscal year 2008 consisted of
approximately a ten month period containing 43 weeks ending on March 29, 2008. The current fiscal year financial statements are presented for the three months ended December 27, 2008, which represents the third quarter of 2009.

Because of the change in reporting periods, year to date information for the period ended December 29, 2007 consists of the seven months beginning June 3,
2007 and ending December 29, 2007. In addition, as discussed in Note 3 Comparative Statements of Operations for the Nine Months ended December 29, 2007 (Unaudited), for comparative purposes, the Company provided pro forma
results for the nine months ended December 29, 2007. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

2. Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the
three months ended December 27, 2008 that are of significance, or potential significance, to the Company.



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##### Table of Contents

3. Comparative Statements of Operations for the Nine Months ended December 27, 2008 (Unaudited)

As discussed in Note 1 Basis of Presentation above, on July 3, 2007, the Companys Board of Directors approved a change in the Companys
reporting periods that results in a fiscal year consisting of 52 or 53 weeks ending on the Saturday nearest March 31. Accordingly, the fiscal 2008 reporting period consisted of a 43-week period ending on March 29, 2008 (approximately ten
months).

To create a pro forma nine-month statement of operations as of December 29, 2007 for comparative purposes, the Company used year to date
results as reported in the Form 10-Q for the seven months ended December 29, 2007, and then calculated the estimated unaudited results for the two months ended June 2, 2007. To calculate the estimated April and May 2007 results, management
estimated certain items that were normally recorded on a quarterly basis, including standard cost variances, overhead allocations, certain operating expenses and the income tax provision. Certain standard cost variances and overhead allocations were
estimated on a pro rata revenue basis for the quarter. Certain operating expenses were estimated on a pro rata or normalized basis, as appropriate. The Company added the resulting estimated two month results ending June 2, 2007 to the
previously provided seven month results ending December 29, 2007 to arrive at pro forma operating results for the nine months ended December 29, 2007, which are as follows:



|                                                          |  |                                                    |        
|--------------------------------------------------------- |  | -------------------------------------------------- | -------
|(In thousands, except per share data)                     |  | Pro forma ninemonths endedDec. 29, 2007(unaudited)
|Net sales                                                 |  | $                                                  | 242,956
|Cost of sales                                             |  |                                                    | 133,228
|                                                          |  |                                                    |        
|Gross profit                                              |  |                                                    | 109,728
|Selling, service and administration                       |  |                                                    | 44,336 
|Research, development and engineering                     |  |                                                    | 31,862 
|Write-off of acquired in-process research and development |  |                                                    | 2,800  
|                                                          |  |                                                    |        
|Operating income                                          |  |                                                    | 30,730 
|Interest and other income, net                            |  |                                                    | 6,555  
|                                                          |  |                                                    |        
|Income before income taxes                                |  |                                                    | 37,285 
|Provision for income taxes                                |  |                                                    | 14,376 
|                                                          |  |                                                    |        
|Net income                                                |  | $                                                  | 22,909 
|                                                          |  |                                                    |        
|Net income per share  basic                              |  | $                                                  | 0.81   
|                                                          |  |                                                    |        
|Net income per share  diluted                            |  | $                                                  | 0.80   
|                                                          |  |                                                    |        
|Weighted average number of shares  basic                 |  |                                                    | 28,301 
|                                                          |  |                                                    |        
|Weighted average number of shares  diluted               |  |                                                    | 28,733 
|                                                          |  |                                                    |        

4. Acquisition of New Wave Research, Incorporated

On July 20, 2007, the Company acquired New Wave Research, Incorporated (NWR), a privately held company headquartered in Fremont, California. The Company acquired
100% of NWRs outstanding common stock for approximately $36.2 million, comprised of $34.9 million in cash and merger-related transaction costs of $1.3 million.



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##### Table of Contents

The following table presents the details of the intangible assets purchased in the NWR acquisition as of July 20,
2007 and accumulated amortization to date at December 27, 2008:



|                                                   |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|-------------------------------------------------- |  | --------------------- |  | -------------------------------------- | ------ | ----------------------- | - | ------ | ----------------------------- |  | - | -----
|(In thousands, except years)                       |  | Useful Life(in years) |  | EstimatedFair Value atAcquisition Date |        | AccumulatedAmortization |   |        | RecordedValue atDec. 27, 2008
|Developed technology                               |  | 7                     |  | $                                      | 8,100  |                         | $ | (1,669 | )                             |  | $ | 6,431
|Customer relationships                             |  | 6                     |  |                                        | 2,700  |                         |   | (1,055 | )                             |  |   | 1,645
|Customer backlog                                   |  | 1                     |  |                                        | 700    |                         |   | (700   | )                             |  |   |     
|Trade name and trademarks                          |  | 3                     |  |                                        | 400    |                         |   | (192   | )                             |  |   | 208  
|Change of control agreements                       |  | 1                     |  |                                        | 100    |                         |   | (100   | )                             |  |   |     
|Fair value of below-market lease                   |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|(non-current portion)                              |  | 3.8                   |  |                                        | 311    |                         |   | (156   | )                             |  |   | 155  
|                                                   |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|Subtotal  long term                               |  |                       |  |                                        | 12,311 |                         |   | (3,872 | )                             |  |   | 8,439
|Fair value of below-market lease (current portion) |  |                       |  |                                        | 110    |                         |   |       |                               |  |   | 110  
|                                                   |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|Total acquired intangible assets                   |  |                       |  | $                                      | 12,421 |                         | $ | (3,872 | )                             |  | $ | 8,549
|                                                   |  |                       |  |                                        |        |                         |   |        |                               |  |   |      

Amortization expense for intangible assets purchased in the NWR acquisition has been recorded in the Condensed
Consolidated Statement of Operations as follows:



|                                    |  |                    |     |                               |   |                                |  |   |       |  |   |      
|----------------------------------- |  | ------------------ | --- | ----------------------------- | - | ------------------------------ |  | - | ----- |  | - | -----
|                                    |  | Three months ended |     | Nine monthsendedDec. 27, 2008 |   | Seven monthsendedDec. 29, 2007
|                                    |  | Dec. 27, 2008      |     | Dec. 29, 2007                 |   |                               
|Cost of sales                       |  | $                  | 289 |                               | $ | 289                            |  | $ | 867   |  | $ | 511  
|Selling, service and administration |  |                    | 222 |                               |   | 454                            |  |   | 952   |  |   | 799  
|                                    |  |                    |     |                               |   |                                |  |   |       |  |   |      
|Total                               |  | $                  | 511 |                               | $ | 743                            |  | $ | 1,819 |  | $ | 1,310
|                                    |  |                    |     |                               |   |                                |  |   |       |  |   |      

The estimated amortization expense of intangible assets purchased in the NWR acquisition for the current year,
including amounts amortized to date, and in future years is as follows:



|             |  |                            |       
|------------ |  | -------------------------- | ------
|Year         |  | Amortization(in thousands)
|2009         |  | $                          | 2,330 
|2010         |  |                            | 1,954 
|2011         |  |                            | 1,734 
|2012         |  |                            | 1,472 
|2013         |  |                            | 1,325 
|Future years |  |                            | 1,556 
|             |  |                            |       
|             |  | $                          | 10,371
|             |  |                            |       

The NWR results of operations are included in the Companys condensed consolidated financial statements from
the date of acquisition forward. The NWR acquisition was not significant, as defined in Regulation S-X of the Securities and Exchange Commission, compared to the Companys overall financial position. Accordingly, pro forma financial statements
of the combined entities are not presented.

During the third quarter of 2009, the Company recorded a $4.7 million addition to its goodwill balance related
to NWR for the estimated amount of final disbursement from the acquisition escrow deposit balance previously recorded as a non-current asset. As described further in Note 10 Goodwill, the Company recorded an impairment charge on its
total goodwill balance, primarily consisting of the goodwill recorded for the NWR acquisition, including the amount of the increase related to the escrow deposit.



6



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5. Proposed Acquisition of Zygo Corporation

On October 16, 2008, the Company announced that it entered into a definitive agreement with Zygo Corporation (Zygo) under which the Company will acquire Zygo in an all stock transaction. Zygo Corporation is a
worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial markets.

Under the terms of the merger agreement, Zygo shareholders will receive 1.0233 shares of ESI stock for each share of Zygo stock, in a transaction that is intended to be
tax free. Based on the October 15, 2008 closing price of ESI stock, this represents a value of $10.30 per share of Zygo common stock. Upon closing, ESI would issue approximately 18.1 million shares on a diluted basis to complete the
transaction, resulting in approximately 40% Zygo shareholder ownership of the combined company.

In connection with the merger agreement, the Company filed
a registration statement on Form S-4 on December 8, 2008.

During the three months ended December 27, 2008, a total of $1.4 million of expenses
were incurred in connection with the proposed acquisition and have been included in the Other current assets balance in the Condensed Consolidated Balance Sheet.

On January 20, 2009, Zygo announced that its Board of Directors had withdrawn its recommendation in favor of the merger agreement. ESI believes it continues to have options under the merger agreement, which will
remain in effect unless terminated in accordance with its terms. Should the transaction be terminated, the $1.4 million of acquisition costs will be written-off as operating expenses in the period the termination occurs. These costs would also be
written-off if the transaction were to close once the Company has adopted SFAS No. 141(Revised 2007), Business Combinations (SFAS 141R), which will be effective beginning with our first fiscal quarter of 2010. The acquisition
remains subject to approval by both companies stockholders, as well as the satisfaction of customary closing conditions.

6. Share-Based
Compensation

The Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123R) in 2007 using the modified
prospective approach as described in the statement and has not restated prior year results. SFAS 123R requires that the fair value for share-based compensation be recognized as an expense over the service period that the awards are expected to vest.

Share-based compensation expense recorded in Condensed Consolidated Statement of Operations is as follows:



|                                       |  |                    |     |                               |   |                                |  |   |       |  |   |      
|-------------------------------------- |  | ------------------ | --- | ----------------------------- | - | ------------------------------ |  | - | ----- |  | - | -----
|                                       |  | Three months ended |     | Nine monthsendedDec. 27, 2008 |   | Seven monthsendedDec. 29, 2007
|(In thousands)                         |  | Dec. 27, 2008      |     | Dec. 29, 2007                 |   |                               
|Cost of sales                          |  | $                  | 170 |                               | $ | 169                            |  | $ | 599   |  | $ | 326  
|Selling, service and administration    |  |                    | 618 |                               |   | 685                            |  |   | 2,168 |  |   | 1,511
|Research, development and engineering  |  |                    | 18  |                               |   | 284                            |  |   | 618   |  |   | 540  
|                                       |  |                    |     |                               |   |                                |  |   |       |  |   |      
|Total share-based compensation expense |  | $                  | 806 |                               | $ | 1,138                          |  | $ | 3,385 |  | $ | 2,377
|                                       |  |                    |     |                               |   |                                |  |   |       |  |   |      

The total amount of cash received from the exercise of stock options and ESPP purchases for the three and nine
months ending December 27, 2008 was $0.5 million and $2.4 million, respectively. The tax differential arising from the exercises was accounted for in accordance with SFAS 123R, and for the nine month period ending
December 27, 2008, resulted in a reduction of $0.1 million to additional paid in capital. Upon exercise of stock options, the Company issues new shares of common stock from its authorized shares.



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##### Table of Contents

During the three months ended December 27, 2008, there were no significant activities related to share-based payment
awards. An adjustment to the estimated forfeiture rate of share-based awards made during the third quarter of 2009 resulted in a decline in share-based compensation expense compared to the three months ended December 29, 2007, primarily
affecting research, development and engineering expense. As of December 27, 2008, no share-based compensation expenses were capitalized. As of December 27, 2008, the Company had $13.9 million of total unamortized stock-based compensation
costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.37 years.

See Note 5 Share-Based Compensation of the
Notes to the Consolidated Financial Statements in Item 8 Financial Statements and Supplementary Data in Part II of the Companys Transition Report on Form 10-K for the year ended March 29, 2008 for more detailed information about
share-based compensation plans.

7. Fair Value Measurements

Effective March 30, 2008, the Company adopted SFAS 157, Fair Value Measurements(SFAS 157). The Company adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only. The adoption
of this statement did not have a material impact on the Companys condensed consolidated results of operations and financial condition. In addition, on October 10, 2008, the FASB issued FASB Staff Position No. 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP FAS 157-3) which is effective upon issuance, including prior periods for which financial statements have not been issued. This
standard provides guidance when valuing securities in markets that are not active.

Fair value is defined under SFAS 157 as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used
to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These
tiers include the following:



| |  |  | Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2, defined as inputs other than quoted prices in active markets for similar assets or liabilities that are either directly or indirectly observable;
and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

As of December 27, 2008, the Company held a total of $15.6 million invested in auction rate securities at par value, while an
additional $4.0 million of par value ARS was converted by the bond insurer to its preferred stock during the third quarter of 2009. At the time of purchase in 2007 these ARS were rated AAA and AA. Prior to September 2007, these securities provided
short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism previously allowed existing investors to either retain or liquidate
their holdings by selling such securities at par. As a result of the liquidity issues experienced in the global credit and capital markets, during the second quarter of 2008 the Companys ARS began to experience failed auctions. Since that time
none of the Companys securities have traded through the auction process and no other market transactions for these securities have been observed. During the second quarter of 2009, further deterioration in the general markets and global
economy resulted in credit rating downgrades of the nations largest bond insurers and the effective elimination of the active market for these securities, and during the third quarter of 2009, these bond insurers credit ratings were
again downgraded. The Companys ARS and preferred stock holdings are issued or insured by these bond insurers. The ARS are comprised predominately of securities issued by insurance companies to raise funds to meet regulatory capital reserve
requirements and the ARS assume the credit ratings of the bond insurers who guarantee the timely payment of principal and interest on these insured securities.



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##### Table of Contents

At the end of the first quarter of 2009, it was determined that the decline in fair value of its ARS represented an
other-than-temporary impairment in accordance with U.S. generally accepted accounting principles. Accordingly, the cost bases of these securities were written down to their estimated fair values at the end of the first quarter with an
other-than-temporary impairment charge of $5.1 million recorded in the results of operations for the three months ended June 28, 2008.

Near the end
of the second quarter of 2009, Lehman Brothers, the broker who had been providing investment management, custodial and valuation services for these securities, declared bankruptcy and ceased providing valuation services for the Company.
Consequently, the Company procured independent third-party valuations of these securities as of the end of the second and third quarters of 2009. As a result of the continued deterioration in the credit markets along with further credit downgrades
experienced by insurers of the Companys ARS, the valuations of these securities declined from the values estimated as of the end of the first quarter of 2009. Accordingly, the cost bases of these securities were written down to their estimated
fair values at the end of the second quarter with an other-than-temporary impairment charge of $5.4 million recorded in the results of operations for the three months ended September 27, 2008.

During the third quarter of 2009, a bond insurer converted $4.0 million of par value ARS to its preferred stock. Due to continued deterioration and volatility of the
credit markets during this quarter, as well as additional reductions in the ARS insurers credit ratings, the Companys ARS and preferred stock holdings were written down to their estimated fair values at the end of the third quarter with
an additional other-than-temporary impairment charge of $2.0 million recorded in the results of operations for the three months ended December 27, 2008.

The $7.1 million total estimated fair value of the ARS and preferred stock remains classified as a non-current investment in the Condensed Consolidated Balance Sheets at December 27, 2008, consistent with the classification at
March 29, 2008 and each interim reporting date thereafter. Due to the unsuccessful auctions and downgrades of the insurers, interest rates on remaining ARS have been reset at higher rates with predetermined premiums as defined in the security
offerings. The Company currently continues to receive all interest payments when due and expects to receive dividend payments on its preferred stock. Given the continued challenges in the financial markets and the prolonged credit crisis, the
Company cannot reasonably predict when these securities will become liquid.

In accordance with SFAS 157, the following table represents the Companys
fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of December 27, 2008:



|                                      |  |         |        |         |   |        |         |  |       |       |  |   |         |  
|------------------------------------- |  | ------- | ------ | ------- | - | ------ | ------- |  | ----- | ----- |  | - | ------- | -
|(In thousands)                        |  | Level 1 |        | Level 2 |   |        | Level 3 |  | Total |      
|Money market securities               |  | $       | 55,712 |         | $ |       |         |  | $     |      |  | $ | 55,712  |  
|Commercial paper                      |  |         |       |         |   | 62,861 |         |  |       |      |  |   | 62,861  |  
|Corporate notes and bonds             |  |         |       |         |   | 2,039  |         |  |       |      |  |   | 2,039   |  
|U.S. Government agencies              |  |         |       |         |   | 19,999 |         |  |       |      |  |   | 19,999  |  
|Forward purchase or (sale) contracts: |  |         |        |         |   |        |         |  |       |       |  |   |         |  
|Japanese Yen                          |  |         |       |         |   | 3,849  |         |  |       |      |  |   | 3,849   |  
|Taiwan Dollar                         |  |         |       |         |   | 4,300  |         |  |       |      |  |   | 4,300   |  
|Korean Won                            |  |         |       |         |   | (1,198 | )       |  |       |      |  |   | (1,198  | )
|Euro                                  |  |         |       |         |   | (291   | )       |  |       |      |  |   | (291    | )
|British Pound                         |  |         |       |         |   | (5,159 | )       |  |       |      |  |   | (5,159  | )
|Auction rate securities               |  |         |       |         |   |       |         |  |       | 6,723 |  |   | 6,723   |  
|Preferred stock                       |  |         |        |         |   |        |         |  |       | 380   |  |   | 380     |  
|                                      |  |         |        |         |   |        |         |  |       |       |  |   |         |  
|                                      |  | $       | 55,712 |         | $ | 86,400 |         |  | $     | 7,103 |  | $ | 149,215 |  
|                                      |  |         |        |         |   |        |         |  |       |       |  |   |         |  



9



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##### Table of Contents

The following table illustrates Level 3 activity from September 27, 2008 to December 27, 2008:



|                                                            |  |         |        |  
|----------------------------------------------------------- |  | ------- | ------ | -
|(In thousands)                                              |  | Level 3 |       
|Fair Value, September 27, 2008                              |  | $       | 9,125  |  
|Transfers into (out of) Level 3, net                        |  |         |       |  
|Other-than-temporary impairment of auction rate investments |  |         | (1,638 | )
|Other-than-temporary impairment of preferred stock          |  |         | (384   | )
|                                                            |  |         |        |  
|Fair Value, December 27, 2008                               |  | $       | 7,103  |  
|                                                            |  |         |        |  

For Level 1 assets, the Company utilized quoted prices in active markets for identical assets.

For Level 2 assets, exclusive of forward contracts, the Company utilized quoted prices in active markets for similar assets. For the forward contracts, spot prices at
December 26, 2008 were utilized to calculate the unrealized gain/loss on open forward contracts which were recorded in accumulated other comprehensive loss and other assets.

The Level 3 assets consisted of ARS and preferred stock acquired through the conversion of certain ARS during the third quarter of 2009. As there has been no trading of the ARS or preferred stock which the Company
holds, estimated fair values were based primarily upon the income approach using a discounted cash flow model which took into account the following: (i) the underlying structure of each security; (ii) the present value of future principal
and interest payments discounted at rates that reflect current market conditions; (iii) consideration of the probabilities of default, restructuring or redemption by the issuer (trigger events); (iv) estimates of the recovery rates in the
event of default for each security; (v) the financial condition, results, and ratings of, and financial claims on the bond insurers and issuers and (vi) the underlying trust assets of the securities.

8. Inventories

Inventories are principally valued at standard costs,
which approximate the lower of cost (first-in, first-out) or market. Components of inventories, net of reserves, were as follows:



|                                  |  |               |        |               |   |        
|--------------------------------- |  | ------------- | ------ | ------------- | - | -------
|(In thousands)                    |  | Dec. 27, 2008 |        | Mar. 29, 2008
|Raw materials and purchased parts |  | $             | 62,958 |               | $ | 62,060 
|Work in process                   |  |               | 8,189  |               |   | 15,154 
|Finished goods                    |  |               | 18,996 |               |   | 24,287 
|                                  |  |               |        |               |   |        
|                                  |  | $             | 90,143 |               | $ | 101,501
|                                  |  |               |        |               |   |        

9. Other Current Assets

Other current assets consisted of the following:



|                                                   |  |               |        |               |   |      
|-------------------------------------------------- |  | ------------- | ------ | ------------- | - | -----
|(In thousands)                                     |  | Dec. 27, 2008 |        | Mar. 29, 2008
|Prepaid expenses                                   |  | $             | 3,738  |               | $ | 2,809
|Value added tax receivable                         |  |               | 4,306  |               |   | 3,747
|Income tax refund receivable                       |  |               | 2,650  |               |   | 1,055
|Receivable from sale of minority equity investment |  |               | 4,884  |               |   |     
|Other                                              |  |               | 15     |               |   | 211  
|                                                   |  |               |        |               |   |      
|                                                   |  | $             | 15,593 |               | $ | 7,822
|                                                   |  |               |        |               |   |      

Prepaid expenses at December 27, 2008 included $1.4 million of expenses incurred in conjunction with the
proposed merger with Zygo Corporation.



10



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##### Table of Contents

On December 22, 2008, the Company sold all of its interest in Axsun Technologies, Inc. (Axsun) for $5.0 million. The
Company recorded a $0.1 million loss in its third quarter earnings for the amount of escrow funds that are not anticipated to be returned and accordingly, reduced the related receivable balance to $4.9 million. The investment in Axsun was previously
recorded as a non-current asset within the Other assets balance in the Condensed Consolidated Balance Sheet.

10. Goodwill

Goodwill and other intangible assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least annually in
accordance with the provisions of Statement of Financial Accounting No. 142 Goodwill and Other Intangible Assets (SFAS 142). The Company had previously chosen the fourth quarter to perform its annual goodwill impairment test.

Due to decreases in the Companys market capitalization, the Company reviewed the recoverability of goodwill and other indefinite-lived intangibles
as of the end of the third quarter of 2009. Consistent with historical practices, the estimation of the fair value was determined based on a method that compares the Companys market capitalization against the net book value of the
Companys assets. Based on the results of the review, it was determined that the fair value of the Companys goodwill was less than the carrying value on the consolidated balance sheet, and accordingly, as of the end of the third quarter
of 2009, the Company recognized an impairment charge of $17.4 million, which is reflected in Goodwill impairment charge in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended
December 27, 2008. This charge has no effect on the Companys cash flows or liquidity and is not deductible for income tax purposes.

The
following table reflects the change in the carrying amount of goodwill at December 27, 2008 (in thousands):



|                                                      |  |   |         |  
|----------------------------------------------------- |  | - | ------- | -
|Balance at September 27, 2008                         |  | $ | 12,728  |  
|NWR acquisition escrow funds reclassified to goodwill |  |   | 4,718   |  
|Tax effect of share options exercised by NWR          |  |   | (50     | )
|Impairment charge                                     |  |   | (17,396 | )
|                                                      |  |   |         |  
|Balance at December 27, 2008                          |  | $ |        |  
|                                                      |  |   |         |  

11. Other Assets

Other assets consisted of the following:



|                                    |  |               |        |               |   |       
|----------------------------------- |  | ------------- | ------ | ------------- | - | ------
|(In thousands)                      |  | Dec. 27, 2008 |        | Mar. 29, 2008
|Patents, net                        |  | $             | 92     |               | $ | 137   
|Consignment and demo equipment, net |  |               | 9,293  |               |   | 8,346 
|Minority equity investment          |  |               | 7,991  |               |   | 12,115
|All-Ring patent suit court bond     |  |               | 8,890  |               |   | 9,705 
|Acquisition escrow deposit          |  |               | 222    |               |   | 4,940 
|Other                               |  |               | 719    |               |   | 864   
|                                    |  |               |        |               |   |       
|                                    |  | $             | 27,207 |               | $ | 36,107
|                                    |  |               |        |               |   |       

The decline in the Minority equity investment account was due to the $5.0 million sale of the Companys
minority equity investment in Axsun during the three months ended December 27, 2008. See Note 9 Other Current Assets for further discussion.

The decline in the Acquisition escrow deposit reflects the reclassification of $4.7 million to goodwill during the three months ended December 27, 2008 in conjunction with the anticipated disbursement to NWR. See Note 4
Acquisition of New Wave Research, Incorporated for further discussion.



11



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##### Table of Contents

12. Accrued Liabilities

Accrued liabilities consisted of the following:



|                           |  |               |        |               |   |       
|-------------------------- |  | ------------- | ------ | ------------- | - | ------
|(In thousands)             |  | Dec. 27, 2008 |        | Mar. 29, 2008
|Payroll-related            |  | $             | 4,817  |               | $ | 11,248
|Income tax payable         |  |               | 944    |               |   |      
|Product warranty           |  |               | 3,098  |               |   | 3,740 
|Purchase order commitments |  |               | 1,525  |               |   | 1,093 
|Professional fees          |  |               | 1,393  |               |   | 1,553 
|Other                      |  |               | 6,142  |               |   | 7,666 
|                           |  |               |        |               |   |       
|                           |  | $             | 17,919 |               | $ | 25,300
|                           |  |               |        |               |   |       

See Note 13 Product Warranty for a discussion of the accrual for product warranty.

13. Product Warranty

The following is a reconciliation of the change
in the aggregate accrual for product warranty:



|                                    |  |                    |        |   |                               |   |        |                                |  |   |        |   |  |   |        |  
|----------------------------------- |  | ------------------ | ------ | - | ----------------------------- | - | ------ | ------------------------------ |  | - | ------ | - |  | - | ------ | -
|                                    |  | Three months ended |        |   | Nine monthsendedDec. 27, 2008 |   |        | Seven monthsendedDec. 29, 2007 | 
|(In thousands)                      |  | Dec. 27, 2008      |        |   | Dec. 29, 2007                 |   |        |                               
|Product warranty accrual, beginning |  | $                  | 3,799  |   |                               | $ | 4,424  |                                |  | $ | 3,740  |   |  | $ | 3,893  |  
|Acquired warranty reserve (NWR)     |  |                    |       |   |                               |   |       |                                |  |   |       |   |  |   | 774    |  
|Warranty charges incurred, net      |  |                    | (2,946 | ) |                               |   | (2,448 | )                              |  |   | (6,923 | ) |  |   | (3,746 | )
|Provision for warranty charges      |  |                    | 2,245  |   |                               |   | 1,900  |                                |  |   | 6,281  |   |  |   | 2,955  |  
|                                    |  |                    |        |   |                               |   |        |                                |  |   |        |   |  |   |        |  
|Product warranty accrual, ending    |  | $                  | 3,098  |   |                               | $ | 3,876  |                                |  | $ | 3,098  |   |  | $ | 3,876  |  
|                                    |  |                    |        |   |                               |   |        |                                |  |   |        |   |  |   |        |  

Warranty charges incurred includes labor charges and replacement parts for system repairs under warranty and are
recorded net of any estimated cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Companys suppliers for defective components. The provision for warranty charges reflects the estimate of
future anticipated net warranty costs to be incurred for all products under warranty at quarter end and is included in cost of sales.

14. Deferred
Revenue

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Companys factory and title transfer which frequently
occur at the time of delivery to a common carrier. Revenue is deferred when title transfer is pending and/or acceptance criteria have not yet been fulfilled. Deferred revenue occurrences include sales to Japanese end-user customers, shipments of
substantially new products and shipments with custom specifications and acceptance criteria. In sales involving multiple element arrangements, the fair value of any undelivered elements, including installation services, is deferred until the
elements are delivered and acceptance criteria are met. Revenue related to maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.



12



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The following is a reconciliation of the changes in deferred revenue:



|                                |  |                    |        |   |                               |   |         |                                |  |   |         |   |  |   |         |  
|------------------------------- |  | ------------------ | ------ | - | ----------------------------- | - | ------- | ------------------------------ |  | - | ------- | - |  | - | ------- | -
|                                |  | Three months ended |        |   | Nine monthsendedDec. 27, 2008 |   |         | Seven monthsendedDec. 29, 2007 | 
|(In thousands)                  |  | Dec. 27, 2008      |        |   | Dec. 29, 2007                 |   |         |                               
|Deferred revenue, beginning     |  | $                  | 11,219 |   |                               | $ | 19,365  |                                |  | $ | 12,583  |   |  | $ | 12,290  |  
|Acquired deferred revenue (NWR) |  |                    |       |   |                               |   |        |                                |  |   |        |   |  |   | 1,603   |  
|Revenue deferred                |  |                    | 6,414  |   |                               |   | 16,574  |                                |  |   | 19,105  |   |  |   | 32,577  |  
|Revenue recognized              |  |                    | (5,755 | ) |                               |   | (11,188 | )                              |  |   | (19,810 | ) |  |   | (21,719 | )
|                                |  |                    |        |   |                               |   |         |                                |  |   |         |   |  |   |         |  
|Deferred revenue, ending        |  | $                  | 11,878 |   |                               | $ | 24,751  |                                |  | $ | 11,878  |   |  | $ | 24,751  |  
|                                |  |                    |        |   |                               |   |         |                                |  |   |         |   |  |   |         |  

15. Earnings Per Share

Basic earnings per share was calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share was calculated based on these same weighted average shares outstanding plus the effect
of potentially dilutive share-based awards as calculated using the treasury stock method. Share-based awards were excluded from the calculation to the extent their effect would be antidilutive.

Earnings per share were calculated as follows:



|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       
|----------------------------------------------------------- |  | ------------------ | ------- | ----------------------------- | ------------- | - | ------------------------------ |  | - | ------- | - |  | - | ------
|                                                            |  | Three months ended |         | Nine monthsendedDec. 27, 2008 |               |   | Seven monthsendedDec. 29, 2007
|(In thousands)                                              |  | Dec. 27, 2008      |         |                               | Dec. 29, 2007 |   |                               
|Net (loss) income                                           |  | $                  | (29,258 | )                             |               | $ | 6,662                          |  | $ | (36,125 | ) |  | $ | 13,610
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       
|Weighted average shares used for basic earnings per share   |  |                    | 27,040  |                               |               |   | 27,817                         |  |   | 27,061  |   |  |   | 28,073
|Incremental dilutive shares                                 |  |                    |        |                               |               |   | 421                            |  |   |        |   |  |   | 458   
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       
|Weighted average shares used for diluted earnings per share |  |                    | 27,040  |                               |               |   | 28,238                         |  |   | 27,061  |   |  |   | 28,531
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       
|Earnings per share:                                         |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       
|Net (loss) income  basic                                   |  | $                  | (1.08   | )                             |               | $ | 0.24                           |  | $ | (1.33   | ) |  | $ | 0.48  
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       
|Net (loss) income  diluted                                 |  | $                  | (1.08   | )                             |               | $ | 0.24                           |  | $ | (1.33   | ) |  | $ | 0.48  
|                                                            |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |       

For the three months ended December 27, 2008 and December 29, 2007, awards of options and unvested
shares representing an additional 4.3 million and 2.6 million shares of common stock were outstanding, respectively. For the nine months ended December 27, 2008 and seven months ended December 29, 2007, awards of options and
unvested shares representing an additional 4.4 million and 2.6 million shares of common stock were outstanding, respectively. These shares were not included in the calculation of diluted net earnings per share because their effect would
have been antidilutive.

16. Income Taxes

The income
tax benefit recorded for the three months ended December 27, 2008 was $1.8 million on pretax loss of $31.1 million, an effective rate of 5.9%. Comparatively, the income tax provision was $3.4 million on pretax income of $10.1 million for the
three months ended December 29, 2007, an effective tax rate of 33.7%.

The total income tax benefit for the nine months ended December 27, 2008
was $6.0 million on pretax loss of $42.1 million, an effective rate of 14.2%. Comparatively, the total income tax provision for the seven months ended December 29, 2007 was $8.3 million on $21.9 million pretax income, an effective tax rate of
37.9%.



13



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##### Table of Contents

The change in the effective tax rate for each comparison period is primarily due to the goodwill impairment charge
recorded in the third quarter of 2009 that is not deductible for US tax purposes as well as a valuation allowance on deferred tax assets that was established in the third quarter. This valuation allowance was due to unrealized capital losses arising
from the write-down of our auction rate securities and was necessary because capital losses are only deductible to the extent of capital gains. It is uncertain whether the Company will have the ability to generate sufficient capital gains in the
future to utilize these losses and has a limited ability to utilize tax planning strategies given the current market price of the Companys stock compared to net book value.

Current and non-current deferred income taxes were $20.0 million and $4.7 million, respectively at December 27, 2008. This represents an increase of $5.1 million and $3.7 million, respectively, from
March 29, 2008. The increase in current deferred tax assets is primarily related to increased net operating loss. The non-current deferred tax asset increase was due to the expected utilization of our tax credits.

17. Comprehensive Income

The components of comprehensive income, net
of tax, were as follows:



|                                                                          |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        |  
|------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------------------- | ------------- | - | ------------------------------ |  | - | ------- | - |  | - | ------ | -
|                                                                          |  | Three months ended |         | Nine monthsendedDec. 27, 2008 |               |   | Seven monthsendedDec. 29, 2007 | 
|(In thousands)                                                            |  | Dec. 27, 2008      |         |                               | Dec. 29, 2007 |   |                               
|Net (loss) income                                                         |  | $                  | (29,258 | )                             |               | $ | 6,662                          |  | $ | (36,125 | ) |  | $ | 13,610 |  
|Other comprehensive income                                                |  |                    | 2       |                               |               |   | 4                              |  |   | 6       |   |  |   | 9      |  
|Foreign currency translation adjustment                                   |  |                    | (925    | )                             |               |   | 49                             |  |   | (2,204  | ) |  |   | 517    |  
|Reclassification of unrealized loss on auction rate investments           |  |                    |        |                               |               |   |                               |  |   | 2,496   |   |  |   |       |  
|Net unrealized gain (loss) on securities classified as available for sale |  |                    | 88      |                               |               |   | 1                              |  |   | (2      | ) |  |   | (88    | )
|                                                                          |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        |  
|Other comprehensive (loss) income                                         |  | $                  | (30,093 | )                             |               | $ | 6,716                          |  | $ | (35,829 | ) |  | $ | 14,048 |  
|                                                                          |  |                    |         |                               |               |   |                                |  |   |         |   |  |   |        |  

18. Share Repurchase Program

On May 15, 2008, the Board of Directors authorized a share repurchase program for $20.0 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation
programs. The repurchases are to be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions,
share price and other factors. There is no fixed completion date for the repurchase program.

During the third quarter of 2009, the Board of Directors
approved an increase to the existing share repurchase program to $100 million, contingent upon the close of the proposed acquisition of Zygo Corporation.

During the third quarter of 2009, the Company did not repurchase any additional shares under this program. As of December 27, 2008, a total of 307,865 shares have been repurchased under this program at an average price of $15.34 per
share, totaling $4.7 million under this authorization, calculated inclusive of commissions and fees. Cash used to settle repurchase transactions is reflected as a component of cash used in financing activities in the condensed consolidated
statements of cash flows.



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19. Product and Geographic Information

Net sales by product type were as follows:



|                                   |  |                    |        |                               |   |                                |  |   |         |  |   |        
|---------------------------------- |  | ------------------ | ------ | ----------------------------- | - | ------------------------------ |  | - | ------- |  | - | -------
|                                   |  | Three months ended |        | Nine monthsendedDec. 27, 2008 |   | Seven monthsendedDec. 29, 2007
|(In thousands)                     |  | Dec. 27, 2008      |        | Dec. 29, 2007                 |   |                               
|Semiconductor group (SG)           |  | $                  | 5,534  |                               | $ | 39,691                         |  | $ | 39,782  |  | $ | 85,433 
|Passive Component (PCG)            |  |                    | 4,557  |                               |   | 18,767                         |  |   | 24,551  |  |   | 46,976 
|Interconnect/Micro-machining (IMG) |  |                    | 15,527 |                               |   | 18,828                         |  |   | 74,919  |  |   | 44,156 
|                                   |  |                    |        |                               |   |                                |  |   |         |  |   |        
|                                   |  | $                  | 25,618 |                               | $ | 77,286                         |  | $ | 139,252 |  | $ | 176,565
|                                   |  |                    |        |                               |   |                                |  |   |         |  |   |        

Net sales by geographic area, based on the location of the end user, were as follows:



|               |  |                    |        |                               |   |                                |  |   |         |  |   |        
|-------------- |  | ------------------ | ------ | ----------------------------- | - | ------------------------------ |  | - | ------- |  | - | -------
|               |  | Three months ended |        | Nine monthsendedDec. 27, 2008 |   | Seven monthsendedDec. 29, 2007
|(In thousands) |  | Dec. 27, 2008      |        | Dec. 29, 2007                 |   |                               
|Asia           |  | $                  | 16,810 |                               | $ | 54,614                         |  | $ | 99,732  |  | $ | 133,826
|Americas       |  |                    | 5,508  |                               |   | 14,937                         |  |   | 26,593  |  |   | 28,818 
|Europe         |  |                    | 3,300  |                               |   | 7,735                          |  |   | 12,927  |  |   | 13,921 
|               |  |                    |        |                               |   |                                |  |   |         |  |   |        
|               |  | $                  | 25,618 |                               | $ | 77,286                         |  | $ | 139,252 |  | $ | 176,565
|               |  |                    |        |                               |   |                                |  |   |         |  |   |        

20. Legal Proceedings

All Ring Patent Infringement Prosecution

In August 2005, the Company commenced a proceeding in the Kaohsiung District Court of Taiwan (the
Court) directed against All Ring Tech Co., Ltd. (All Ring) of Taiwan. The Company alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes ESIs Taiwan Patent No. 207469, entitled Circuit
Component Handler (the 207469 patent). As part of this proceeding, the Court issued a Provisional Attachment Order (PAO) in August 2005, restricting the use of some of All Rings assets. All Ring then filed a bond with the Court to obtain
relief from the attachment of its assets. In July 2007, the Court issued a second PAO and approximately US$6.0 million was restricted in All Rings accounts. The second PAO remains in effect and cannot be revoked.

In October 2005, the Company filed a formal patent infringement action against All Ring in the Court. The Court-appointed expert has concluded that the Capacitor Tester
and All Rings RK-T2000 both infringe every claim of the 207469 patent and that All Rings RK-L50 infringes a number of the claims as well. Also in October 2005, the Court executed a Preliminary Injunction Order (PIO) that prohibits All
Ring from manufacturing, selling, offering for sale or using the Capacitor Tester until final judgment is entered in the formal patent infringement action. The Court dismissed All Rings application to revoke the PIO on January 18, 2008,
and the PIO remains in place.

In November 2005, All Ring filed a cancellation action against ESIs 207469 patent in the Taiwan Intellectual Property
Office (the IPO). On July 5, 2007, the IPO issued a notice requiring the Company to cancel two of the claims in the 207469 patent. The Company filed a response canceling the two claims and amending the remaining claims accordingly in August
2007. On August 12, 2008, the IPO decided the action in the Companys favor and dismissed the cancellation action. All Ring appealed the IPOs cancellation decision to the Board of Appeal of the Ministry of Economic Affairs on
September 12, 2008.

On March 4, 2008, pursuant to All Rings motion, the Court issued a suspension order, staying the formal action until
after a final decision is rendered in the cancellation action. The High Court revoked the Courts suspension decision on May 2, 2008. On May 12, 2008, All Ring appealed the High Courts ruling. The Supreme Court denied All
Rings appeal on August 12, 2008. On September 3, 2008, the presiding judge of the Court asked for re-assignment of the formal action to a new judge, and it was re-assigned to Judge Lin in November 2008. Proceedings have since
resumed.



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Pursuant to the Courts Provisional Attachment Orders and Preliminary Injunction Order, the Company was required to
post Taiwan dollar security bonds with the Court. The total security bonds were valued at approximately US$8.9 million at December 27, 2008 and this amount was included in the Companys other assets in the Condensed Consolidated Balance
Sheet at December 27, 2008.

In the ordinary course of business the Company is involved in various other legal matters, either asserted or unasserted,
and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on the Companys consolidated financial position, results of operations or cash flows.

21. Restructuring and Cost Management Plans

In the fourth quarter of
2008, the Company observed weakness in the memory market and reductions in capital spending and as a result, began to take actions in response to the change in market conditions. These adverse trends in the memory market and capital spending
continued into the second quarter of 2009 and were further compounded by significant volatility in global financial markets and economic slowing. As a result, the Company took additional actions in the second quarter of 2009 in response to the
market conditions in order to mitigate the impact of lower business levels. These actions included reductions in workforce, office consolidations in foreign subsidiary locations and the closure of a small research and development facility.

These actions resulted in $0.7 million, $1.2 million and $0.1 million in restructuring expenses during the first, second and third quarters of 2009,
respectively. For the nine months ended December 27, 2008, these actions have resulted in $2.0 million of total expense, which consisted of $1.6 million in selling, service and administration expenses and $0.4 million in research, development
and engineering expenses. At December 27, 2008, approximately $0.5 million was included in accrued liabilities, consisting primarily of unpaid severance and employee related costs.

On January 29, 2009, the Company announced additional restructuring and cost management actions, including plans to reduce headcount in the fourth quarter of 2009 by 12%, suspension of its 401(k) match, executive
pay reductions, company-wide furloughs and plant shutdowns. The Company expects to incur approximately $2.5 million in cash charges related to the restructuring plan, substantially all of which costs are expected to be recognized in the fourth
quarter of 2009.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The statements contained in this report that are not statements of historical fact, including without limitation, statements containing the words believes, expects and similar words, constitute
forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that
actual results may materially differ as a result of many factors, including the risks described in Part II, Item 1A Risk Factors.

Overview of Business

Electro Scientific Industries, Inc. and its subsidiaries (ESI) provide high-technology manufacturing equipment to the
global electronics market, including advanced laser systems that are used to microengineer electronic device features in high-volume manufacturing environments. Our customers are primarily manufacturers of semiconductors, passive components and
interconnect devices. Our equipment enables these manufacturers to achieve the yield and productivity gains in their manufacturing processes that can be critical to their profitability. The components and devices manufactured by our customers are
used in a wide variety of end products in the computer, consumer electronics, and communications industries.



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We supply advanced laser microengineering systems that allow electronics manufacturers to physically alter select device
features during high-volume production in order to heighten performance and boost production yields of semiconductor devices, passive components and circuitry, high-density interconnect (HDI) circuit boards, advanced semiconductor packaging,
high-bright LEDs and flat panel LCD displays. Laser microengineering comprises a set of precise fine-tuning processes (laser micro-machining, link cutting and via drilling) that require application-specific laser systems able to meet semiconductor
and microelectronics manufacturers exacting performance and productivity requirements.

Additionally, we produce high-speed test, inspection and
termination equipment used in the high-volume production of multi-layer ceramic capacitors (MLCC) and other passive components, as well as original equipment manufacturer machine vision products.

Change in Fiscal Reporting Periods

On July 3, 2007, the
Companys Board of Directors approved a change in the Companys reporting periods that results in a fiscal year end on the Saturday nearest March 31. Accordingly, the Companys fiscal year 2008 consisted of approximately a ten
month period containing 43 weeks ending on March 29, 2008. The current fiscal year financial statements are presented for the three months ended December 27, 2008, which represents the third quarter of 2009.

Because of the change in reporting periods, year to date information for the period ended December 29, 2007 consists of the seven months beginning June 3, 2007
and ending December 29, 2007. In addition, as discussed in Note 3 Comparative Statements of Operations for the Nine Months ended December 29, 2007 (Unaudited), the Company provided pro forma results for the nine months ended
December 29, 2007 for comparative purposes. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

Acquisitions

On October 16, 2008, the Company announced that it entered into a definitive agreement with Zygo Corporation (Zygo) under
which the Company would acquire Zygo in an all stock transaction. Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the
semiconductor capital equipment and industrial markets. On January 20, 2009, Zygo announced that its Board of Directors had withdrawn its recommendation in favor of the merger agreement. ESI believes it continues to have options under the
merger agreement, which will remain in effect unless terminated in accordance with its terms. See Note 5 Proposed Acquisition of Zygo Corporation of the Notes to the Condensed Consolidated Financial Statements for additional information
on the planned acquisition of Zygo Corporation.

On July 20, 2007, we acquired New Wave Research, Incorporated (NWR), a privately-held company
headquartered in Fremont, California. NWR is a global leader in the development of high-end lasers and laser-based systems and its products are used in the semiconductor market for sapphire wafer scribing, flat-panel display repair and semiconductor
failure analysis, among other applications. The acquisition was an investment aimed at leveraging our combined core competencies into adjacent markets and driving revenue growth and shareholder value. See Note 4 Acquisition of New Wave
Research, Incorporated of the Notes to the Condensed Consolidated Financial Statements for additional information.

Summary of Sequential
Quarterly Results

During fiscal 2008, the semiconductor memory market began to experience falling memory prices which significantly impacted the
profitability of memory producers and resulted in lower capital spending among our customers. We began to see the impact of this trend in our fourth quarter of fiscal 2008 resulting in a significant reduction in orders for our semiconductor memory
yield improvement products. In addition, we began to see weakness in our passive component business due to absorption of capacity added earlier in 2008 and cautious spending related to concerns about the global economic environment. During the third
quarter of 2009, the impact of the global financial crisis and a weakening economic environment exacerbated the overcapacity condition of our customers, resulting in further contraction in our markets. Looking forward to the remainder of 2009, we
expect these conditions to continue and the timing of a recovery in our markets is uncertain.



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For the third quarter of 2009, orders for new business were $21.2 million, a decrease of $16.4 million from $37.6 million
for the second quarter of 2009. This decrease was driven by reductions in each of the three business groups, reflecting global economic slowdown. The Company also removed $5.2 million of backlog from its books during the quarter to reflect order
cancellations or customer deferral of shipment dates.

Orders for our Semiconductor Group (SG) products decreased by approximately 47% compared to the
second quarter of 2009. The decrease in orders for the SG products was due to the impact of weak memory prices and the financial crisis as well as lower consumer demand which has reduced the capacity requirements of our customers.

Passive Components Group (PCG) product orders decreased by approximately 54% compared to the second quarter of 2009, as our third quarter new orders were limited to
tooling and other consumables. This reflects the continued weak demand environment and economic slowdown.

Orders for our Interconnect/Micro-machining
Group (IMG) products decreased by approximately 37% compared to the second quarter of 2009. This decrease was largely attributable to absorption by our customers of previously ordered micro-machining systems as well as the economic environment.

Gross margins were 29.0% on net sales of $25.6 million in the third quarter of 2009, compared to 42.5% on net sales of $49.6 million in the second quarter
of 2009. The decline in gross margin was primarily due to both lower revenue and lower production levels, which resulted in lower overhead absorption. Additionally, higher excess and obsolete inventory charges in the third quarter adversely impacted
margin. Included in cost of sales in both quarters were $0.3 million in purchase accounting expenses related to the acquisition of NWR.

Total operating
expenses increased $14.1 million to $37.5 million in the third quarter of 2009, compared to $23.4 million in the second quarter of 2009. This increase was due to the recognition of a goodwill impairment charge of $17.4 million during the third
quarter resulting from the significant decline in the Companys stock price. Excluding this charge, operating expenses declined $3.3 million, which was the result of savings realized through our efforts to reduce costs through restructuring and
cost management plans, lower discretionary spending, engineering project costs, and variable pay as well as $1.1 million less restructuring expenses and $0.3 million less share-based compensation expense incurred in the third quarter.

Operating loss increased to $30.1 million in the third quarter of 2009 compared to $2.3 million in the second quarter of 2009, driven by lower revenue volume and gross
profit in the quarter, along with the $17.4 million goodwill impairment charge.

An other-than-temporary impairment of auction rate securities (ARS) held
in our investment portfolio resulted in a non-operating expense of $2.0 million and $5.4 million for the third quarter and second quarters of 2009, respectively. The additional charge was the result of continued deterioration of credit markets and
reductions in the credit rating of the bond insurers of our ARS. For periods prior to the first quarter of 2009, unrealized losses on ARS were not considered other-than-temporary, thus estimated changes in fair value were recorded in the Condensed
Consolidated Balance Sheet as a component of accumulated other comprehensive loss.

Net interest and other income of $1.0 million in the third quarter of
2009 declined slightly from $1.1 million in the second quarter of 2009. The decrease was driven by lower interest income, the result of a market driven decline in interest rates, mostly offset by an increase in average invested assets.

The effective tax rate was 5.9% in the third quarter of 2009 resulting in an income tax benefit of $1.8 million. Comparatively, the effective tax rate was 37.3% for
the second quarter of 2009 resulting in an income tax benefit of $2.4 million. The change in the effective tax rates is primarily related to the goodwill impairment charge recorded in the third quarter of 2009 that is not deductible for US tax
purposes as well as a valuation allowance on deferred tax assets that was established in the third quarter. This allowance was required due to unrealized capital losses arising from the write-down of our auction rate securities.



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Net loss for the third quarter was $29.3 million or $1.08 per basic and diluted share, compared to a net loss of $4.1
million or $0.15 per basic and diluted share in the second quarter of 2009.

Results of Operations

Three Months Ended December 27, 2008 Compared to Three Months Ended December 29, 2007

The following table presents results of operations data as a percentage of net sales:



|                                                            |  |                    |    |  |               |  
|----------------------------------------------------------- |  | ------------------ | -- |  | ------------- | -
|                                                            |  | Three months ended |   
|                                                            |  | Dec. 27, 2008      |    |  | Dec. 29, 2007 |  
|Net sales                                                   |  | 100.0              | %  |  | 100.0         | %
|Cost of sales                                               |  | 71.0               |    |  | 53.8          |  
|                                                            |  |                    |    |  |               |  
|Gross profit                                                |  | 29.0               |    |  | 46.2          |  
|Selling, service and administration                         |  | 47.7               |    |  | 20.7          |  
|Research, development and engineering                       |  | 30.8               |    |  | 14.9          |  
|Goodwill impairment charge                                  |  | 67.9               |    |  |              |  
|                                                            |  |                    |    |  |               |  
|Operating (loss) income                                     |  | (117.4             | )  |  | 10.6          |  
|Other-than-temporary impairment of auction rate investments |  | (7.9               | )  |  |              |  
|Interest and other income, net                              |  | 4.0                |    |  | 2.4           |  
|                                                            |  |                    |    |  |               |  
|(Loss) income before income taxes                           |  | (121.3             | )  |  | 13.0          |  
|(Benefit from) provision for income taxes                   |  | (7.2               | )  |  | 4.4           |  
|                                                            |  |                    |    |  |               |  
|Net (loss) income                                           |  | (114.1             | )% |  | 8.6           | %
|                                                            |  |                    |    |  |               |  

Expenses as a percentage of net sales for the third quarter of 2009 increased over the third quarter of 2008 due
to significantly lower sales volume.

Net Sales

Net sales were $25.6 million for the third quarter of 2009, a decrease of $51.7 million or 66.9% compared to net sales of $77.3 million for the third quarter of 2008. The overall decrease was primarily driven by significant decreases in SG
and PCG net sales, and to a lesser extent, lower sales of IMG products.

Net sales by product group for the three months ended December 27, 2008 and
December 29, 2007 were as follows:



|                                   |  |                    |        |                |               |   |           |   |                |  |       |  
|---------------------------------- |  | ------------------ | ------ | -------------- | ------------- | - | --------- | - | -------------- |  | ----- | -
|                                   |  | Three months ended |       
|                                   |  | Dec. 27, 2008      |        |                | Dec. 29, 2007 |  
|(In thousands, except percentages) |  | Net Sales          |        | % of Net Sales |               |   | Net Sales |   | % of Net Sales | 
|Semiconductor (SG)                 |  | $                  | 5,534  |                | 21.6          | % |           | $ | 39,691         |  | 51.3  | %
|Passive Components (PCG)           |  |                    | 4,557  |                | 17.8          | % |           |   | 18,767         |  | 24.3  | %
|Interconnect/Micro-machining (IMG) |  |                    | 15,527 |                | 60.6          | % |           |   | 18,828         |  | 24.4  | %
|                                   |  |                    |        |                |               |   |           |   |                |  |       |  
|                                   |  | $                  | 25,618 |                | 100.0         | % |           | $ | 77,286         |  | 100.0 | %
|                                   |  |                    |        |                |               |   |           |   |                |  |       |  

SG sales in the third quarter of 2009 decreased $34.2 million or 86.1% compared to the third quarter of 2008. The
overall decrease in sales was due to the significant downturn in the memory markets as well as reduced consumer demand, which is the primary driver of demand by our own customers.

PCG sales in the third quarter of 2009 declined $14.2 million or 75.7% compared to the third quarter of 2008. The decrease in PCG net sales was driven by low demand for capital equipment as customers utilize existing
capacity to cover current needs during the weak global economy.



19



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##### Table of Contents

IMG sales in the third quarter of 2009 decreased $3.3 million or 17.5% compared to the third quarter of 2008. The
decrease was driven primarily by a slowing in demand for general purpose micromachining systems.

Net sales by geographic region for the three months ended
December 27, 2008 and December 29, 2007 were as follows:



|                                   |  |                    |        |                |               |   |           |   |                |  |       |  
|---------------------------------- |  | ------------------ | ------ | -------------- | ------------- | - | --------- | - | -------------- |  | ----- | -
|                                   |  | Three months ended |       
|                                   |  | Dec. 27, 2008      |        |                | Dec. 29, 2007 |  
|(In thousands, except percentages) |  | Net Sales          |        | % of Net Sales |               |   | Net Sales |   | % of Net Sales | 
|Asia                               |  | $                  | 16,810 |                | 65.6          | % |           | $ | 54,614         |  | 70.7  | %
|Americas                           |  |                    | 5,508  |                | 21.5          | % |           |   | 14,937         |  | 19.3  | %
|Europe                             |  |                    | 3,300  |                | 12.9          | % |           |   | 7,735          |  | 10.0  | %
|                                   |  |                    |        |                |               |   |           |   |                |  |       |  
|                                   |  | $                  | 25,618 |                | 100.0         | % |           | $ | 77,286         |  | 100.0 | %
|                                   |  |                    |        |                |               |   |           |   |                |  |       |  

Compared to the three months ended December 29, 2007, net sales for the three months ended December 27,
2008 declined $37.8 million or 69.2% in Asia, $9.4 million or 63.1% in the Americas, and $4.4 million or 57.3% in Europe. These decreases reflect the weakening economic climate in all of our global markets.

Gross Profit

Gross profit for the three months ended
December 27, 2008 and December 29, 2007 was as follows:



|                                   |  |                    |       |                |               |   |              |   |                |  |      |  
|---------------------------------- |  | ------------------ | ----- | -------------- | ------------- | - | ------------ | - | -------------- |  | ---- | -
|                                   |  | Three months ended |      
|                                   |  | Dec. 27, 2008      |       |                | Dec. 29, 2007 |  
|(In thousands, except percentages) |  | Gross Profit       |       | % of Net Sales |               |   | Gross Profit |   | % of Net Sales | 
|Gross Profit                       |  | $                  | 7,418 |                | 29.0          | % |              | $ | 35,684         |  | 46.2 | %
|                                   |  |                    |       |                |               |   |              |   |                |  |      |  

Gross profit for the three months ended December 27, 2008 was $7.4 million, a decline of $28.3 million
compared to gross profit of $35.7 million for the three months ended December 29, 2007. Gross profit also declined as a percentage of net sales, decreasing from 46.2% for the third quarter of 2008 to 29.0% for the third quarter of 2009. These
decreases were primarily related to lower revenue and production levels, which also led to significantly lower absorption levels. Although manufacturing spending decreased significantly, the impact of fixed costs led to unfavorable absorption
variances. In addition, margins were negatively impacted by higher excess and obsolete inventory write-downs resulting from the deteriorating economic environment as well as excess service inventory as customers decommissioned older machines.

Operating Expenses

Operating expenses for the
three months ended December 27, 2008 and December 29, 2007 were as follows:



|                                      |  |                    |        |                |               |   |         |   |                |  |      |  
|------------------------------------- |  | ------------------ | ------ | -------------- | ------------- | - | ------- | - | -------------- |  | ---- | -
|                                      |  | Three months ended |       
|                                      |  | Dec. 27, 2008      |        |                | Dec. 29, 2007 |  
|(In thousands, except percentages)    |  | Expense            |        | % of Net Sales |               |   | Expense |   | % of Net Sales | 
|Selling, Service and Administration   |  | $                  | 12,224 |                | 47.7          | % |         | $ | 15,978         |  | 20.7 | %
|Research, Development and Engineering |  |                    | 7,889  |                | 30.8          | % |         |   | 11,508         |  | 14.9 | %
|Goodwill Impairment Charge            |  |                    | 17,396 |                | 67.9          | % |         |   |               |  |     |  
|                                      |  |                    |        |                |               |   |         |   |                |  |      |  
|                                      |  | $                  | 37,509 |                | 146.4         | % |         | $ | 27,486         |  | 35.6 | %
|                                      |  |                    |        |                |               |   |         |   |                |  |      |  

In the fourth quarter of 2009, we expect increases in operating expenses of approximately $2.5 million due to
additional restructuring and cost management plans. See Note 21 Restructuring and Cost Management Plans of the Notes to the Condensed Consolidated Financial Statements for additional information about these actions.



20



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##### Table of Contents

Selling, Service and Administration Expenses

The primary items included in selling, service and administration (SS&A) expenses are labor and other employee-related expenses, travel expenses, professional fees, commissions and facilities costs. SS&A
expenses were $12.2 million (47.7% of net sales) for the three months ended December 27, 2008, a decrease of $3.8 million compared to $16.0 million (20.7% of net sales) in the three months ended December 29, 2007. Included in third quarter
2009 SS&A expenses were $0.1 million of restructuring charges and $0.2 million of purchase accounting expenses, compared to no restructuring expenses and $0.5 million of purchase accounting expenses during the third quarter of 2008. Excluding
these items, the decrease in SS&A expenses was $3.6 million, primarily attributable to restructuring and cost management activities completed in late fiscal 2008 and early 2009. These actions included a company-wide reduction in force of 17%
from the third quarter of 2008 to the third quarter of 2009 and consequent decreases in compensation, labor, and travel related costs.

Research,
Development and Engineering Expenses

Research, development and engineering (RD&E) expenses are primarily comprised of labor and other
employee-related expenses, professional fees, project materials, equipment and facilities costs. RD&E expenses totaled $7.9 million (30.8% of net sales) for the three months ended December 27, 2008, which represents a decline of $3.6
million compared to $11.5 million (14.9% of net sales) for the three months ended December 29, 2007. This decrease was driven by our efforts to reduce costs, which included the company-wide reduction of force.

Goodwill Impairment Charge

Due to poor economic conditions and the
uncertain timing of a recovery, the Companys stock price and market capitalization declined substantially during the third quarter of 2009. As a result, we reviewed the recoverability of goodwill and other indefinite-lived intangibles as of
December 27, 2008 and recognized an impairment charge of $17.4 million. This charge is reflected in Goodwill impairment charge in the accompanying unaudited Condensed Consolidated Statements of Operations for the three and nine
months ended December 27, 2008. This charge is not deductible for income tax purposes and has no effect on the Companys cash flows or liquidity.

Non-operating Income and Expense

Other-than-temporary Impairment of Auction Rate Investments

Other-than-temporary impairment of auction rate investments for the three months ended December 27, 2008 and December 29, 2007 was as follows:



|                                                            |  |                                |       |                |               |   |                                |   |                |  |  
|----------------------------------------------------------- |  | ------------------------------ | ----- | -------------- | ------------- | - | ------------------------------ | - | -------------- |  | -
|                                                            |  | Three months ended            
|                                                            |  | Dec. 27, 2008                  |       |                | Dec. 29, 2007
|(In thousands, except percentages)                          |  | Other-than-temporaryImpairment |       | % of Net Sales |               |   | Other-than-temporaryImpairment |   | % of Net Sales
|Other-than-temporary Impairment of Auction Rate Investments |  | $                              | 2,022 |                | 7.9           | % |                                | $ |               |  | 
|                                                            |  |                                |       |                |               |   |                                |   |                |  |  

As of December 27, 2008, the Company held a total of $15.6 million invested in auction rate securities at par
value, while an additional $4.0 million of par value ARS was converted by the bond insurer to its preferred stock during the third quarter of 2009. At the time of purchase in 2007 these ARS were rated AAA and AA. Prior to September 2007, these
securities provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism previously allowed existing investors to either
retain or liquidate their holdings by selling such securities at par. As a result of the liquidity issues experienced in the global credit and capital markets, during the second quarter of 2008 our ARS began to experience failed auctions. Since that
time none of our securities have traded through the auction process and no other market



21



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##### Table of Contents

transactions for these securities have been observed. During the second quarter of 2009, further deterioration in the general markets and global economy
resulted in credit rating downgrades of the nations largest bond insurers and the effective elimination of the active market for these securities, and during the third quarter of 2009, these bond insurers credit ratings were again
downgraded. Our ARS and preferred stock holdings are issued or insured by these bond insurers. The ARS are comprised predominately of securities issued by insurance companies to raise funds to meet regulatory capital reserve requirements and the ARS
assume the credit ratings of the bond insurers who guarantee the timely payment of principal and interest on these insured securities.

At the end of the
first quarter of 2009, we determined that the declines in fair value of these ARS represented an other-than-temporary impairment in accordance with U.S. generally accepted accounting principles. Accordingly, the cost bases of these securities were
written down to their estimated fair values at the end of the first quarter with an other-than-temporary impairment charge of $5.1 million recorded in the results of operations for the three months ended June 28, 2008.

Near the end of the second quarter of 2009, Lehman Brothers, the broker who had been providing investment management, custodial and valuation services for these
securities, declared bankruptcy and ceased providing valuation services for the Company. Consequently, the Company procured independent third-party valuations of these securities as of the end of the second and third quarters of 2009. As a result of
the continued deterioration in the credit markets along with further credit downgrades experienced by insurers of our ARS, the valuations of these securities declined from the values estimated as of the end of the first quarter of 2009. Accordingly,
the cost bases of these securities were written down to their estimated fair values at the end of the second quarter with an other-than-temporary impairment charge of $5.4 million recorded in the results of operations for the three months ended
September 27, 2008.

During the third quarter of 2009, certain ARS held by the Company with a par value of $4.0 million were converted to preferred
stock of the insurer. Due to continued deterioration and volatility of the credit markets during this quarter, as well as additional reductions in the ARS insurers credit ratings, the Companys ARS and preferred stock holdings were
written down to their estimated fair values at the end of the third quarter with an additional other-than-temporary impairment charge of $2.0 million recorded in the results of operations for the three months ended December 27, 2008.

The $7.1 million estimated fair value of these securities remains classified as a non-current investment in the Condensed Consolidated Balance Sheets at
December 27, 2008, consistent with the classification at March 29, 2008 and each interim period thereafter. The Company continues to receive all interest payments when due and expects to receive dividend payments on its preferred stock.

The Company continues to monitor the market for ARS and consider its impact (if any) on the fair value of its ARS. It is not possible to ascertain when or
whether market conditions will change resulting in the recovery of the fair value of these auction rate securities. It is also possible that a secondary market for ARS may emerge in which securities similar to our own would trade at prices below our
currently recorded fair values. Under such scenarios, or if other events arise that impact the fair value of the securities, we may have to recognize further other-than temporary impairment charges, which would adversely impact our financial
position and results of operations.

Interest and Other Income, net

Interest and Other Income, net, consists of interest income and expense, market gains and losses on assets held in employees deferred compensation accounts, realized and unrealized foreign exchange gains and
losses, bank charges, investment management and ARS valuation fees and other miscellaneous non-operating items. Net interest and other income for the three months ended December 27, 2008 and December 29, 2007 was as follows:



|                                   |  |                              |       |                |               |   |                              |   |                |  |     |  
|---------------------------------- |  | ---------------------------- | ----- | -------------- | ------------- | - | ---------------------------- | - | -------------- |  | --- | -
|                                   |  | Three months ended           |      
|                                   |  | Dec. 27, 2008                |       |                | Dec. 29, 2007 |  
|(In thousands, except percentages) |  | Interest andOther Income,net |       | % of Net Sales |               |   | Interest andOther Income,net |   | % of Net Sales | 
|Interest and Other Income, net     |  | $                            | 1,021 |                | 4.0           | % |                              | $ | 1,856          |  | 2.4 | %
|                                   |  |                              |       |                |               |   |                              |   |                |  |     |  



22



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##### Table of Contents

Interest and other income, net, for the third quarter of 2009 was $1.0 million compared to $1.9 million in the third
quarter of 2008. The decrease was primarily attributable to a $1.2 million decrease in interest income, partially offset by foreign currency gains. The decline in interest income was driven by a decline in average yields of approximately 2.5%,
commensurate with overall market declines over this period. Looking forward, we expect a decrease in net interest and other income primarily due to the impact of further declines in market interest rates.

We have incurred $1.4 million in costs related to the proposed Zygo acquisition as of the end of December 27, 2008. These costs are classified as other current
assets in the Condensed Consolidated Balance Sheet at December 27, 2008. We expect these costs and ongoing fees related to the proposed Zygo acquisition to be charged to operating expense due to either the termination of the merger agreement or
the adoption of Statement of Financial Accounting Standards No. 141(Revised 2007), Business Combinations (SFAS 141R).

Income
Taxes

The income tax benefit recorded for the three months ended December 27, 2008 was $1.8 million on pretax loss of $30.1 million, an
effective rate of 5.9%. Comparatively, the income tax provision was $3.4 million on pretax income of $10.1 million for the three months ended December 29, 2007, an effective tax rate of 33.7%. The change in the effective tax rates is primarily
related to the goodwill impairment charge recorded in the third quarter of 2009 that is not deductible for US tax purposes as well as a valuation allowance on deferred tax assets that was established in the third quarter. This allowance was required
due to unrealized capital losses arising from the write-down of our auction rate securities.

Our effective tax rate is subject to fluctuation
based upon the occurrence and timing of numerous discrete events, including, for example, changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination
and finalization of income tax returns. For example, the recent re-enactment of the research and experimentation credit will continue to positively impact our effective tax rate for the remainder of fiscal 2009. Based on currently available
information, we are not aware of any such discrete events which are likely to occur that would have a materially adverse effect on our financial position, expected cash flows or results of operations. We anticipate no significant changes in
unrecognized tax benefits in the next 12 months as the result of examinations or lapse of statutes of limitation.

Net (Loss) Income

Net (loss) income for the three months ended December 27, 2008 and December 29, 2007 was as follows:



|                                   |  |                    |         |   |                |        |    |                  |   |                |  |     |  
|---------------------------------- |  | ------------------ | ------- | - | -------------- | ------ | -- | ---------------- | - | -------------- |  | --- | -
|                                   |  | Three months ended |        
|                                   |  | Dec. 27, 2008      |         |   | Dec. 29, 2007  |       
|(In thousands, except percentages) |  | Net(Loss) Income   |         |   | % of Net Sales |        |    | Net(Loss) Income |   | % of Net Sales | 
|Net (Loss) Income                  |  | $                  | (29,258 | ) |                | (114.1 | )% |                  | $ | 6,662          |  | 8.6 | %
|                                   |  |                    |         |   |                |        |    |                  |   |                |  |     |  

Net loss for the third quarter of 2009 was $29.3 million, or $1.08 per basic and diluted share, compared to net
income for the third quarter of 2008 of $6.7 million, or $0.24 per basic share and diluted share. The decline was caused by the overall decrease in net sales and gross profit, the impairment charges on goodwill and ARS, and the remaining factors
discussed above.

Nine Months Ended December 27, 2008 Compared to Seven Months and Pro Forma Nine Months Ended December 29, 2007

Due to the change in our fiscal reporting periods, we have incorporated results for the unaudited seven month period (30 weeks) and the pro forma nine
month period (39 weeks) ended December 29, 2007 in the following year-to-date comparative discussions.



23



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##### Table of Contents

We acquired NWR on July 20, 2007, which was during our second quarter of 2008. Accordingly, our results of
operations for the seven months and the pro forma nine months ended December 29, 2007 include 23 weeks of activity from this business. The results of the nine months ended December 27, 2008 include 39 weeks of activity from this business.
In our description of the results of operations that follows, we will quantify the impact of the NWR acquisition where meaningful.

The following table
presents results of operations data as a percentage of net sales:



|                                                            |  |                               |    |  |                                |   |  |                                         |  
|----------------------------------------------------------- |  | ----------------------------- | -- |  | ------------------------------ | - |  | --------------------------------------- | -
|                                                            |  | Nine monthsendedDec. 27, 2008 |    |  | Seven monthsendedDec. 29, 2007 |   |  | Pro forma ninemonths endedDec. 29, 2007 |  
|Net sales                                                   |  | 100.0                         | %  |  | 100.0                          | % |  | 100.0                                   | %
|Cost of sales                                               |  | 61.4                          |    |  | 54.4                           |   |  | 54.8                                    |  
|                                                            |  |                               |    |  |                                |   |  |                                         |  
|Gross margin                                                |  | 38.6                          |    |  | 45.6                           |   |  | 45.2                                    |  
|Selling, service and administration                         |  | 30.6                          |    |  | 19.9                           |   |  | 18.2                                    |  
|Research, development and engineering                       |  | 19.0                          |    |  | 14.4                           |   |  | 13.1                                    |  
|Write-off of acquired in-process research and development   |  |                              |    |  | 1.6                            |   |  | 1.2                                     |  
|Goodwill impairment charge                                  |  | 12.5                          |    |  |                               |   |  |                                        |  
|                                                            |  |                               |    |  |                                |   |  |                                         |  
|Operating (loss) income                                     |  | (23.5                         | )  |  | 9.7                            |   |  | 12.7                                    |  
|Other-than-temporary impairment of auction rate investments |  | (9.0                          | )  |  |                               |   |  |                                        |  
|Interest and other income, net                              |  | 2.2                           |    |  | 2.7                            |   |  | 2.7                                     |  
|                                                            |  |                               |    |  |                                |   |  |                                         |  
|(Loss) income before income taxes                           |  | (30.3                         | )  |  | 12.4                           |   |  | 15.4                                    |  
|(Benefit from) provision for income taxes                   |  | (4.3                          | )  |  | 4.7                            |   |  | 5.9                                     |  
|                                                            |  |                               |    |  |                                |   |  |                                         |  
|Net (loss) income                                           |  | (26.0                         | )% |  | 7.7                            | % |  | 9.5                                     | %
|                                                            |  |                               |    |  |                                |   |  |                                         |  

Expenses as a percentage of net sales for the nine months ended December 27, 2008 increased over the
comparison periods of 2008 due to significantly lower sales volume.

Net Sales

Net sales by product group for the nine months ended December 27, 2008, the seven months ended December 29, 2007, and the pro forma nine months ended December 29, 2007 were as follows:



|                                   |  |                                |         |               |                                 |   |           |                                         |               |  |       |           |  |               |         |  |       |  
|---------------------------------- |  | ------------------------------ | ------- | ------------- | ------------------------------- | - | --------- | --------------------------------------- | ------------- |  | ----- | --------- |  | ------------- | ------- |  | ----- | -
|                                   |  | Nine months endedDec. 27, 2008 |         |               | Seven months endedDec. 29, 2007 |   |           | Pro formanine months endedDec. 29, 2007 |              
|(In thousands, except percentages) |  | Net Sales                      |         | % ofNet Sales |                                 |   | Net Sales |                                         | % ofNet Sales |  |       | Net Sales |  | % ofNet Sales |        
|Semiconductor (SG)                 |  | $                              | 39,782  |               | 28.6                            | % |           | $                                       | 85,433        |  | 48.4  | %         |  | $             | 133,108 |  | 54.7  | %
|Passive components (PCG)           |  |                                | 24,551  |               | 17.6                            | % |           |                                         | 46,976        |  | 26.6  | %         |  |               | 57,704  |  | 23.8  | %
|Interconnect/Micro-machining (IMG) |  |                                | 74,919  |               | 53.8                            | % |           |                                         | 44,156        |  | 25.0  | %         |  |               | 52,144  |  | 21.5  | %
|                                   |  |                                |         |               |                                 |   |           |                                         |               |  |       |           |  |               |         |  |       |  
|                                   |  | $                              | 139,252 |               | 100.0                           | % |           | $                                       | 176,565       |  | 100.0 | %         |  | $             | 242,956 |  | 100.0 | %
|                                   |  |                                |         |               |                                 |   |           |                                         |               |  |       |           |  |               |         |  |       |  

Net sales for the nine months ended December 27, 2008 decreased by $37.3 million or 21.1% over net sales for
the seven months ended December 29, 2007. A significant decrease in SG and PCG net sales was partially offset by a significant increase in IMG sales, including a net increase in NWR sales of $7.4 million.

Net sales for the nine months ended December 27, 2008 decreased $103.7 million or 42.7% compared to net sales of $243.0 million for the pro forma nine months ended
December 29, 2007. The downward trend was driven by sharp decreases in SG and PCG net sales, partially offset by an increase in IMG net sales, including the $7.4 million net increase in NWR sales.



24



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##### Table of Contents

SG sales for the nine months ended December 27, 2008 decreased $45.7 million or 53.4% compared to the seven months
ended December 29, 2007. SG sales for the nine months ended December 27, 2008 decreased $93.3 million or 70.1% compared to the pro forma nine months ended December 29, 2007. The reductions in SG revenues were attributable to weakened
memory markets. For each comparison, there was a partial offset of $3.2 million from the continued penetration by NWR in the Flat Panel Display and LED Wafer Scribing markets.

PCG sales for the nine months ended December 27, 2008 were down $22.4 million or 47.7% compared to the seven months ended December 29, 2007 and down $33.2 million or 57.4% compared to the pro forma nine
months ended December 29, 2007. These decreases in revenues were due to excess capacity in the market created by reduced consumption of consumer electronics due to the slowing global economy.

IMG sales for the nine months ended December 27, 2008 increased $30.8 million or 69.7% over IMG sales for the seven months ended December 29, 2007 and
increased $22.8 million or 43.7% compared to the pro forma nine months ended December 29, 2007. The increase was driven primarily by demand for our micro-machining product line, combined with continued but softening demand in the flex-circuit
and integrated circuit packaging segments of the market. Both increases reflected $7.4 million additional sales for Laser Ablation tools and Laser Components as a result of the acquisition of NWR.

Net sales by geographic region for the nine months ended December 27, 2008, the seven months ended December 29, 2007, and the pro forma nine months ended
December 29, 2007 were as follows:



|                                   |  |                                |         |               |                                 |   |           |                                         |               |  |       |           |  |               |         |  |       |  
|---------------------------------- |  | ------------------------------ | ------- | ------------- | ------------------------------- | - | --------- | --------------------------------------- | ------------- |  | ----- | --------- |  | ------------- | ------- |  | ----- | -
|                                   |  | Nine months endedDec. 27, 2008 |         |               | Seven months endedDec. 29, 2007 |   |           | Pro formanine months endedDec. 29, 2007 |              
|(In thousands, except percentages) |  | Net Sales                      |         | % ofNet Sales |                                 |   | Net Sales |                                         | % ofNet Sales |  |       | Net Sales |  | % ofNet Sales |        
|Asia                               |  | $                              | 99,732  |               | 71.6                            | % |           | $                                       | 133,826       |  | 75.8  | %         |  | $             | 186,433 |  | 76.7  | %
|Americas                           |  |                                | 26,593  |               | 19.1                            | % |           |                                         | 28,818        |  | 16.3  | %         |  |               | 35,987  |  | 14.8  | %
|Europe                             |  |                                | 12,927  |               | 9.3                             | % |           |                                         | 13,921        |  | 7.9   | %         |  |               | 20,536  |  | 8.5   | %
|                                   |  |                                |         |               |                                 |   |           |                                         |               |  |       |           |  |               |         |  |       |  
|                                   |  | $                              | 139,252 |               | 100.0                           | % |           | $                                       | 176,565       |  | 100.0 | %         |  | $             | 242,956 |  | 100.0 | %
|                                   |  |                                |         |               |                                 |   |           |                                         |               |  |       |           |  |               |         |  |       |  

Net sales to Asia for the nine months ended December 27, 2008 decreased $34.1 million or 25.5% compared to
the seven months ended December 29, 2007 which included a $3.8 million increase attributable to NWR. When comparing the nine months ended December 27, 2008 to the pro forma nine months ended December 29, 2007, net sales to Asia
declined $86.7 million or 46.5%, again, with NWR sales of $3.8 million. This comparison reflects the overall downward trend in revenue due to the continued decline in memory markets and reduced demand for consumer electronics which impacted SG and
PCG sales.

Net sales to the Americas for the nine months ended December 27, 2008 declined $2.2 million or 7.7% when compared to the seven months
ended December 29, 2007 and declined $9.4 million or 26.1% compared to the pro forma nine months ended December 29, 2007. These decreases were due to the overall decline in market conditions for capital equipment, specifically in sales of
SG systems. NWR sales in the region for the nine months ended December 27, 2008 increased $5.2 million over both comparison periods ended December 29, 2007, partially offsetting the overall decreases.

Net sales to Europe for the nine months ended December 27, 2008 declined $1.0 million or 7.1% compared to the seven months ended December 29, 2007. When
compared to the pro forma nine months ended December 29, 2007, net sales to Europe declined $7.6 million or 37.1%. This decrease was primarily due to a drop in SG sales from the softening of global memory markets, which was somewhat offset by
an increase in NWR sales in the region of $1.6 million over both comparison periods.



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Gross Profit

Gross profit for the nine months ended December 27, 2008, the seven months ended December 29, 2007, and pro forma nine months ended December 29, 2007 was as follows:



|                                   |  |                                |        |               |                                 |   |             |                                         |               |  |      |             |  |               |         |  |      |  
|---------------------------------- |  | ------------------------------ | ------ | ------------- | ------------------------------- | - | ----------- | --------------------------------------- | ------------- |  | ---- | ----------- |  | ------------- | ------- |  | ---- | -
|                                   |  | Nine months endedDec. 27, 2008 |        |               | Seven months endedDec. 29, 2007 |   |             | Pro formanine months endedDec. 29, 2007 |              
|(In thousands, except percentages) |  | GrossProfit                    |        | % ofNet Sales |                                 |   | GrossProfit |                                         | % ofNet Sales |  |      | GrossProfit |  | % ofNet Sales |        
|Gross Profit                       |  | $                              | 53,781 |               | 38.6                            | % |             | $                                       | 80,568        |  | 45.6 | %           |  | $             | 109,728 |  | 45.2 | %
|                                   |  |                                |        |               |                                 |   |             |                                         |               |  |      |             |  |               |         |  |      |  

Gross profit was $53.8 million for the nine months ended December 27, 2008, a decrease of $26.8 million
compared to the seven month ended December 29, 2007. The net dollar increase was primarily caused by decreased revenue levels and unfavorable absorption variance.

Gross profit as a percentage of net sales was 38.6% for the nine months ended December 27, 2008, a decrease of 7.0 percentage points from the 45.6% gross profit percentage for the seven months ended
December 29, 2007. The decrease in margin was primarily due to lower production volumes, higher warranty costs, and higher excess and obsolete charges. Lower production levels in the nine months ended December 27, 2008 led to reduced
benefits of scale and significant under-absorption of overhead costs. Additionally, lower demand for some products led to increased excess and obsolete charges, and warranty costs were up primarily due to specific supplier-related laser failures as
well as higher costs associated with the introduction of new products.

When comparing gross profit for the nine months ended December 27, 2008 to the
pro forma nine months ended December 29, 2007, these same factors contributed to the decrease of $55.9 million in gross profit (6.6 percentage point reduction in gross margin). In both comparisons, the impact of lower production, higher
warranty costs, and higher excess and obsolete charges was partially offset by a decrease in NWR purchase accounting expenses and an increase in gross profit attributable to NWR.

Operating Expenses

Operating expenses for the nine months ended December 27, 2008, the seven months
ended December 29, 2007, and the pro forma nine months ended December 29, 2007 were as follows:



|                                                          |  |                                |        |               |                                 |   |          |                                         |               |  |      |          |  |               |        |  |      |  
|--------------------------------------------------------- |  | ------------------------------ | ------ | ------------- | ------------------------------- | - | -------- | --------------------------------------- | ------------- |  | ---- | -------- |  | ------------- | ------ |  | ---- | -
|                                                          |  | Nine months endedDec. 27, 2008 |        |               | Seven months endedDec. 29, 2007 |   |          | Pro formanine months endedDec. 29, 2007 |              
|(In thousands, except percentages)                        |  | Expenses                       |        | % ofNet Sales |                                 |   | Expenses |                                         | % ofNet Sales |  |      | Expenses |  | % ofNet Sales |       
|Selling, Service and Administration                       |  | $                              | 42,547 |               | 30.6                            | % |          | $                                       | 35,103        |  | 19.9 | %        |  | $             | 44,336 |  | 18.2 | %
|Research, Development and Engineering                     |  |                                | 26,439 |               | 19.0                            | % |          |                                         | 25,487        |  | 14.4 | %        |  |               | 31,862 |  | 13.1 | %
|Write-off of Acquired In-process Research and Development |  |                                |       |               |                                |   |          |                                         | 2,800         |  | 1.6  | %        |  |               | 2,800  |  | 1.2  | %
|Goodwill Impairment Charge                                |  |                                | 17,396 |               | 12.5                            | % |          |                                         |              |  |     |          |  |               |       |  |     |  
|                                                          |  |                                |        |               |                                 |   |          |                                         |               |  |      |          |  |               |        |  |      |  
|                                                          |  | $                              | 86,382 |               | 62.1                            | % |          | $                                       | 63,390        |  | 35.9 | %        |  | $             | 78,998 |  | 32.5 | %
|                                                          |  |                                |        |               |                                 |   |          |                                         |               |  |      |          |  |               |        |  |      |  

Selling, Service and Administration Expenses

SS&A expenses for the nine months ended December 27, 2008 increased $7.4 million when compared to the SS&A expenses for the seven month period ended December 29, 2007, primarily due to the two month
differential in reporting periods. In addition, there was an increase of $1.6 million in expenses attributable to assuming NWR operations, $1.6 million related to restructuring expenses, and $0.7 million related to share-based compensation.



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##### Table of Contents

The SS&A expenses for the nine month period ended December 27, 2008 decreased $1.8 million compared to the pro
forma nine months ended December 29, 2007. This decrease reflects cost savings from restructuring and cost management activities, though these effects which were partially offset by increases of $1.6 million attributable to the assumption of
NWR operations following the acquisition, $1.6 million related to restructuring expense, and $0.4 million related to share-based compensation.

Research, Development and Engineering Expenses

RD&E expenses for the nine months ended December 27, 2008 were $1.0 million higher
than the seven months ended December 29, 2007. This increase was primarily due to the two month differential in reporting periods. In addition, there was an increase of $0.5 million additional expenses from the assumption of NWR operations and
$0.4 million related to restructuring expenses. On average, RD&E expenses decreased compared to the seven months ended December 29, 2007, which was the result of cost savings realized from restructuring and cost management efforts.

RD&E expenses for the nine months ended December 27, 2008 decreased $5.4 million from the pro forma nine months ended December 29, 2007.
This decrease was primarily due to our efforts to reduce costs through restructuring and cost management plans, partially offset by the increases of $0.5 million from the acquisition of NWR and $0.4 million related to restructuring expense.

Write-off of In-process Research and Development

During the second quarter of 2008, NWR had in-process research and development valued at $2.8 million and the immediate write-off of this amount upon acquisition was included in operating expenses for the pro forma nine month period ended
December 29, 2007.

Goodwill Impairment Charge

The Company recognized an impairment charge of $17.4 million related to its goodwill balance as of the end of the third quarter of 2009. No such charges were incurred during the prior periods presented. See discussion above and Note 10
Goodwill of the Notes to the Condensed Consolidated Financial Statements for additional information.

Non-operating Income and Expense

Other-than-temporary Impairment of Auction Rate Investments

Other-than-temporary impairments of auction rate investments for the nine months ended December 27, 2008, the seven months ended December 29, 2007, and the pro forma nine months ended December 29, 2007
were as follows:



|                                                            |  |                                |        |               |                                 |   |                                         |   |               |  |                                |  |               |   |  |  
|----------------------------------------------------------- |  | ------------------------------ | ------ | ------------- | ------------------------------- | - | --------------------------------------- | - | ------------- |  | ------------------------------ |  | ------------- | - |  | -
|                                                            |  | Nine months endedDec. 27, 2008 |        |               | Seven months endedDec. 29, 2007 |   | Pro formanine months endedDec. 29, 2007
|(In thousands, except percentages)                          |  | Other-than-temporaryImpairment |        | % ofNet Sales |                                 |   | Other-than-temporaryImpairment          |   | % ofNet Sales |  | Other-than-temporaryImpairment |  | % ofNet Sales
|Other-than-temporary Impairment of Auction Rate Investments |  | $                              | 12,497 |               | 9.0                             | % |                                         | $ |              |  |                               |  | $             |  |  | 
|                                                            |  |                                |        |               |                                 |   |                                         |   |               |  |                                |  |               |   |  |  

For the nine months ended December 27, 2008, we recorded other-than-temporary impairment charges of $12.5
million in the results of operations related to our ARS. Given the continued challenges in the financial markets and the prolonged credit crisis, we cannot reasonably predict when these securities will become liquid. See discussion above related to
other-than-temporary impairment charges and Note 7 Fair Value Measurements for further discussion.



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Interest and Other Income, net

Interest and other income, net, consists of interest income and expense, market gains and losses on assets held in employees deferred compensation accounts, realized and unrealized foreign exchange gains and
losses, bank charges, investment management and ARS valuation fees and other miscellaneous non-operating items. Interest and other income, net for the nine months ended December 27, 2008, the seven months ended December 29, 2007, and the
pro forma nine months ended December 29, 2007 were as follows:



|                                   |  |                                |       |               |                                 |   |        |                                         |               |  |     |        |  |               |       |  |     |  
|---------------------------------- |  | ------------------------------ | ----- | ------------- | ------------------------------- | - | ------ | --------------------------------------- | ------------- |  | --- | ------ |  | ------------- | ----- |  | --- | -
|                                   |  | Nine months endedDec. 27, 2008 |       |               | Seven months endedDec. 29, 2007 |   |        | Pro formanine months endedDec. 29, 2007 |              
|(In thousands, except percentages) |  | Income                         |       | % ofNet Sales |                                 |   | Income |                                         | % ofNet Sales |  |     | Income |  | % ofNet Sales |      
|Interest and Other income, net     |  | $                              | 2,998 |               | 2.2                             | % |        | $                                       | 4,732         |  | 2.7 | %      |  | $             | 6,555 |  | 2.7 | %
|                                   |  |                                |       |               |                                 |   |        |                                         |               |  |     |        |  |               |       |  |     |  

For the nine months ended December 27, 2008, interest and other income, net, was $3.0 million, compared to
$4.7 million for the seven months ended December 29, 2007. This $1.7 million decrease was primarily due to a $2.2 million decline in interest income that was primarily the result of a market-driven average yield decrease of approximately 2.2%.
Partially offsetting the impact of the interest income decrease were net gains from foreign exchange rate movements.

Compared to the pro forma nine months
ended December 29, 2007, interest and other income, net, for the nine months ended December 27, 2008 decreased $3.6 million. This decrease was primarily due to a $5.0 million decrease in interest income, which was primarily caused by a
market-driven average yield decline of approximately 3.0%. Partially offsetting the impact of the interest income decrease were net gains from foreign exchange rate movements.

Income Taxes

The total income tax benefit for the nine months ended December 27, 2008 was $6.0
million on pretax loss of $42.1 million, an effective rate of 14.2%. Comparatively, the total income tax provision for the seven months ended December 29, 2007 was $8.3 million on $21.9 million pretax income, an effective tax rate of 37.9%, and
the total income tax provision for the pro forma nine months ended December 29, 2007 was $14.4 million on pretax income of $37.3 million, for an effective tax rate of 38.6%. The change in the effective tax rates is primarily related to the
goodwill impairment charge recorded in the third quarter of 2009 that is not deductible for US tax purposes as well as a valuation allowance on deferred tax assets that was established in the third quarter. This valuation allowance was due to
unrealized capital losses arising from the write-down of our auction rate securities and was necessary because capital losses are only deductible to the extent of capital gains. It is uncertain whether the Company will have the ability to generate
sufficient capital gains in the future to utilize these losses and has a limited ability to utilize tax planning strategies given the current market price of the Companys stock compared to net book value.

Our effective tax rate is subject to fluctuation based upon the occurrence and timing of numerous discrete events, including, for example, changes in tax laws or their
interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination and finalization of income tax returns. Based on currently available information, we are not aware of any such discrete
events which are likely to occur that would have a materially adverse effect on our financial position, expected cash flows or results of operations. We anticipate no significant changes in unrecognized tax benefits in the next 12 months as the
result of examinations or lapse of statutes of limitation.



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Net (Loss) Income

Net (loss) Income for the nine months ended December 27, 2008 and the seven months ended December 29, 2007, and the pro forma nine months ended December 29, 2007 was as follows:



|                                   |  |                                |         |   |                                 |       |    |                                         |   |               |  |     |                  |  |               |        |  |     |  
|---------------------------------- |  | ------------------------------ | ------- | - | ------------------------------- | ----- | -- | --------------------------------------- | - | ------------- |  | --- | ---------------- |  | ------------- | ------ |  | --- | -
|                                   |  | Nine months endedDec. 27, 2008 |         |   | Seven months endedDec. 29, 2007 |       |    | Pro formanine months endedDec. 29, 2007 |  
|(In thousands, except percentages) |  | Net (Loss)Income               |         |   | % ofNet Sales                   |       |    | Net (Loss)Income                        |   | % ofNet Sales |  |     | Net (Loss)Income |  | % ofNet Sales |       
|Net (Loss) Income                  |  | $                              | (36,125 | ) |                                 | (26.0 | )% |                                         | $ | 13,610        |  | 7.7 | %                |  | $             | 22,909 |  | 9.5 | %
|                                   |  |                                |         |   |                                 |       |    |                                         |   |               |  |     |                  |  |               |        |  |     |  

Net loss for the nine months ended December 27, 2008, was $36.1 million or $1.33 per basic and diluted share.
This compares to net income for the seven months ended December 29, 2007 of $13.6 million, or $0.48 per basic and diluted share and net income for the pro forma nine months ended December 29, 2007 of $22.9 million, or $0.81 per basic and
$0.80 per diluted share. The decreases in net income of $49.7 million and $59.0 million for the seven months and the pro forma nine months ended December 29, 2007, respectively, were driven by the factors and events noted in the preceding
portions of Managements Discussion and Analysis of Financial Condition and Results of Operations.

Financial Condition and Liquidity

At December 27, 2008, our principal sources of liquidity consisted of cash, cash equivalents and current marketable investments of $158.6 million
and accounts receivable of $23.8 million. At December 27, 2008, we had a current ratio of 8.7 and no long-term debt. Working capital of $274.6 million remained effectively flat compared to the March 29, 2008 balance of $274.7 million.

On October 16, 2008, we announced that we entered into a definitive agreement to acquire Zygo Corporation (Zygo) through an all stock transaction. We
have incurred fees and other costs related to the transaction and expect to continue to incur such costs. At December 27, 2008, $1.4 million of such costs were classified as other current assets in the Condensed Consolidated Balance Sheet. We
expect these and ongoing fees will be charged to operating expense due to either the termination of the merger agreement or the adoption of SFAS 141R.

On
January 20, 2009, Zygo announced that its Board of Directors had withdrawn its recommendation in favor of the merger agreement. ESI believes it continues to have options under the merger agreement, which will remain in effect unless terminated
in accordance with its terms.

On May 15, 2008, the Board of Directors authorized a share repurchase program for $20 million in shares of the
Companys outstanding common stock primarily to offset dilution from equity compensation programs. On October 16, 2008, this authorized total was increased to $100 million contingent upon the close of the acquisition of Zygo Corporation.
Repurchases under the program are to be made at managements discretion in the open market in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors. No shares
were repurchased during the three months ended December 27, 2008. During the nine months ended December 27, 2008, the Company repurchased a total of 307,865 shares for $4.7 million under the share repurchase program at an average price per
share of $15.34, calculated inclusive of commissions and fees. Cash used to settle repurchase transactions is reflected as a component of cash used in financing activities in the condensed consolidated statements of cash flow. There is no fixed
completion date for the repurchase program.

As of December 27, 2008, we held a total of $15.6 million invested in auction rate securities at par
value, while an additional $4.0 million of par value ARS was converted by the bond insurer to its preferred stock. The contractual maturities of the ARS range up to calendar year 2050 and several securities and the preferred stock do not have a
stated maturity. At the time of purchase in 2007 these securities were rated AAA and AA. The Companys ARS are comprised predominately of securities issued by insurance companies to raise funds to meet regulatory capital reserve requirements
and the ARS assume the credit



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ratings of the bond insurers, who guarantee the timely payment of principal and interest on these insured securities. Over the past eighteen months, our ARS
have experienced failed auctions and most of the bond insurers, including the issuer of the preferred stock, have experienced credit rating downgrades. While we continue to receive interest income on these investments at the maximum contractual rate
and expect to receive dividend payments on the preferred stock, the estimated market value of these securities no longer approximates par value.

Consequently, in the first quarter of 2009, it was determined that the decline in fair value of these securities represented an other-than-temporary impairment in accordance with U.S. generally accepted accounting principles. Accordingly,
the cost bases of these securities were written down to their estimated fair values with an other-than-temporary impairment charge of $5.1 million recorded in the results of operations for the fiscal quarter ended June 28, 2008. As a result of
credit deterioration and rating downgrades, an additional other-than-temporary impairment charge of $5.4 million was recorded in the second quarter of 2009. In the third quarter of 2009, continued credit deterioration and illiquidity resulted in a
$2.0 million other-than-temporary impairment charge. In total, $12.5 million of other-than-temporary impairment charges have been recorded during the first three quarters of 2009. The $7.1 million estimated fair value of these securities remains
classified as a non-current investment in the Condensed Consolidated Balance Sheets at December 27, 2008, consistent with the classification at March 29, 2008 and subsequent interim periods. The Company continues to receive all interest
payments when due and expects to receive dividend payments on the preferred stock.

The Company continues to monitor the market for auction rate securities
and consider its impact (if any) on the fair value of its ARS. It is not possible to ascertain when or whether market conditions will change resulting in the recovery of fair value on these securities. It is also possible that a secondary market for
ARS may emerge in which securities similar to our own would trade at prices below our currently recorded fair values. Under such scenarios, or if other events arise that impact the fair value of the securities, we may have to recognize further
other-than temporary impairment charges, which would adversely impact our financial position and results of operations.

Sources and Uses of Cash for
the Three Months Ended December 27, 2008

Net cash flows provided by operating activities totaled $8.9 million for the three months ended
December 27, 2008. Significant impacts to cash flows for the period were the net loss of $29.3 million adjusted for non-cash items totaling $22.6 million, which included the $17.4 impairment charge to goodwill and $2.0 million impairment charge
to ARS, offset by net improvements in working capital. Net decreases in trade receivables due to reduced sales volumes and collections of existing receivables provided operating cash of $25.0 million, while decreases in accounts payable and accrued
liabilities consumed $8.7 million of cash.

For the three months ended December 27, 2008, net cash of $16.7 million used in investing activities
consisted primarily of a net $14.7 million used to settle investment transactions and $1.4 million used in transaction costs for the proposed Zygo acquisition.

For the three months ended December 27, 2008, net cash provided by financing activities of $0.5 million was comprised of proceeds from employee stock plans.

Sources and Uses of Cash for the Nine Months Ended December 27, 2008

Net cash flows provided by operating
activities for the nine month period ended December 27, 2008 totaled $24.7 million. Significant impacts to cash flows for the period were the year-to-date net loss of $36.1 million adjusted for non-cash items totaling $36.0 million and net
improvements in working capital. Net decreases in trade receivables provided operating cash of $34.3 million and net decreases in inventories provided $9.3 million. Operating cash was consumed by net decreases in accounts payable and accrued
liabilities of $16.8 million.

For the nine months ended December 27, 2008, net cash of $21.5 million used in investing activities consisted primarily
of a net $17.1 million used to settle investment transactions, $3.0 million used in the purchases of property and equipment, and $1.4 million used for transaction costs for the proposed Zygo acquisition.



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For the nine months ended December 27, 2008, net cash used in financing activities of $2.4 million was comprised of
$4.7 million used for the repurchase of our common stock partially offset by $2.4 million in proceeds received from employee stock plans.

We believe that
our existing cash, cash equivalents and marketable securities are adequate to fund our operations, share repurchase program, merger-related transaction costs and contractual obligations for at least the next twelve months.

Critical Accounting Policies and Estimates

Except as discussed
below, we reaffirm the Critical Accounting Policies and Estimates in Part II Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations reported in our Form 10-K for the year ended
March 29, 2008.

Fair Value Measurements

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does not
impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value measurements.

On October 10, 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active (FSP FAS 157-3). This Staff Position offers clarifying guidance related to the application of SFAS No. 157, issued in September 2006, when the market for the financial asset is not active. This guidance includes clarification
related to (1). how management should consider its internal cash flow and discount rate assumptions when measuring fair value when relevant observable data do not exist; (2) how observable market information in a market that is not active
should be considered when measuring fair value; (3) how to use market quotes when assessing the relevance of observable and unobservable data available to measure fair value.

SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, and FSP FAS 157-3 is effective upon issuance. In February 2008, the FASB issued Staff
Position No. SFAS 157-2, Effective Date of FASB Statement No. 157, which provides a one-year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. Therefore, we adopted the provisions of SFAS 157 with respect to our financial assets and liabilities only, effective with 2009. We also adopted the provisions of FAS 157-3 in
the second quarter of 2009 for the fair value measurements disclosure requirement. See Note 6 Fair Value Measurements of the Notes to the Condensed Consolidated Financial Statements for additional information on the adoption.

The Level 3 assets consisted solely of auction rate securities (ARS). As there has been no trading of the ARS which the Company holds, estimated fair values were
based primarily upon the income approach using a discounted cash flow model which took into account the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted
at rates that reflect current market conditions; (iii) consideration of the probabilities of default, restructuring or redemption by the issuer (trigger events); (iv) estimates of the recovery rates in the event of default for each
security; (v) the financial condition, results, and ratings of, and financial claims on the bond insurers and issuers and (vi) the underlying trust assets of the securities.

Contractual Commitments

There have been no significant changes in our contractual commitments and obligations
subsequent to those reported in our 2008 Transition Report on Form 10-K for our fiscal year ended on March 29, 2008.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

There have been no material changes in the market risk disclosure contained in our 2008 Transition Report on Form 10-K for our fiscal year ended on March 29, 2008. The information regarding liquidity of auction rate securities under
the heading Financial Condition and Liquidity in Item 2 of Part I of this report is incorporated herein by reference.



|Item 4. | Controls and Procedures
|------- | -----------------------

Attached to this quarterly report
as exhibits 31.1 and 31.2 are the certifications of our President and Chief Executive Officer (CEO) and our Chief Financial Officer (CFO) required by Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This
portion of our quarterly report on Form 10-Q is our disclosure of the conclusions of our management regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report based on managements
evaluation of those disclosure controls and procedures. This disclosure should be read in conjunction with the Section 302 Certifications for a complete understanding of the topics presented.

Disclosure Controls and Procedures

Our management has
evaluated, under the supervision and with the participation of our CEO and CFO, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange
Act of 1934, as amended (Exchange Act). Based on that evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to
be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended December 27, 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

All Ring Patent Infringement
Prosecution

In August 2005, we commenced a proceeding in the Kaohsiung District Court of Taiwan (the Court) directed against All Ring Tech Co., Ltd.
(All Ring) of Taiwan. We alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes our Taiwan Patent No. 207469, entitled Circuit Component Handler (the 207469 patent). As part of this proceeding,
the Court issued a Provisional Attachment Order (PAO) in August 2005, restricting the use of some of All Rings assets. All Ring then filed a bond with the Court to obtain relief from the attachment of its assets. In July 2007, the Court issued
a second PAO and approximately US$6.0 million was restricted in All Rings accounts. The second PAO remains in effect and cannot be revoked.

In
October 2005, we filed a formal patent infringement action against All Ring in the Court. The Court-appointed expert has concluded that the Capacitor Tester and All Rings RK-T2000 both infringe every claim of the 207469 patent and that All
Rings RK-L50 infringes a number of the claims as well. Also in October 2005, the Court executed a Preliminary Injunction Order (PIO) that prohibits All Ring from manufacturing, selling, offering for sale or using the Capacitor Tester until
final judgment is entered in the formal patent infringement action. The Court dismissed All Rings application to revoke the PIO on January 18, 2008, and the PIO remains in place.



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In November 2005, All Ring filed a cancellation action against our 207469 patent in the Taiwan Intellectual Property
Office (the IPO). On July 5, 2007, the IPO issued a notice requiring us to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. We filed a response canceling the two claims and amending the remaining
claims accordingly in August 2007. On August 12, 2008, the IPO decided the action in our favor and dismissed the cancellation action. All Ring appealed the IPOs cancellation decision to the Board of Appeal of the Ministry of Economic
Affairs on September 12, 2008.

On March 4, 2008, pursuant to All Rings motion, the Court issued a suspension order, staying the formal
infringement action until after a final decision is rendered in the cancellation action. The High Court revoked the Courts suspension decision on May 2, 2008. On May 12, 2008, All Ring appealed the High Courts ruling. The
Supreme Court denied All Rings appeal on August 12, 2008. On September 3, 2008, the presiding judge of the Court asked for re-assignment of the formal action to a new judge, and it was re-assigned to Judge Lin in November 2008. The
proceedings have since resumed.

Pursuant to the Courts Provisional Attachment Order and Preliminary Injunction Order, in October 2005, we were
required to post a Taiwan dollar security bond with the Court. An additional Taiwan dollar bond of approximately US$2.1 million was posted in June 2007 related to the second PAO. The total security bonds were valued at approximately US$8.9 million
at December 27, 2008 and this amount was included in other assets in the Condensed Consolidated Balance Sheet at December 27, 2008.



|Item 1A. | Risk Factors
|-------- | ------------

Factors That May Affect Future Results

The statements contained in this report that are not statements of historical fact, including without limitation statements containing the words
believes, expects and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time, we may make other forward-looking statements. Investors are cautioned that
such forward-looking statements are subject to an inherent risk that actual results may differ materially. The following information highlights some of the factors that could cause actual results to differ materially from the results expressed or
implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors. Factors that may result in such variances include, but are not limited to, the following:

The industries that comprise our primary markets are volatile and unpredictable and we are experiencing weakness in most of our markets and may experience weakness
in the future.

Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications,
computers and other electronic products. The markets for electronic devices have experienced sharp downturns in the past, are currently experiencing such a downturn, and may experience further downturns in the future. In 2008, we began to see the
impact of weakness in the memory market and lower capital spending, particularly in the fourth quarter. This weakening trend has continued, with orders in all of our product groups declining in both the second and third quarters of 2009. There could
be further declines in these markets and others. During such downturns, semiconductor and micro-electronics manufacturers, including our customers, can be expected to delay or cancel capital expenditures, which may have a negative impact on our
financial results. During a downturn, we are not able to project when or if demand for our products will increase or that demand will not decrease further. Even if demand for our products does increase, there may be significant fluctuations in our
profitability and net sales.

During this and any downturn, it is difficult for us to maintain our sales levels. As a consequence, to maintain
profitability we need to reduce our operating expenses. Our ability to quickly reduce operating expenses is dependent upon the nature of the actions we take to reduce expense and our subsequent ability to implement those actions and realize expected
cost savings. Additionally, we may be unable to defer capital expenditures and we need to continue to invest in certain areas such as research and development. This and any economic downturn may also cause us to incur charges related to impairment
of assets, inventory write-offs, and reductions in force, and we may experience delays in payments from our customers, which would have a negative effect on our financial results. For example, in the third quarter of 2009 we incurred a charge of
$17.4 million for the impairment of our goodwill balance.



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In addition, because we derive a substantial portion of our revenue from the sale of a relatively small number of
products, the timing of, or changes to, orders by our customers may also cause our order levels and results of operations to fluctuate between periods, perhaps significantly. Accordingly, order levels or results of operations for a given period may
not be indicative of order levels or results of operations for following periods.

The global financial crisis and economic slowdown may have an
impact on our business and financial condition in ways that we currently cannot predict.

The continued credit crisis and related turmoil in the
global financial system and economic slowdown have had and may continue to have an impact on our business and our financial condition. For example, demand for consumer electronics has fallen as a result of these events, reducing capital spending by
our customers and thereby adversely affecting demand for our products. In addition to the impact that the global financial crisis and economic slowdown have already had on us, we may face significant challenges if these conditions do not improve or
continue to worsen. Demand for our products could be adversely impacted if customers are not able to obtain financing for capital expenditures, declare bankruptcy, or are forced to discontinue operations, which could have a negative effect on our
revenues. For example, in January 2009, Qimonda AG, one of our historical SG customers, filed a petition to open insolvency proceedings in Germany.

Our business is highly competitive, and if we fail to compete effectively, our business will be harmed.

The industries in which we
operate are highly competitive. We face substantial competition from established competitors, some of which have greater financial, engineering, manufacturing and marketing resources than we do. If we are unable to compete effectively with these
companies, our market share may decline and our business could be harmed. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products. New companies may enter the markets in which
we compete, or industry consolidation may occur, further increasing competition in those markets. Furthermore, our technological advantages may be reduced or lost as a result of technological advances by our competitors.

Our competitors greater resources in the areas described above may enable them to:



| |  |  | Better withstand periodic downturns;
| | - |  | ------------------------------------



| |  |  | Compete more effectively on the basis of price and technology; and
| | - |  | ------------------------------------------------------------------



| |  |  | More quickly develop enhancements to and new generations of products.
| | - |  | ---------------------------------------------------------------------

We believe that our ability to compete successfully depends on a number of factors, including:



| |  |  | Performance of our products;
| | - |  | ----------------------------



| |  |  | Quality of our products;
| | - |  | ------------------------



| |  |  | Reliability of our products;
| | - |  | ----------------------------



| |  |  | Cost of using our products;
| | - |  | ---------------------------



| |  |  | The ability to upgrade our products;
| | - |  | ------------------------------------



| |  |  | Consistent availability of critical components;
| | - |  | -----------------------------------------------



| |  |  | Our ability to ship products on schedules required;
| | - |  | ---------------------------------------------------



| |  |  | Quality of the technical service we provide;
| | - |  | --------------------------------------------



| |  |  | Timeliness of the services we provide;
| | - |  | --------------------------------------



| |  |  | Our success in developing new products and enhancements;
| | - |  | --------------------------------------------------------



| |  |  | Our understanding of the needs of our customers;
| | - |  | ------------------------------------------------



| |  |  | Existing market and economic conditions; and
| | - |  | --------------------------------------------



| |  |  | Price of our products as compared to our competitors products.
| | - |  | ---------------------------------------------------------------



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We may not be able to compete successfully in the future and increased competition may result in price reductions,
reduced profit margins and loss of market share.

We depend on a few significant customers and we do not have long-term contracts with any of our
customers.

We depend on a few significant customers for a large portion of our revenue. For example, our top ten customers for 2008 accounted for
approximately 59% of total net sales in 2008, with two customers accounting for a cumulative 23% of total net sales in 2008. None of our customers has any long-term obligation to continue to buy our products or services, and any customer could
delay, reduce or cease ordering our products or services at any time. Further, reduced revenue resulting from cyclicality or market downturns may result in a few customers accounting for a higher percentage of our revenue. For example, in the second
quarter of 2009, one customer accounted for approximately one-third of our revenue primarily as a result of reduced overall revenue in the quarter. As a result, any delay, reduction or cessation in purchases by such customers during a period of
reduced sales could have a significant negative impact on our financial results. In addition, the semiconductor industry, and particularly the memory market, is very cyclical, which could result in consolidation among customers, changes in various
partnership and technology arrangements among customers, bankruptcy of customers or departures of customers from the industry. For example, in January 2009, Qimonda AG, a historical SG customer that as recently as 2007 was one of our top ten
customers, filed a petition to open insolvency proceedings in Germany. These changes could negatively affect demand for our products or negatively impact the value of our technology strategies.

Our markets are subject to rapid technological change, and to compete effectively, we must continually introduce new products that achieve market acceptance.

The markets for our products are characterized by rapid technological change and innovation, frequent new product introductions, changes in
customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological changes as well as current and
potential customer requirements.

We and our competitors are continuously working to develop new or enhanced products and new technologies. The
introduction by us or by our competitors of new or enhanced products, or alternative technologies, may cause our customers to defer, change or cancel orders for our existing products or cease purchasing our products altogether, which may harm our
operating results. In the past we have also experienced delays in new product development. Similar delays may occur in the future. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements
or, where necessary, to license these technologies from others.

Product development delays may result from numerous factors, including:



| |  |  | Changing product specifications and customer requirements;
| | - |  | ----------------------------------------------------------



| |  |  | Difficulties in hiring and retaining necessary technical personnel;
| | - |  | -------------------------------------------------------------------



| |  |  | Difficulties in reallocating engineering resources and overcoming resource limitations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Difficulties with contract manufacturers;
| | - |  | -----------------------------------------



| |  |  | Changing market or competitive product requirements; and
| | - |  | --------------------------------------------------------



| |  |  | Unanticipated engineering complexities.
| | - |  | ---------------------------------------

The
development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market
trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure that our new products will gain market
acceptance or that we will be able to respond effectively to product announcements by competitors, technology changes or emerging industry standards. Any failure to respond to product or technology changes or new industry standards that may render
our current products or technologies obsolete could significantly harm our business.



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Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to
us in a timely and cost-effective manner could negatively affect our business.

We use a wide range of materials from numerous suppliers in the
production of our products, including custom electronic and mechanical components. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service interruptions and shortages of key
parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available
from multiple suppliers, some key parts are available only from a single supplier or a limited group of suppliers in the short term. Operations at our suppliers facilities are subject to disruption for a variety of reasons, including changes
in business relationships, competitive factors, financial difficulties, work stoppages, fire, earthquake, flooding or other natural disasters. Such disruption could interrupt our manufacturing. Our business may be harmed if we do not receive
sufficient parts to meet our production requirements in a timely and cost-effective manner.

Delays in manufacturing, shipment or customer acceptance
of our products could substantially decrease our sales for a period.

We depend on manufacturing flexibility to meet the changing demands of our
customers. Any significant delay or interruption in receiving raw materials or in our manufacturing operations as a result of software deficiencies, natural disasters, or other causes could result in reduced manufacturing capabilities or delayed
product deliveries, any or all of which could materially and adversely affect our results of operations.

We also have an arrangement with a contract
manufacturer in Singapore to complete the manufacture of certain of our products. Any significant interruption in this contract manufacturers ability to provide manufacturing services to us as a result of contractual disputes with us or
another party, labor disruptions, financial difficulties, natural disasters, delay or interruption in the receipt of inventory or other causes could result in reduced manufacturing capabilities or delayed deliveries for certain of our products, any
or all of which could materially and adversely affect our results of operations.

In addition, we derive a substantial portion of our revenue from the sale
of a relatively small number of products. Consequently, shipment and/or customer acceptance delays, including acceptance delays related to new product introductions or customizations, could significantly impact recognition of revenue and could be
further magnified by announcements from us or our competitors of new products and technologies. Such announcements could cause our customers to defer purchases of our systems, change existing orders or purchase products from our competitors. Any of
these delays could result in a material adverse change in our results of operations for any particular period.

We acquire inventory based upon
projected demand. If these projections are incorrect, we may carry inventory that cannot be used, which may result in significant charges for excess and obsolete inventory.

Our business is highly competitive and one factor on which we compete is the ability to ship products on schedules required by customers. In order to facilitate timely shipping, management forecasts demand, both in
type and amount of products, and these forecasts are used to determine inventory to be purchased. Certain types of inventory, including lasers and optical equipment, are particularly expensive and can only be used in the production of a single type
of product. If actual demand is lower than forecast with respect to the type or amount of products actually ordered, or both, our inventory levels may increase. As a result, there is a risk that we may have to incur material accounting charges for
excess and obsolete inventory if inventory cannot be used, which could negatively affect our financial results.



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We are exposed to the risks that others may violate our proprietary rights, and our intellectual property rights
may not be well protected in foreign countries.

Our success is dependent upon the protection of our proprietary rights. In the high technology
industry, intellectual property is an important asset that is always at risk of infringement. We incur substantial costs to obtain and maintain patents and defend our intellectual property. For example, we have initiated litigation alleging that
certain parties have violated various patents of ours, such as the action we initiated in Taiwan against All Ring Tech Co., Ltd. in August 2005. We rely upon the laws of the United States and of foreign countries in which we develop, manufacture or
sell our products to protect our proprietary rights. However, these proprietary rights may not provide the competitive advantages that we expect or other parties may challenge, invalidate or circumvent these rights.

Further, our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as
in the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could
be easier for our competitors to sell competing products in foreign countries, which could result in reduced sales and gross margins.

We may be
subject to claims of intellectual property infringement.

Several of our competitors hold patents covering a variety of technologies, applications
and methods of use similar to some of those used in our products. While we attempt in our designs to avoid patent infringement, from time to time we and our customers have received correspondence from our competitors claiming that some of our
products, as used by our customers, may be infringing one or more of these patents. Competitors or others have in the past and may in the future assert infringement claims against our customers or us with respect to current or future products or
uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against our customers, those customers may seek indemnification from
us for damages or expenses they incur.

If we become subject to infringement claims, we will evaluate our position and consider the available alternatives,
which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially
reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.

Our ability to reduce costs is limited by our need to invest in research and development.

Our industry is characterized by the need
for continued investment in research and development. Because of intense competition in the industries in which we compete, if we were to fail to invest sufficiently in research and development, our products could become less attractive to potential
customers, and our business and financial condition could be materially and adversely affected. As a result of our need to maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below
expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating costs may increase in the future, and research and development expenses may increase as a percentage of total operating
expenses and as a percentage of net sales.

Our worldwide direct sales and service operations and our overseas research and development facility
expose us to employer-related risks in foreign countries.

We have established direct sales and service organizations throughout the world. We have
also established a research and development facility in China. Having overseas employees involves certain risks. We are subject to compliance with the labor laws and other laws governing employers in the countries where our operations are located
and as a result we may incur additional costs to comply with these local regulations. Additionally, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell, market and service our products. If we cannot
effectively manage the risks related to employing persons in foreign countries, our operating results could be adversely affected.



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We may be subject to a variety of risks and uncertainties relating to the proposed transaction with Zygo
Corporation.

In October 2008, we entered into an agreement to acquire Zygo Corporation. On January 20, 2009, Zygo notified us that its board
of directors had withdrawn its recommendation in favor of the merger. We believe we have alternatives under the merger agreement, including proceeding with a shareholder vote or terminating the merger agreement and demanding payment of the break-up
fee provided in the agreement.

If we elect to terminate the agreement and demand the break-up fee, there is a risk that litigation with Zygo could result.
This could result in substantial costs being incurred and diversion of managements attention, which could have a negative effect on our business. These risks also exist if we seek to collect the reduced break-up fee payable if the Zygo
shareholders do not approve the transaction in the event we elect to proceed with a shareholder vote.

If we elect to proceed with this proposed
acquisition and it receives the requisite shareholder approvals, there will be numerous risks, many of which are unpredictable and beyond our control, including:



| |  |  | Difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of the merged businesses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implementation of the Companys ERP system into the acquired companys operations;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Diversion of managements attention from other operational matters;
| | - |  | -------------------------------------------------------------------



| |  |  | The potential loss of key employees of the acquired company;
| | - |  | ------------------------------------------------------------



| |  |  | Lack of synergy or inability to realize expected synergies resulting from the proposed acquisition;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties establishing satisfactory internal controls at the acquired company;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | Risks and uncertainties relating to the performance of the combined company following the proposed transaction; and
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Incurring unanticipated liabilities for which we will not be indemnified.
| | - |  | -------------------------------------------------------------------------

Our inability to effectively manage these risks could materially and adversely affect our business, financial condition and results of operations and could cause us not to realize the anticipated benefits of the
proposed acquisition on a timely basis or at all. Because we would be issuing common stock to pay for the proposed acquisition, the ownership percentage of our existing shareholders will be reduced and the value of the shares held by our existing
shareholders could be diluted. In addition, the accounting for the proposed acquisition could result in significant charges resulting from amortization of intangible assets we acquire.

In the future, we may make other acquisitions of or significant investments in other businesses with complementary products, services, or technologies, which transactions will be subject to risks similar to those
related to the proposed Zygo transaction. We may also make additional strategic investments in development stage companies and such investments are subject to a high degree of risk, and therefore it is possible that we could lose our entire
investment.

We are exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations, legal and
regulatory changes and the impact of regional and global economic disruptions.

International shipments accounted for 82% of net sales in 2008, with
74% of our net sales to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. We also have an arrangement with a contract manufacturer in Singapore to complete the
manufacture of certain of our products. Our non-U.S. sales, purchases and operations, including contract manufacturing, are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:



| |  |  | Periodic local or geographic economic downturns and unstable political conditions;
| | - |  | ----------------------------------------------------------------------------------



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| |  |  | Price and currency exchange controls;
| | - |  | -------------------------------------



| |  |  | Fluctuation in the relative values of currencies;
| | - |  | -------------------------------------------------



| |  |  | Difficulties protecting intellectual property;
| | - |  | ----------------------------------------------



| |  |  | Local labor disputes;
| | - |  | ---------------------



| |  |  | Shipping delays and disruptions;
| | - |  | --------------------------------



| |  |  | Increases in shipping costs, caused by increased fuel costs or otherwise, which we may not be able to pass on to our customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing suppliers, distributors and representatives, and
repatriation of earnings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our business and operating results are subject to uncertainties arising out of the possibility of regional or
global economic disruptions (including those resulting from the global financial crisis and economic slowdown, natural disasters, or outbreaks of infectious disease), the economic consequences of military action or terrorist activities and
associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties, we are subject to:



| |  |  | The risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our
U.S. facilities or our ability to hire new non-U.S. employees in such facilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The risk of more frequent instances of shipping delays;
| | - |  | -------------------------------------------------------



| |  |  | The risk that demand for our products may not increase or may decrease; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | The risk that our customers or suppliers may experience financial difficulties or cease operations.
| | - |  | ---------------------------------------------------------------------------------------------------

Our tax rates are subject to fluctuation, which could impact our financial position, and our estimates of tax liabilities may be subject to audit, which could
result in additional assessments.

Our effective tax rates are subject to fluctuation as the income tax rates for each year are a function of:
(a) taxable income levels and the effects of a mix of profits (losses) earned by ESI and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates, (b) our ability to utilize deferred tax assets, (c) taxes,
refunds, interest or penalties resulting from tax audits, (d) the magnitude of various credits and deductions as a percentage of total taxable income and (e) changes in tax laws or the interpretation of such tax laws. Changes in the mix of
these items may cause our effective tax rates to fluctuate between periods, which could have a material adverse effect on our financial position and results of operations.

We are subject to income taxes in both the United States and numerous foreign jurisdictions. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is
uncertain. Significant judgment is exercised in determining our worldwide provisions for income taxes. Furthermore, we are occasionally under audit by tax authorities. Although we believe our tax estimates are reasonable, the final outcome of tax
audits and the impact of changes in tax laws or the interpretation of tax laws could result in material differences from what is reflected in historical income tax accruals. If additional taxes are assessed as a result of an examination, a material
effect on our financial results, tax positions or cash flows could occur in the period or periods in which the determination is made.



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No market currently exists for the auction rate securities (ARS) we hold and as a result we may not be able to
liquidate them at the current valuation, if at all. As a result, we have written down the cost basis of these securities to their estimated fair value with other-than-temporary impairment charges to earnings and we may have to do so again in the
future under certain scenarios.

We currently hold $15.6 million of par value Auction Rate Securities (ARS) and preferred stock that resulted from
the conversion of an additional $4.0 million of par value ARS by the bond insurer. The estimated fair value of these securities at December 27, 2008, was $7.1 million. At the time of purchase in 2007 these ARS were rated AAA and AA. The
contractual maturities of these securities range up to calendar year 2050 and several securities and the preferred stock do not have stated maturities. The Companys ARS are comprised predominately of securities issued by insurance companies to
raise funds to meet regulatory capital reserve requirements and the ARS assume the credit ratings of the bond insurers who guarantee the timely payment of principal and interest on these insured securities. Prior to September 2007, these securities
provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their
holdings by selling such securities at par.

As a result of the liquidity issues experienced in the global credit and capital markets, during the second
quarter of 2008 the Companys ARS began to experience failed auctions. Since that time none of the Companys securities have traded through the auction process and no other market transactions for these securities have been observed.
Further deterioration in the general markets and global economy resulted in credit rating downgrades of the nations two largest bond insurers and the effective elimination of the active market for auction rate securities. The Company holds ARS
issued or insured by these two bond insurers.

At the end of the first quarter of 2009, it was determined that the decline in fair value of these ARS
represented an other-than-temporary impairment in accordance with U.S. generally accepted accounting principles. Accordingly, the cost bases of these securities were written down to their estimated fair values at the end of the first quarter with an
other-than-temporary impairment charge of $5.1 million recorded in the results of operations for the three months ended June 28, 2008.

Near the end
of the second quarter of 2009, Lehman Brothers, the broker who had been providing investment management, custodial and valuation services for these securities, declared bankruptcy and ceased providing valuation services for the Company.
Consequently, the Company procured independent, third-party valuations of these securities as of the end of the second and third quarter. As a result of the continued deterioration in the credit markets along with further credit downgrades
experienced by insurers of the Companys ARS, the valuations of these securities have declined from the values estimated as of the end of the first quarter of 2009. Accordingly, the cost bases of these securities were written down to their
estimated fair values at the end of the second quarter and third quarters with other-than-temporary impairment charges of $5.4 million and $2.0 million, respectively.

The $7.1 million estimated fair value of these securities remains classified as a non-current investment in the Condensed Consolidated Balance Sheets at December 27, 2008, consistent with the classification at
March 29, 2008 and each interim reporting period thereafter. Due to the unsuccessful auctions and downgrades of the insurers, interest rates on the ARS have been reset at higher rates with predetermined premiums as defined in the security
offerings. We have the intent and ability to hold these securities for an extended period of time, continue to receive interest income when due, and expect to receive dividends on the preferred stock. Given the continued challenges in the financial
markets and the prolonged credit crisis, the Company cannot reasonably predict when these securities will become liquid.

It is not possible to ascertain
when or whether market conditions will change resulting in the recovery of fair value on these auction rate securities. It is also possible that a secondary market for auction rate securities may emerge in which securities similar to our own would
trade at prices below our currently recorded fair values. Under such a scenario, or if other events arise that impact the fair value of the securities, we may have to recognize further other-than temporary impairment charges, which would adversely
impact our financial position and results of operations.



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It is possible that continued uncertainty in the credit markets could also impact the liquidity of our other investments
and cash equivalents, which could impair our liquidity or require us to recognize other-than-temporary impairment on the value of those investments, which would negatively impact our financial position and results of operations.

The loss of key personnel or our inability to attract, retain and assimilate sufficient numbers of managerial, financial, engineering and other technical personnel
could have a material effect upon our results of operations.

Our continued success depends, in part, upon key managerial, financial, engineering
and technical personnel as well as our ability to continue to attract, retain and assimilate additional personnel. The loss of key personnel could have a material adverse effect on our business or results of operations. We may not be able to retain
our key managerial, financial, engineering and technical employees. Attracting qualified personnel may be difficult and our efforts to attract and retain these personnel may not be successful. In addition, we may not be able to assimilate qualified
personnel, including any new members of senior management, which could disrupt our operations.

Our internal control over financial reporting could
be adversely affected if material weaknesses are discovered in the future.

During 2007, we reported a material weakness in our internal control
over financial reporting, which we have since remediated. However, the identification of one or more additional material weaknesses in the future could result in material misstatements in our financial reports and could lead us or our auditors to
conclude that we do not have effective controls over financial reporting as required under Section 404 of the Sarbanes-Oxley Act. This may negatively impact the markets view of our control environment and, potentially, our stock price.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On May 15, 2008, the Board of Directors authorized a share repurchase program for $20.0 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation programs. The repurchases
are to be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and other factors.
There is no fixed completion date for the repurchase program.

The following table sets forth information about the share repurchase transactions in
accordance with SEC Regulation S-K, Item 703:



|                               |  |                               |  |                            |  |                                                                                         |  |                                                                              |           
|------------------------------ |  | ----------------------------- |  | -------------------------- |  | --------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------- | ----------
|Period                         |  | TotalNumber ofSharesPurchased |  | Average PricePaid perShare |  | ApproximateTotal Number ofShares Purchasedas Part ofPublicly AnnouncedPlans or
Programs |  | Dollar
Valueof Sharesthat May Yet BePurchased Under thePlans or Programs (a)
|Sept. 28, 2008 to Nov. 1, 2008 |  |                              |  |                           |  | 307,865                                                                                 |  | $                                                                            | 15,280,090
|Nov. 2, 2008 to Nov. 29, 2008  |  |                              |  |                           |  | 307,865                                                                                 |  | $                                                                            | 15,280,090
|Nov. 30, 2008 to Dec. 27, 2008 |  |                              |  |                           |  | 307,865                                                                                 |  | $                                                                            | 15,280,090
|                               |  |                               |  |                            |  |                                                                                         |  |                                                                              |           
|Total                          |  |                              |  |                           |  |                                                                                         |  |                                                                              |           
|                               |  |                               |  |                            |  |                                                                                         |  |                                                                              |           



|(a) | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs reflects the $20.0 million share repurchase program approved by the Board of Directors on
May 15, 2008, less $4.7 million purchased in 2009. As of December 27, 2008, a total of 307,865 shares have been repurchased at average price of $15.34 per share, calculated inclusive of commissions and fees.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Subsequent to the end of the second quarter of 2009, the Board of Directors approved an increase to the existing share
repurchase program to $100 million, contingent upon the close of the acquisition of Zygo Corporation. See Note 5 Proposed Acquisition of Zygo Corporation for additional information on the acquisition of Zygo Corporation.



|Item 6. | Exhibits
|------- | --------

This list is intended to
constitute the exhibit index.



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Agreement and Plan of Merger and Reorganization by and among Electro Scientific Industries, Inc., Zirkon Merger Sub LLC and Zygo Corporation, dated as of October 15, 2008. Incorporated by
reference to Exhibit 2.1 of the Companys Current Report on Form 8-K filed on October 15, 2008.                                                                                                                                                                    
|     | 
|2.2  |  | Amendment No. 1 to Agreement and Plan of Reorganization by and among Electro Scientific Industries, Inc., Zirkon Merger Sub LLC and Zygo Corporation, dated as of December 2, 2008. Incorporated
by reference to Annex A of the Companys Registration Statement on Form S-4 filed on December 8, 2008.                                                                                                                                                        
|     | 
|3.1  |  | Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-A of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1991.                                                                                                                                                                                                                                                                                               
|     | 
|3.2  |  | Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-B of the Companys Annual Report on Form 10-K for the fiscal year ended May 31,
1999.                                                                                                                                                                                                                                                                
|     | 
|3.3  |  | Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3 of the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended
December 2, 2000.                                                                                                                                                                                                                                                        
|     | 
|3.4  |  | 2004 Restated Bylaws, as amended. Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October 21, 2004.                                                                                                                                                                                                                                                                                                              
|     | 
|4.1  |  | Amended and Restated Rights Agreement, dated as of March 1, 2001, between the Company and Mellon Investor Services, relating to rights issued to all holders of Company common stock. Incorporated
by reference to Exhibit 4-A of the Companys Annual Report on Form 10-K for the fiscal year ended June 2, 2001.                                                                                                                                             
|     | 
|4.2  |  | First Amendment to Amended and Restated Rights Agreement, dated as of August 26, 2002, between the Company and Mellon Investor Services LLC. Incorporated by reference to Exhibit 4 of the
Companys Current Report on Form 8-K filed on August 27, 2002.                                                                                                                                                                                                      
|     | 
|4.3  |  | Second Amendment to Amended and Restated Rights Agreement, dated as of August 20, 2008, between the Company and Mellon Investor Services LLC. Incorporated by reference to Exhibit 4 of the
Companys Current Report on Form 8-K filed on August 25, 2008.                                                                                                                                                                                                     
|     | 
|4.4  |  | Third Amendment to Amended and Restated Rights Agreement, dated as of December 8, 2008, between Electro Scientific Industries, Inc. and Mellon Investor Services LLC. Incorporated by reference to
Exhibit 4 of the Companys Current Report on Form 8-K filed on December 9, 2008.                                                                                                                                                                            
|     | 
|10.1 |  | Voting Agreement, dated as of December 8, 2008, among Electro Scientific Industries, Inc. and The D3 Family Fund, L.P., The D3 Family Bulldog Fund, L.P., The D3 Family Canadian Fund, L.P., The
DIII Offshore Fund, L.P., Nierenberg Investment Management Company, Inc., Nierenberg Investment Management Offshore, Inc. and David Nierenberg. Incorporated by reference to Exhibit 10 of the Companys Current Report on Form 8-K filed on
December 9, 2008.
|     | 
|10.2 |  | Amendment to Employment Agreement, dated November 12, 2008, between the Company and Nicholas Konidaris.                                                                                                                                                                                                                                                                                                                                                        
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                     



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##### Table of Contents

|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                        
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |  |  |                                     |  |                                                                                  |  |                       
|----------------------- |  |  |  | ----------------------------------- |  | -------------------------------------------------------------------------------- |  | ----------------------
|Dated: February 4, 2009 |  |  |  | ELECTRO SCIENTIFIC INDUSTRIES, INC.
|                        |  |  |  |                                    
|                        |  |  |  |                                     |  | By                                                                               |  | /s/ Nicholas Konidaris
|                        |  |  |  |                                     |  | Nicholas Konidaris                                                              
|                        |  |  |  |                                     |  | President and Chief Executive Officer                                           
|                        |  |  |  |                                     |  | (Principal Executive Officer)                                                   
|                        |  |  |  |                                    
|                        |  |  |  |                                     |  | By                                                                               |  | /s/ Paul Oldham       
|                        |  |  |  |                                     |  | Paul Oldham                                                                     
|                        |  |  |  |                                     |  | Vice President of Administration,Chief Financial Officer and Corporate Secretary
|                        |  |  |  |                                     |  | (Principal Financial Officer)                                                   
|                        |  |  |  |                                    
|                        |  |  |  |                                     |  | By                                                                               |  | /s/ Kerry Mustoe      
|                        |  |  |  |                                     |  | Kerry Mustoe                                                                    
|                        |  |  |  |                                     |  | Vice President, Corporate Controller and Chief Accounting Officer               
|                        |  |  |  |                                     |  | (Principal Accounting Officer)                                                  



44