##### Table of Contents





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 September 26, 2009

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 incorporation or 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).    Yes   ̈    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, 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 October 30, 2009 was 27,429,459 shares.









---

##### Table of Contents

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 September 26, 2009 and March 28,
2009                                                                  |  | 1       
|                                 |  |                                                                                                                                                             
|                                 |  | Condensed Consolidated Statements of Operations (Unaudited) -for the fiscal quarter and two fiscal quarters
 ended September 26, 2009 and September 27, 2008 |  | 2       
|                                 |  |                                                                                                                                                             
|                                 |  | Condensed Consolidated Statements of Cash Flows (Unaudited) -for the two fiscal quarters ended September
 26, 2009 and September 27, 2008                    |  | 3       
|                                 |  |                                                                                                                                                             
|                                 |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                             |  | 4       
|                                 |  |                                                                                                                                                             
|Item 2.                          |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                        |  | 12      
|                                 |  |                                                                                                                                                             
|Item 3.                          |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                   |  | 23      
|                                 |  |                                                                                                                                                             
|Item 4.                          |  | Controls and Procedures                                                                                                                                      |  | 23      
|                                 | 
|PART II.    OTHER INFORMATION    |  |                                                                                                                                                             
|                                 |  |                                                                                                                                                             
|Item 1.                          |  | Legal Proceedings                                                                                                                                            |  | 24      
|                                 |  |                                                                                                                                                             
|Item 1A.                         |  | Risk Factors                                                                                                                                                 |  | 25      
|                                 |  |                                                                                                                                                             
|Item 4.                          |  | Submission of Matters to a Vote of Security Holders                                                                                                          |  | 32      
|                                 |  |                                                                                                                                                             
|Item 6.                          |  | Exhibits                                                                                                                                                     |  | 33      
|                                 | 
|SIGNATURES                       |  | 34                                                                                                                                                          



---

##### Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



|                                                                                                     |  |              |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -
|(In thousands)                                                                                       |  | Sep 26, 2009 |         |   | Mar 28, 2009 |  
|ASSETS                                                                                               | 
|Current assets:                                                                                      |  |              |         |   |              |   |         |  
|Cash and cash equivalents                                                                            |  | $            | 85,291  |   |              | $ | 153,538 |  
|Restricted cash                                                                                      |  |              | 2,400   |   |              |   |        |  
|Short-term investments                                                                               |  |              | 66,760  |   |              |   | 2,380   |  
|                                                                                                     |  |              |         |   |              |   |         |  
|Total cash, restricted cash and investments                                                          |  |              | 154,451 |   |              |   | 155,918 |  
|                                                                                                     |  |             
|Trade receivables, net of allowances of $1,015 and $969                                              |  |              | 22,054  |   |              |   | 18,847  |  
|Inventories                                                                                          |  |              | 77,215  |   |              |   | 84,882  |  
|Shipped systems pending acceptance                                                                   |  |              | 3,876   |   |              |   | 2,072   |  
|Deferred income taxes, net                                                                           |  |              | 6,497   |   |              |   | 6,298   |  
|Other current assets                                                                                 |  |              | 11,246  |   |              |   | 10,594  |  
|                                                                                                     |  |              |         |   |              |   |         |  
|Total current assets                                                                                 |  |              | 275,339 |   |              |   | 278,611 |  
|                                                                                                     |  |             
|Non-current assets:                                                                                  |  |              |         |   |              |   |         |  
|Auction rate securities                                                                              |  |              | 8,555   |   |              |   | 6,007   |  
|Property, plant and equipment, net of accumulated depreciation of $79,666 and $74,877                |  |              | 41,108  |   |              |   | 43,005  |  
|Non-current deferred income taxes, net                                                               |  |              | 28,765  |   |              |   | 22,620  |  
|Acquired intangible assets, net of accumulated amortization of $5,974 and $4,885                     |  |              | 8,883   |   |              |   | 9,972   |  
|Other assets                                                                                         |  |              | 20,334  |   |              |   | 24,032  |  
|                                                                                                     |  |              |         |   |              |   |         |  
|Total assets                                                                                         |  | $            | 382,984 |   |              | $ | 384,247 |  
|                                                                                                     |  |              |         |   |              |   |         |  
|                                                                                                    
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                 | 
|Current liabilities:                                                                                 |  |              |         |   |              |   |         |  
|Accounts payable                                                                                     |  | $            | 7,981   |   |              | $ | 7,492   |  
|Accrued liabilities                                                                                  |  |              | 13,216  |   |              |   | 12,958  |  
|Deferred revenue                                                                                     |  |              | 12,490  |   |              |   | 11,251  |  
|                                                                                                     |  |              |         |   |              |   |         |  
|Total current liabilities                                                                            |  |              | 33,687  |   |              |   | 31,701  |  
|                                                                                                     |  |             
|Non-current liabilities:                                                                             |  |              |         |   |              |   |         |  
|Income taxes payable                                                                                 |  |              | 9,352   |   |              |   | 9,023   |  
|                                                                                                     |  |             
|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; 27,427 and 27,184 issued and outstanding |  |              | 138,189 |   |              |   | 133,808 |  
|Retained earnings                                                                                    |  |              | 199,821 |   |              |   | 211,085 |  
|Accumulated other comprehensive income related to auction rate securities                            |  |              | 2,161   |   |              |   |        |  
|Accumulated other comprehensive loss, other                                                          |  |              | (226    | ) |              |   | (1,370  | )
|                                                                                                     |  |              |         |   |              |   |         |  
|Total shareholders equity                                                                           |  |              | 339,945 |   |              |   | 343,523 |  
|                                                                                                     |  |              |         |   |              |   |         |  
|Total liabilities and shareholders equity                                                           |  | $            | 382,984 |   |              | $ | 384,247 |  
|                                                                                                     |  |              |         |   |              |   |         |  

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



1



---

##### Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|---------------------------------------------------------- |  | -------------------- | ------ | - | ------------------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                                           |  | Fiscal quarter ended |        |   | Two fiscal quarters ended |  
|(In thousands, except per share amounts)                   |  | Sep 26, 2009         |        |   | Sep 27, 2008              |   |        | Sep 26, 2009 |  |   | Sep 27, 2008 |  
|Net sales                                                  |  | $                    | 27,638 |   |                           | $ | 49,610 |              |  | $ | 50,241       |   |  | $ | 113,634 |  
|Cost of sales                                              |  |                      | 18,212 |   |                           |   | 28,538 |              |  |   | 34,854       |   |  |   | 67,271  |  
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Gross profit                                               |  |                      | 9,426  |   |                           |   | 21,072 |              |  |   | 15,387       |   |  |   | 46,363  |  
|                                                           |  |                      |        |  
|Operating expenses:                                        |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Selling, service and administration                        |  |                      | 11,355 |   |                           |   | 13,746 |              |  |   | 23,326       |   |  |   | 28,846  |  
|Research, development and engineering                      |  |                      | 7,441  |   |                           |   | 8,446  |              |  |   | 14,896       |   |  |   | 18,104  |  
|Restructuring costs                                        |  |                      |       |   |                           |   | 1,174  |              |  |   |             |   |  |   | 1,923   |  
|Merger termination proceeds, net                           |  |                      |       |   |                           |   |       |              |  |   | (4,516       | ) |  |   |        |  
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Net operating expenses                                     |  |                      | 18,796 |   |                           |   | 23,366 |              |  |   | 33,706       |   |  |   | 48,873  |  
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Operating loss                                             |  |                      | (9,370 | ) |                           |   | (2,294 | )            |  |   | (18,319      | ) |  |   | (2,510  | )
|                                                           |  |                      |        |  
|Non-operating income (expense):                            |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Other-than-temporary impairment of auction rate securities |  |                      |       |   |                           |   | (5,381 | )            |  |   |             |   |  |   | (10,475 | )
|Interest and other income, net                             |  |                      | 357    |   |                           |   | 1,117  |              |  |   | 699          |   |  |   | 1,977   |  
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Total non-operating income (expense)                       |  |                      | 357    |   |                           |   | (4,264 | )            |  |   | 699          |   |  |   | (8,498  | )
|                                                           |  |                      |        |  
|Loss before income taxes                                   |  |                      | (9,013 | ) |                           |   | (6,558 | )            |  |   | (17,620      | ) |  |   | (11,008 | )
|Benefit from income taxes                                  |  |                      | (2,893 | ) |                           |   | (2,449 | )            |  |   | (5,970       | ) |  |   | (4,141  | )
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Net loss                                                   |  | $                    | (6,120 | ) |                           | $ | (4,109 | )            |  | $ | (11,650      | ) |  | $ | (6,867  | )
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Net loss per share  basic                                 |  | $                    | (0.22  | ) |                           | $ | (0.15  | )            |  | $ | (0.43        | ) |  | $ | (0.25   | )
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Net loss per share  diluted                               |  | $                    | (0.22  | ) |                           | $ | (0.15  | )            |  | $ | (0.43        | ) |  | $ | (0.25   | )
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Weighted average number of shares  basic                  |  |                      | 27,356 |   |                           |   | 27,035 |              |  |   | 27,295       |   |  |   | 27,072  |  
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Weighted average number of shares  diluted                |  |                      | 27,356 |   |                           |   | 27,035 |              |  |   | 27,295       |   |  |   | 27,072  |  
|                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  

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



2



---

##### Table of Contents

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                      |  |                           |          |   |              |   |          |  
|------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ------------ | - | -------- | -
|                                                                                      |  | Two fiscal quarters ended |         
|(In thousands)                                                                        |  | Sep 26, 2009              |          |   | Sep 27, 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                  |  |                           |          |   |              |   |          |  
|Net loss                                                                              |  | $                         | (11,650  | ) |              | $ | (6,867   | )
|Adjustments to reconcile net loss to cash (used in) provided by operating activities: |  |                           |          |   |              |   |          |  
|Depreciation and amortization                                                         |  |                           | 4,987    |   |              |   | 5,104    |  
|Amortization of acquired intangible assets                                            |  |                           | 1,089    |   |              |   | 1,338    |  
|Share-based compensation expense                                                      |  |                           | 4,455    |   |              |   | 2,579    |  
|Provision for doubtful accounts                                                       |  |                           |         |   |              |   | 66       |  
|Loss on disposal of property and equipment                                            |  |                           | 8        |   |              |   | 92       |  
|Other-than-temporary impairment of auction rate securities                            |  |                           |         |   |              |   | 10,475   |  
|Deferred income taxes                                                                 |  |                           | (6,894   | ) |              |   | (6,237   | )
|Changes in operating accounts:                                                        |  |                           |          |   |              |   |          |  
|(Increase) decrease in trade receivables, net                                         |  |                           | (2,673   | ) |              |   | 9,286    |  
|Decrease in inventories                                                               |  |                           | 9,174    |   |              |   | 8,570    |  
|(Increase) decrease in shipped systems pending acceptance                             |  |                           | (1,804   | ) |              |   | 1,198    |  
|Increase in other current assets                                                      |  |                           | (466     | ) |              |   | (251     | )
|Increase (decrease) in accounts payable and accrued liabilities                       |  |                           | 446      |   |              |   | (8,116   | )
|Increase (decrease) in deferred revenue                                               |  |                           | 1,239    |   |              |   | (1,364   | )
|                                                                                      |  |                           |          |   |              |   |          |  
|Net cash (used in) provided by operating activities                                   |  |                           | (2,089   | ) |              |   | 15,873   |  
|                                                                                      |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES                                                  |  |                           |          |   |              |   |          |  
|Purchases of investments                                                              |  |                           | (117,720 | ) |              |   | (584,095 | )
|Proceeds from sales and maturities of investments                                     |  |                           | 53,340   |   |              |   | 581,644  |  
|Purchase of property, plant and equipment                                             |  |                           | (1,115   | ) |              |   | (2,557   | )
|Proceeds from the sale of property, plant and equipment                               |  |                           |         |   |              |   | 4        |  
|Increase in restricted cash                                                           |  |                           | (2,400   | ) |              |   |         |  
|Decrease in other assets                                                              |  |                           | 894      |   |              |   | 1,159    |  
|Minority equity investment                                                            |  |                           | (193     | ) |              |   | (876     | )
|                                                                                      |  |                           |          |   |              |   |          |  
|Net cash used in investing activities                                                 |  |                           | (67,194  | ) |              |   | (4,721   | )
|                                                                                      |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES                                                  |  |                           |          |   |              |   |          |  
|Proceeds from exercise of stock options and stock plans                               |  |                           | 439      |   |              |   | 1,871    |  
|Share repurchases                                                                     |  |                           | (555     | ) |              |   | (4,724   | )
|                                                                                      |  |                           |          |   |              |   |          |  
|                                                                                      |  |                          
|Net cash used in financing activities                                                 |  |                           | (116     | ) |              |   | (2,853   | )
|Effect of exchange rate changes on cash                                               |  |                           | 1,152    |   |              |   | (2,315   | )
|                                                                                      |  |                           |          |   |              |   |          |  
|                                                                                      |  |                          
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                               |  |                           | (68,247  | ) |              |   | 5,984    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |  |                           | 153,538  |   |              |   | 141,059  |  
|                                                                                      |  |                           |          |   |              |   |          |  
|                                                                                      |  |                          
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |  | $                         | 85,291   |   |              | $ | 147,043  |  
|                                                                                      |  |                           |          |   |              |   |          |  
|                                                                                      |  |                          
|SUPPLEMENTAL CASH FLOW INFORMATION                                                    |  |                           |          |   |              |   |          |  
|Cash paid for income taxes                                                            |  | $                         | (1,220   | ) |              | $ | (1,445   | )
|Income tax refunds received                                                           |  | $                         | 541      |   |              | $ | 551      |  

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



3



---

##### 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 Annual 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.

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; fair value measurements; valuation of cost method equity investments; and valuation of long-lived assets.

With the exception of the adoption of certain pronouncements as described in Note 2 Recent Accounting Pronouncements, there have been no
significant changes to the Companys significant accounting policies from those presented in Note 2 Summary of Significant Accounting Policies to the consolidated financial statements included in the Companys Annual Report on
Form 10-K filed for its fiscal year ended March 28, 2009.

Certain reclassifications have been made in the accompanying condensed
consolidated financial statements for prior periods to conform to the current presentation. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

2. Recent Accounting Pronouncements

In
June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
(SFAS No. 168). SFAS No. 168 replaces SFAS No. 162 The Hierarchy of Generally Accepted Accounting Principles and establishes the FASB Accounting Standards Codification (ASC) as the source of authoritative
accounting principles. SFAS No. 168 was incorporated into the ASC within ASC Topic 105 Generally Accepted Accounting Principles with the issuance of ASC Accounting Standards Update (ASU) 2009-1. The ASC combines all existing
authoritative standards into a comprehensive, topically organized online database to simplify user access to all authoritative GAAP. The ASC became effective for the Companys second quarter of 2010 and the adoption of the ASC did not have a
material impact on the Companys financial statements.

In September 2009, the FASB ratified ASC ASU 2009-13 (ASC ASU 2009-13),
previously Emerging Issues Task Force (EITF) Issue No. 08-1 Revenue Arrangements with Multiple Deliverables. ASC ASU 2009-13 addresses how arrangement consideration should be allocated to deliverables in a multiple-deliverable
revenue arrangement. ASC ASU 2009-13 will become effective for the Companys first quarter of fiscal 2012. The Company is currently evaluating the impact, if any, that the adoption of ASC ASU 2009-13 will have on its financial position and
results of operations.

In September 2009, the FASB ratified ASC ASU 2009-14, previously EITF No. 09-3 Certain Revenue
Arrangements That Include Software Elements. ASC ASU 2009-14 modifies the scope of Software Revenue Recognition to exclude non-software components of tangible products and software components of tangible products that are sold, licensed,
or leased with tangible products when the software



4



---

##### Table of Contents

components and non-software components of the tangible product function together to deliver the tangible products essential functionality. ASC ASU 2009-14 will become effective for the
Companys first quarter of fiscal 2012. The Company is currently evaluating the impact, if any, that the adoption of ASC ASU 2009-14 will have on its financial position and results of operations.

3. Restricted Cash

As of
September 26, 2009, the Company had restricted cash of $2.4 million. This amount collateralizes a commercial letter of credit in the amount of $2.0 million substituted for a portion of the cash bond held by the Kaohsiung District Court of
Taiwan. See Note 16 Legal Proceedings for further discussion.

4. Fair Value Measurements

Fair value is defined under ASC Topic 820 Fair Value Measurements and Disclosures (ASC Topic 820) 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 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 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 September 26, 2009, the Company held a total of $15.6 million invested in auction rate securities (ARS) at par
value. Additionally, the Company held $4.0 million of par value ARS which were converted by the bond issuer to its preferred stock during the third quarter of fiscal 2009. 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 time of purchase in
fiscal 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. 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 fiscal 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 very few market transactions for
these securities have been observed. Additionally, the bond insurers of the ARS and preferred stock experienced credit rating downgrades throughout fiscal 2009. Consequently, it was determined that the declines in fair value of these securities
during fiscal 2009 represented other-than-temporary impairments in accordance with U.S. generally accepted accounting principles. Accordingly, at the end of each quarter of fiscal 2009, the cost bases of these securities were written down to their
estimated fair values with other-than-temporary impairment charges totaling $13.6 million, of which $5.4 million was recorded during the second quarter of fiscal 2009.

As of the beginning of the first quarter of fiscal 2010, in accordance with the adoption of ASC Topic 320 Investments  Debt and Equity Securities (ASC Topic 320), the Company recorded a
cumulative-effect adjustment to increase the opening balance of retained earnings by $0.4 million, which represented the non-credit portion of the ARS loss previously recorded as an other-than-temporary impairment in the statement of operations. The
credit portion of the ARS loss was determined by direct estimation of the change in fair value attributable to market movements. The Company utilized market indices representing investments of constant credit quality over time and measured the index
yield, which is considered



5



---

##### Table of Contents

attributable to non-credit related factors, at the beginning and end of the period. The effect of this change in yield on the value of the security was measured and subtracted from the total
change in fair value to arrive at the estimated change in value attributable to changes in credit quality. The Company also recorded fair value adjustments to accumulated other comprehensive income of $1.1 million and $1.4 million at the end of the
first and second quarters of fiscal 2010, respectively, to reflect the estimated increase in fair value of the ARS. These adjustments together with the cumulative-effect adjustment of $0.4 million resulted in net total unrealized gains on ARS of
approximately $2.2 million as of September 26, 2009. The $8.6 million estimated fair value of these securities is classified as a non-current asset on the Condensed Consolidated Balance Sheet at September 26, 2009, consistent with the
classification at September 27, 2008 and each subsequent reporting period.

The Company currently continues to receive all interest and
preferred stock dividend payments when due. Given the continued challenges in the financial markets and the prolonged credit crisis, the Company cannot reasonably predict when these securities will become liquid.

The Company sold $2.0 million of available-for-sale securities during the quarter ended September 26, 2009. There were no sales of available-for-sale
securities during the quarter ended September 27, 2008. The sale of available-for-sale securities in the quarter ended September 26, 2009 resulted in an immaterial net gain. For purposes of determining gross realized gains and losses and
reclassification out of accumulated other comprehensive income, the cost of securities sold is based on specific identification. Net unrealized holding gains and losses on available-for-sale securities included in accumulated other comprehensive
income were a $2.2 million gain and a $0.1 million loss as of September 26, 2009 and September 27, 2008, respectively. Gains reclassified out of accumulated other comprehensive income during the quarter ended September 26, 2009 were
immaterial.

Certain information regarding marketable securities at September 26, 2009 and March 28, 2009 was as follows (in
thousands):



|                                                  |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       
|------------------------------------------------- |  | ---- | ------ | ---------- | - | ----- | ------------ | - | -- | ---------- |  | - | ------- | - |  | - | ------
|                                                  |  |      |        | Unrealized |   |       | RealizedLoss |   |    |           
|September 26, 2009                                |  | Cost |        | Gain       |   | Loss  |              |   |    | Fair Value
|Available-for-sale debt securities (current):     |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       
|Commercial paper                                  |  | $    | 47,830 |            | $ |      |              | $ | (3 | )          |  | $ |        |   |  | $ | 47,827
|Government agencies                               |  |      | 38,905 |            |   | 12    |              |   |   |            |  |   |        |   |  |   | 38,917
|                                                  |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       
|                                                  |  | $    | 86,735 |            | $ | 12    |              | $ | (3 | )          |  | $ |        |   |  | $ | 86,744
|                                                  |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       
|Available-for-sale debt securities (non-current): |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       
|Auction rate securities                           |  | $    | 15,600 |            | $ | 2,161 |              | $ |   |            |  | $ | (9,586  | ) |  | $ | 8,175 
|Preferred stock                                   |  |      | 4,000  |            |   |      |              |   |   |            |  |   | (3,620  | ) |  |   | 380   
|                                                  |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       
|                                                  |  | $    | 19,600 |            | $ | 2,161 |              | $ |   |            |  | $ | (13,206 | ) |  | $ | 8,555 
|                                                  |  |      |        |            |   |       |              |   |    |            |  |   |         |   |  |   |       



6



---

##### Table of Contents

|                                                  |  |      |        |            |   |              |  |   |            |  |   |         |   |  |   |      
|------------------------------------------------- |  | ---- | ------ | ---------- | - | ------------ |  | - | ---------- |  | - | ------- | - |  | - | -----
|                                                  |  |      |        | Unrealized |   | RealizedLoss |  |   |           
|March 28, 2009                                    |  | Cost |        | Gain       |   | Loss         |  |   | Fair Value
|Available-for-sale debt securities (current):     |  |      |        |            |   |              |  |   |            |  |   |         |   |  |   |      
|Corporate notes and bonds                         |  | $    | 2,072  |            | $ | 12           |  | $ |           |  | $ |        |   |  | $ | 2,084
|                                                  |  |      |        |            |   |              |  |   |            |  |   |         |   |  |   |      
|Available-for-sale debt securities (non-current): |  |      |        |            |   |              |  |   |            |  |   |         |   |  |   |      
|Auction rate securities                           |  | $    | 15,600 |            | $ |             |  | $ |           |  | $ | (9,973  | ) |  | $ | 5,627
|Preferred stock                                   |  |      | 4,000  |            |   |             |  |   |           |  |   | (3,620  | ) |  |   | 380  
|                                                  |  |      |        |            |   |              |  |   |            |  |   |         |   |  |   |      
|                                                  |  | $    | 19,600 |            | $ |             |  | $ |           |  | $ | (13,593 | ) |  | $ | 6,007
|                                                  |  |      |        |            |   |              |  |   |            |  |   |         |   |  |   |      

Underlying maturities of investments at September 26, 2009 were approximately $86.7 million
within one year and $8.6 million beyond 10 years.

As of September 26, 2009, the Company had $6.0 million invested in Series D Preferred
Stock and $2.2 million invested in Series E Preferred Stock of OmniGuide, Inc., representing an 11% interest. At each reporting period end, the Company determines whether events or circumstances have occurred that are likely to have a significant
adverse effect on the fair value of these investments. If there are no events or circumstances identified that would adversely affect the fair value of the investments, the fair values of the investments are not calculated as it is not practicable
to do so. As of September 26, 2009 and March 28, 2009, management had not identified any events or circumstances that indicated the investments were impaired; therefore, as presented in Note 8 Other Assets, the full carrying
values of $8.2 million and $8.0 million were included in other assets on the Condensed Consolidated Balance Sheets at September 26, 2009 and March 28, 2009, respectively.

The following table represents the Companys fair value hierarchy for its financial assets measured at fair value on a recurring basis as of September 26, 2009:



|                                      |  |         |        |         |   |        |         |  |       |       |  |   |        |  
|------------------------------------- |  | ------- | ------ | ------- | - | ------ | ------- |  | ----- | ----- |  | - | ------ | -
|(In thousands)                        |  | Level 1 |        | Level 2 |   |        | Level 3 |  | Total |      
|Money market securities               |  | $       | 48,091 |         | $ |       |         |  | $     |      |  | $ | 48,091 |  
|Commercial paper                      |  |         |       |         |   | 47,827 |         |  |       |      |  |   | 47,827 |  
|Government agencies                   |  |         |       |         |   | 38,917 |         |  |       |      |  |   | 38,917 |  
|Forward purchase or (sale) contracts: |  |         |        |         |   |        |         |  |       |       |  |   |        |  
|Japanese Yen                          |  |         |       |         |   | (132   | )       |  |       |      |  |   | (132   | )
|Taiwan Dollar                         |  |         |       |         |   | (86    | )       |  |       |      |  |   | (86    | )
|Korean Won                            |  |         |       |         |   | 65     |         |  |       |      |  |   | 65     |  
|Euro                                  |  |         |       |         |   | (18    | )       |  |       |      |  |   | (18    | )
|British Pound                         |  |         |       |         |   | (42    | )       |  |       |      |  |   | (42    | )
|Auction rate securities               |  |         |       |         |   |       |         |  |       | 8,175 |  |   | 8,175  |  
|Preferred stock                       |  |         |       |         |   |       |         |  |       | 380   |  |   | 380    |  

The following table illustrates Level 3 activity during the second quarter of fiscal 2010:



|                                       |  |                        |       |                |   |       |  |   |      
|-------------------------------------- |  | ---------------------- | ----- | -------------- | - | ----- |  | - | -----
|(In thousands)                         |  | AuctionRate Securities |       | PreferredStock |   | Total
|Fair value, June 27, 2009              |  | $                      | 6,754 |                | $ | 380   |  | $ | 7,134
|Net unrealized gains:                  |  |                        |       |                |   |       |  |   |      
|Included in earnings                   |  |                        |      |                |   |      |  |   |     
|Included in other comprehensive income |  |                        | 1,421 |                |   |      |  |   | 1,421
|Purchases, issuances and settlements   |  |                        |      |                |   |      |  |   |     
|Net transfers into (out of) Level 3    |  |                        |      |                |   |      |  |   |     
|                                       |  |                        |       |                |   |       |  |   |      
|Fair value, September 26, 2009         |  | $                      | 8,175 |                | $ | 380   |  | $ | 8,555
|                                       |  |                        |       |                |   |       |  |   |      

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 September 25, 2009 were utilized to calculate the unrealized gain/loss on open forward contracts which were recorded in Accumulated other comprehensive income (loss) and Other assets on the Condensed Consolidated
Balance Sheet as of September 26, 2009.



7



---

##### Table of Contents

The Level 3 assets consisted of ARS and preferred stock acquired through the conversion of certain ARS
during the third quarter of 2009. As none of the Companys securities have traded through the auction process and very few market transactions have been observed for these securities, 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, ratings of and financial claims on the bond insurers and issuers; and (vi) the underlying trust assets of the securities.

5. Inventories

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



|                                  |  |              |        |              |   |       
|--------------------------------- |  | ------------ | ------ | ------------ | - | ------
|(In thousands)                    |  | Sep 26, 2009 |        | Mar 28, 2009
|Raw materials and purchased parts |  | $            | 52,944 |              | $ | 56,701
|Work-in-process                   |  |              | 10,482 |              |   | 7,741 
|Finished goods                    |  |              | 13,789 |              |   | 20,440
|                                  |  |              |        |              |   |       
|                                  |  | $            | 77,215 |              | $ | 84,882
|                                  |  |              |        |              |   |       

6. Other Current Assets

Other current assets consisted of the following:



|                             |  |              |        |              |   |       
|---------------------------- |  | ------------ | ------ | ------------ | - | ------
|(In thousands)               |  | Sep 26, 2009 |        | Mar 28, 2009
|Income tax refund receivable |  | $            | 4,828  |              | $ | 4,828 
|Prepaid expenses             |  |              | 3,772  |              |   | 2,055 
|Value added tax receivable   |  |              | 2,572  |              |   | 3,426 
|Other                        |  |              | 74     |              |   | 285   
|                             |  |              |        |              |   |       
|                             |  | $            | 11,246 |              | $ | 10,594
|                             |  |              |        |              |   |       

7. Acquired Intangible Assets

The following table presents the details of acquired intangible assets and accumulated amortization to date at September 26, 2009:



|                                                       |  |                       |   |  |                                        |        |                         |   |        |                              |  |   |      
|------------------------------------------------------ |  | --------------------- | - |  | -------------------------------------- | ------ | ----------------------- | - | ------ | ---------------------------- |  | - | -----
|(In thousands, except years)                           |  | Useful Life(in years) |   |  | EstimatedFair Value atAcquisition Date |        | AccumulatedAmortization |   |        | RecordedValue atSep 26, 2009
|Developed technology                                   |  | 7                     |   |  | $                                      | 8,100  |                         | $ | (2,537 | )                            |  | $ | 5,563
|Customer relationships                                 |  | 6                     |   |  |                                        | 2,700  |                         |   | (1,513 | )                            |  |   | 1,187
|Customer backlog                                       |  | 1                     |   |  |                                        | 700    |                         |   | (700   | )                            |  |   |     
|Trade name and trademarks                              |  | 3                     |   |  |                                        | 400    |                         |   | (292   | )                            |  |   | 108  
|Change of control agreements                           |  | 1                     |   |  |                                        | 100    |                         |   | (100   | )                            |  |   |     
|Fair value of below-market lease (non-current portion) |  | 3.8                   |   |  |                                        | 311    |                         |   | (237   | )                            |  |   | 74   
|Patents                                                |  | 13.7                  | * |  |                                        | 2,546  |                         |   | (595   | )                            |  |   | 1,951
|                                                       |  |                       |   |  |                                        |        |                         |   |        |                              |  |   |      
|Subtotal  long term                                   |  |                       |   |  |                                        | 14,857 |                         |   | (5,974 | )                            |  |   | 8,883
|                                                       |  |                       |   | 
|Fair value of below-market lease (current portion)     |  |                       |   |  |                                        | 110    |                         |   |       |                              |  |   | 110  
|                                                       |  |                       |   |  |                                        |        |                         |   |        |                              |  |   |      
|Total acquired intangible assets                       |  |                       |   |  | $                                      | 14,967 |                         | $ | (5,974 | )                            |  | $ | 8,993
|                                                       |  |                       |   |  |                                        |        |                         |   |        |                              |  |   |      



|* | Useful life for Patents represents a weighted average of four patents with varying useful lives.
|- | ------------------------------------------------------------------------------------------------



8



---

##### Table of Contents

Amortization expense for intangible assets has been recorded in the Condensed Consolidated Statements of
Operations as follows:



|                                      |  |                      |     |                           |   |              |  |              |       |  |   |      
|------------------------------------- |  | -------------------- | --- | ------------------------- | - | ------------ |  | ------------ | ----- |  | - | -----
|                                      |  | Fiscal quarter ended |     | Two fiscal quarters ended
|(In thousands)                        |  | Sep 26, 2009         |     | Sep 27, 2008              |   | Sep 26, 2009 |  | Sep 27, 2008
|Cost of sales                         |  | $                    | 289 |                           | $ | 289          |  | $            | 578   |  | $ | 578  
|Selling, service and administration   |  |                      | 197 |                           |   | 276          |  |              | 419   |  |   | 730  
|Research, development and engineering |  |                      | 51  |                           |   | 15           |  |              | 92    |  |   | 30   
|                                      |  |                      |     |                           |   |              |  |              |       |  |   |      
|Total                                 |  | $                    | 537 |                           | $ | 580          |  | $            | 1,089 |  | $ | 1,338
|                                      |  |                      |     |                           |   |              |  |              |       |  |   |      

The estimated amortization expense for intangible assets for the current year, including amounts
amortized year to date, and in future years is as follows (in thousands):



|             |  |              |       
|------------ |  | ------------ | ------
|Year         |  | Amortization
|2010         |  | $            | 2,131 
|2011         |  |              | 1,896 
|2012         |  |              | 1,627 
|2013         |  |              | 1,469 
|2014         |  |              | 1,340 
|Future years |  |              | 1,619 
|             |  |              |       
|             |  | $            | 10,082
|             |  |              |       

8. Other Assets

Other assets consisted of the following:



|                                    |  |              |        |              |   |       
|----------------------------------- |  | ------------ | ------ | ------------ | - | ------
|(In thousands)                      |  | Sep 26, 2009 |        | Mar 28, 2009
|Minority equity investment          |  | $            | 8,184  |              | $ | 7,991 
|All-Ring patent suit court bond     |  |              | 7,069  |              |   | 8,738 
|Consignment and demo equipment, net |  |              | 4,312  |              |   | 6,447 
|Other                               |  |              | 769    |              |   | 856   
|                                    |  |              |        |              |   |       
|                                    |  | $            | 20,334 |              | $ | 24,032
|                                    |  |              |        |              |   |       

During the quarter ended September 26, 2009, the Company established a letter of credit as
substitution for a portion of the All-Ring patent suit court bond and received back $2.0 million in proceeds from the court. The All-Ring patent suit court bond balance declined by $1.7 million due to the receipt of the $2.0 million proceeds,
partially offset by $0.3 million favorable impact from foreign currency rate fluctuation.

9. Accrued Liabilities

Accrued liabilities consisted of the following:



|                                        |  |              |        |              |   |       
|--------------------------------------- |  | ------------ | ------ | ------------ | - | ------
|(In thousands)                          |  | Sep 26, 2009 |        | Mar 28, 2009
|Payroll-related liabilities             |  | $            | 3,918  |              | $ | 3,971 
|Professional fees payable               |  |              | 1,529  |              |   | 1,143 
|Value added taxes payable               |  |              | 1,457  |              |   | 2,095 
|Customer deposits                       |  |              | 1,186  |              |   | 624   
|Product warranty accrual                |  |              | 1,120  |              |   | 2,057 
|Purchase order commitments and receipts |  |              | 552    |              |   | 673   
|Restructuring costs payable             |  |              | 193    |              |   | 447   
|Other                                   |  |              | 3,261  |              |   | 1,948 
|                                        |  |              |        |              |   |       
|                                        |  | $            | 13,216 |              | $ | 12,958
|                                        |  |              |        |              |   |       



9



---

##### Table of Contents

10. Product Warranty Accrual

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



|                                    |  |                      |       |   |                           |   |        |              |  |   |              |   |  |   |        |  
|----------------------------------- |  | -------------------- | ----- | - | ------------------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                    |  | Fiscal quarter ended |       |   | Two fiscal quarters ended |  
|(In thousands)                      |  | Sep 26, 2009         |       |   | Sep 27, 2008              |   |        | Sep 26, 2009 |  |   | Sep 27, 2008 |  
|Product warranty accrual, beginning |  | $                    | 1,284 |   |                           | $ | 4,024  |              |  | $ | 2,057        |   |  | $ | 3,740  |  
|Warranty charges incurred, net      |  |                      | (971  | ) |                           |   | (1,738 | )            |  |   | (2,661       | ) |  |   | (3,977 | )
|Provision for warranty charges      |  |                      | 807   |   |                           |   | 1,513  |              |  |   | 1,724        |   |  |   | 4,036  |  
|                                    |  |                      |       |   |                           |   |        |              |  |   |              |   |  |   |        |  
|Product warranty accrual, ending    |  | $                    | 1,120 |   |                           | $ | 3,799  |              |  | $ | 1,120        |   |  | $ | 3,799  |  
|                                    |  |                      |       |   |                           |   |        |              |  |   |              |   |  |   |        |  

Net warranty charges incurred include labor costs and costs of replacement parts for system repairs
under warranty. These costs 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 recorded to Cost of sales.

11. 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 whenever title transfer is pending and/or acceptance criteria have not yet been fulfilled. Deferred
revenue occurrences include sales to Japanese 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.

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



|                            |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|--------------------------- |  | -------------------- | ------ | - | ------------------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------- | -
|                            |  | Fiscal quarter ended |        |   | Two fiscal quarters ended |  
|(In thousands)              |  | Sep 26, 2009         |        |   | Sep 27, 2008              |   |        | Sep 26, 2009 |  |   | Sep 27, 2008 |  
|Deferred revenue, beginning |  | $                    | 11,776 |   |                           | $ | 12,838 |              |  | $ | 11,251       |   |  | $ | 12,583  |  
|Revenue deferred            |  |                      | 7,057  |   |                           |   | 5,152  |              |  |   | 12,717       |   |  |   | 12,691  |  
|Revenue recognized          |  |                      | (6,343 | ) |                           |   | (6,771 | )            |  |   | (11,478      | ) |  |   | (14,055 | )
|                            |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  
|Deferred revenue, ending    |  | $                    | 12,490 |   |                           | $ | 11,219 |              |  | $ | 12,490       |   |  | $ | 11,219  |  
|                            |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |         |  

12. 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.

For the quarters ended September 26, 2009 and September 27, 2008, awards of options, stock-settled stock appreciation rights (SOSARs) and unvested
restricted stock units (RSUs) representing an additional 3.2 million and 4.2 million shares of common stock were outstanding, respectively. For the two quarters ended September 26, 2009 and September 27, 2008, awards of options,
SOSARs and unvested RSUs representing an additional 3.9 million and 4.2 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.



10



---

##### Table of Contents

13. Comprehensive Loss

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



|                                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |        |  
|-------------------------------------------------------------------------- |  | -------------------- | ------ | - | ------------------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                                           |  | Fiscal quarter ended |        |   | Two fiscal quarters ended |  
|(In thousands)                                                             |  | Sep 26, 2009         |        |   | Sep 27, 2008              |   |        | Sep 26, 2009 |  |   | Sep 27, 2008 |  
|Net loss                                                                   |  | $                    | (6,120 | ) |                           | $ | (4,109 | )            |  | $ | (11,650      | ) |  | $ | (6,867 | )
|Other comprehensive income                                                 |  |                      | 1      |   |                           |   | 2      |              |  |   | 2            |   |  |   | 4      |  
|Foreign currency translation adjustment                                    |  |                      | 349    |   |                           |   | (998   | )            |  |   | 1,140        |   |  |   | (1,279 | )
|Reclassification of unrealized loss on auction rate securities to earnings |  |                      |       |   |                           |   |       |              |  |   |             |   |  |   | 2,496  |  
|Unrealized gain on auction rate securities                                 |  |                      | 1,421  |   |                           |   |       |              |  |   | 2,548        |   |  |   |       |  
|Net unrealized gain (loss) on securities classified as available-for-sale  |  |                      | 6      |   |                           |   | (68    | )            |  |   | 1            |   |  |   | (90    | )
|                                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |        |  
|Comprehensive loss                                                         |  | $                    | (4,343 | ) |                           | $ | (5,173 | )            |  | $ | (7,959       | ) |  | $ | (5,736 | )
|                                                                           |  |                      |        |   |                           |   |        |              |  |   |              |   |  |   |        |  

14. 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.

The Company did not repurchase any
shares under this program during the quarter ended September 26, 2009. As of September 26, 2009, a total of 372,825 shares have been repurchased for $5.3 million under this authorization at an average price of $14.16 per share, 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.

15. Product and Geographic Information

Net
sales by product type were as follows:



|                                         |  |                      |        |                           |   |              |  |              |        |  |   |        
|---------------------------------------- |  | -------------------- | ------ | ------------------------- | - | ------------ |  | ------------ | ------ |  | - | -------
|                                         |  | Fiscal quarter ended |        | Two fiscal quarters ended
|(In thousands)                           |  | Sep 26, 2009         |        | Sep 27, 2008              |   | Sep 26, 2009 |  | Sep 27, 2008
|Semiconductor Group (SG)                 |  | $                    | 7,714  |                           | $ | 12,520       |  | $            | 12,974 |  | $ | 34,248 
|Passive Component Group (PCG)            |  |                      | 6,098  |                           |   | 6,719        |  |              | 11,248 |  |   | 19,994 
|Interconnect/Micro-machining Group (IMG) |  |                      | 13,826 |                           |   | 30,371       |  |              | 26,019 |  |   | 59,392 
|                                         |  |                      |        |                           |   |              |  |              |        |  |   |        
|                                         |  | $                    | 27,638 |                           | $ | 49,610       |  | $            | 50,241 |  | $ | 113,634
|                                         |  |                      |        |                           |   |              |  |              |        |  |   |        

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



|               |  |                      |        |                           |   |              |  |              |        |  |   |        
|-------------- |  | -------------------- | ------ | ------------------------- | - | ------------ |  | ------------ | ------ |  | - | -------
|               |  | Fiscal quarter ended |        | Two fiscal quarters ended
|(In thousands) |  | Sep 26, 2009         |        | Sep 27, 2008              |   | Sep 26, 2009 |  | Sep 27, 2008
|Asia           |  | $                    | 22,565 |                           | $ | 38,483       |  | $            | 38,652 |  | $ | 82,922 
|Americas       |  |                      | 2,917  |                           |   | 8,182        |  |              | 7,204  |  |   | 21,085 
|Europe         |  |                      | 2,156  |                           |   | 2,945        |  |              | 4,385  |  |   | 9,627  
|               |  |                      |        |                           |   |              |  |              |        |  |   |        
|               |  | $                    | 27,638 |                           | $ | 49,610       |  | $            | 50,241 |  | $ | 113,634
|               |  |                      |        |                           |   |              |  |              |        |  |   |        



11



---

##### Table of Contents

16. 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 $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 initially 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. Because the Company had
amended its claims in the cancellation action as described below, the Court asked the Court-appointed expert to respond to questions regarding the experts initial opinion. The Court-appointed expert conducted an additional inspection of each
of these systems on September 21, 2009, and will re-evaluate whether the systems infringe after the Company and All Ring submit briefs on this issue.

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 (MOEA) on September 12, 2008. On March 23, 2009, the MOEA dismissed the
IPOs cancellation decision solely on procedural grounds. The MOEA remanded the case to the IPO with a request that the IPO issue another decision within six months that rectifies the procedural defects of the IPOs earlier decision. On
July 22, 2009, the IPO issued a decision dismissing All Rings cancellation action. All Ring appealed the IPOs decision to the MOEA in August 2009.

Pursuant to the Courts PAO and PIO, the Company was required to post Taiwan dollar security bonds with the Court. In July 2009, the Company established a letter of credit as a partial substitution
and received back $2.0 million of the security bonds from the Court. The letter of credit is collateralized by $2.4 million of restricted cash. The remaining security bond balance, valued at approximately $7.1 million, is included in the
Companys other assets on the Condensed Consolidated Balance Sheet at September 26, 2009. The restricted cash balance of $2.4 million is included in the Condensed Consolidated Balance Sheet at September 26, 2009 as a current asset.

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.

17. Subsequent Events

On
September 28, 2009, the Company established an additional letter of credit in substitution for the remaining balance of the security bonds held in association with the Taiwan legal matter described in Note 16 Legal Proceedings. As a
result, the Company has received back $7.1 million of the security bonds from the Court and collateralized the letter of credit with $8.4 million of additional restricted cash.

No additional subsequent events as defined under ASC Topic 855 Subsequent Events were identified through November 4, 2009, the date the financial statements were issued.

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, anticipates 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.



12



---

##### Table of Contents

Overview of Business

Electro Scientific Industries, Inc. and its subsidiaries (ESI) provide high-technology manufacturing equipment to the global semiconductor and micro-electronics markets, including advanced laser systems
that are used to micro-engineer electronic device features in high-volume production environments. Our customers are primarily manufacturers of semiconductors, passive components, electronic interconnect devices, and other components used in a wide
variety of end products in the computer, consumer electronics, communications and other industries. Our equipment enables these manufacturers to achieve yield and productivity gains in their manufacturing processes that can be critical to their
profitability. ESI was founded in 1944, is headquartered in Portland, Oregon, and has subsidiaries in the U.S., Europe and Asia.

Our advanced
laser microengineering and inspection systems allow semiconductor and micro-electronics manufacturers to physically alter select device features during high-volume production in order to heighten performance and boost production yields. Laser
micro-engineering comprises a set of precise fine-tuning processes, including micro-machining, wafer scribing and dicing, semiconductor memory-link cutting, device trimming and via drilling, that requires application-specific laser systems able to
meet our customers exacting performance and productivity requirements. Our laser-based systems improve production yields or enable improved performance during the manufacturing process for semiconductor devices, high-density interconnect (HDI)
circuits, including flexible interconnect material and advanced semiconductor packaging, high-brightness light emitting diodes (LED), flat panel liquid crystal displays (LCD) and general micro-machining applications.

Additionally, we produce high-capacity test and optical inspection equipment that is critical to the quality control process during the production of
multi-layer ceramic capacitors (MLCCs). Our equipment ensures that each MLCC meets both the electrical and physical tolerances required to perform properly.

Summary of Sequential Quarterly Results

The financial results of our second quarter of
fiscal 2010, which ended September 26, 2009, reflected improvement from the prior quarter. Total order volume for the second quarter was $29.3 million, compared to $28.7 million for the first quarter of fiscal 2010, which ended June 27,
2009. The sequential increase in orders was driven by increases in our Semiconductor Group (SG) which offset lower orders in our Passive Components Group (PCG).

Orders for our SG products increased by over 25% for the second quarter compared to the prior quarter. The increase in orders for SG products reflected modest spending in non-memory markets as some
customers chose to replace older systems to increase capacity.

Orders for our PCG products declined during the second quarter compared to the
prior quarter. The decrease was driven primarily by timing of system orders as we received a multi-system order in the first quarter; however, orders for consumables and tooling increased due to improvements in our customers utilization of
existing tools.

Orders for our Interconnect/Micro-machining Group (IMG) products increased slightly during the second quarter compared to the
first quarter.

Net sales increased $5.0 million for the second quarter to $27.6 million compared to $22.6 million for the prior quarter. This
increase reflects improvements in each of our product groups.

Gross margin was 34.1% on net sales of $27.6 million for the second quarter
compared to 26.4% on net sales of $22.6 million for the prior quarter. The increase in gross margin percentage reflects the benefit from higher sales volume and factory utilization as well as a favorable product and service mix compared to the prior
quarter. Included in cost of sales in both quarters were $0.3 million of amortization of intangible assets acquired in the acquisition of New Wave Research, Incorporated (NWR) in July, 2007.



13



---

##### Table of Contents

Net operating expenses increased $3.9 million to $18.8 million in the second quarter compared to $14.9
million in the prior quarter. This increase was primarily driven by a one-time receipt of $4.5 million in the prior quarter of net proceeds from a merger termination fee. Excluding the net merger termination proceeds, net operating expenses
decreased $0.6 million due to a $0.3 million decrease in share-based compensation, timing of project expenses between quarters and continued efforts to manage our cost structure. In our third quarter of fiscal 2010, we expect net operating expenses
to increase as the quarter will include fourteen weeks rather than the usual thirteen weeks and also due to the partial reinstatement of temporary pay reductions.

Operating loss increased to $9.4 million in the second quarter compared to $8.9 million in the prior quarter. The increase was primarily due to the receipt of net merger termination proceeds of $4.5
million in the first quarter, partially offset by increased gross profit in the second quarter.

Net interest and other income of $0.4 million
remained essentially flat in the second quarter compared to the prior quarter.

The effective tax rate was 32.1% for the second quarter,
resulting in an income tax benefit of $2.9 million, compared to an effective rate of 35.7% for the prior quarter that resulted in an income tax benefit of $3.1 million.

Net loss for the second quarter was $6.1 million or $0.22 per basic and diluted share, compared to a net loss of $5.5 million or $0.20 per basic and diluted share in the prior quarter.

Results of Operations

Quarter Ended
September 26, 2009 Compared to Quarter Ended September 27, 2008

The following table presents results of operations data as a
percentage of net sales for the quarters ended September 26, 2009 and September 27, 2008:



|                                                           |  |                      |    |  |              |   
|---------------------------------------------------------- |  | -------------------- | -- |  | ------------ | --
|                                                           |  | Fiscal quarter ended |   
|                                                           |  | Sep 26, 2009         |    |  | Sep 27, 2008 |   
|Net sales                                                  |  | 100.0                | %  |  | 100.0        | % 
|Cost of sales                                              |  | 65.9                 |    |  | 57.5         |   
|                                                           |  |                      |    |  |              |   
|Gross margin                                               |  | 34.1                 |    |  | 42.5         |   
|Selling, service and administration                        |  | 41.1                 |    |  | 27.7         |   
|Research, development and engineering                      |  | 26.9                 |    |  | 17.0         |   
|Restructuring costs                                        |  |                     |    |  | 2.4          |   
|                                                           |  |                      |    |  |              |   
|Operating loss                                             |  | (33.9                | )  |  | (4.6         | ) 
|Other-than-temporary impairment of auction rate securities |  |                     |    |  | (10.8        | ) 
|Interest and other income, net                             |  | 1.3                  |    |  | 2.2          |   
|                                                           |  |                      |    |  |              |   
|Loss before income taxes                                   |  | (32.6                | )  |  | (13.2        | ) 
|Benefit from income taxes                                  |  | (10.5                | )  |  | (4.9         | ) 
|                                                           |  |                      |    |  |              |   
|Net loss                                                   |  | (22.1                | )% |  | (8.3         | )%
|                                                           |  |                      |    |  |              |   

Net Sales

Net sales were $27.6 million for the quarter ended September 26, 2009, a decrease of $22.0 million or 44.3% compared to net sales of $49.6 million for the quarter ended September 27, 2008.
Compared to the prior year, revenue decreased in each of our product groups, reflecting the impact of the global economic downturn, which resulted in declining revenues throughout fiscal 2009. Although we experienced sequential improvement in net
sales from the latter part of fiscal 2009, our revenue volume in the second quarter of fiscal 2010 was lower than a year ago as our worldwide customers continue to be severely affected by depressed demand for consumer electronics.



14



---

##### Table of Contents

Net sales by product group for the quarter ended September 26, 2009 and September 27, 2008 were as
follows:



|                                         |  |                      |        |                |              |   |           |   |                |  |       |  
|---------------------------------------- |  | -------------------- | ------ | -------------- | ------------ | - | --------- | - | -------------- |  | ----- | -
|                                         |  | Fiscal quarter ended |       
|                                         |  | Sep 26, 2009         |        |                | Sep 27, 2008 |  
|(In thousands, except percentages)       |  | Net Sales            |        | % of Net Sales |              |   | Net Sales |   | % of Net Sales | 
|Semiconductor Group (SG)                 |  | $                    | 7,714  |                | 27.9         | % |           | $ | 12,520         |  | 25.2  | %
|Passive Components Group (PCG)           |  |                      | 6,098  |                | 22.1         | % |           |   | 6,719          |  | 13.6  | %
|Interconnect/Micro-machining Group (IMG) |  |                      | 13,826 |                | 50.0         | % |           |   | 30,371         |  | 61.2  | %
|                                         |  |                      |        |                |              |   |           |   |                |  |       |  
|                                         |  | $                    | 27,638 |                | 100.0        | % |           | $ | 49,610         |  | 100.0 | %
|                                         |  |                      |        |                |              |   |           |   |                |  |       |  

SG sales in the quarter ended September 26, 2009 decreased $4.8 million or 38.4% compared to the
quarter ended September 27, 2008. The overall decrease in sales was due to the continued weakness in the memory markets, as customer utilization of existing systems is below calendar 2008 capacity levels and has reduced the demand for new
memory repair capital equipment.

PCG sales in the quarter ended September 26, 2009 decreased $0.6 million or 9.2% compared to the
quarter ended September 27, 2008. Although PCG quarterly net sales have increased sequentially for the last three quarters, they continue to be impacted by the economic downturn and its impact on the demand for our customers products and
their need for expanding capacity.

IMG sales in the quarter ended September 26, 2009 decreased $16.5 million or 54.5% compared to the
quarter ended September 27, 2008. Although the economic downturn has negatively impacted IMG sales, the year-over-year decrease was also impacted by large micro-machining sales that occurred in the second quarter of fiscal 2009.

Net sales by geographic region for the quarter ended September 26, 2009 and September 27, 2008 were as follows:



|                                   |  |                      |        |                |              |   |           |   |                |  |       |  
|---------------------------------- |  | -------------------- | ------ | -------------- | ------------ | - | --------- | - | -------------- |  | ----- | -
|                                   |  | Fiscal quarter ended |       
|                                   |  | Sep 26, 2009         |        |                | Sep 27, 2008 |  
|(In thousands, except percentages) |  | Net Sales            |        | % of Net Sales |              |   | Net Sales |   | % of Net Sales | 
|Asia                               |  | $                    | 22,565 |                | 81.6         | % |           | $ | 38,483         |  | 77.6  | %
|Americas                           |  |                      | 2,917  |                | 10.6         | % |           |   | 8,182          |  | 16.5  | %
|Europe                             |  |                      | 2,156  |                | 7.8          | % |           |   | 2,945          |  | 5.9   | %
|                                   |  |                      |        |                |              |   |           |   |                |  |       |  
|                                   |  | $                    | 27,638 |                | 100.0        | % |           | $ | 49,610         |  | 100.0 | %
|                                   |  |                      |        |                |              |   |           |   |                |  |       |  

Compared to the quarter ended September 27, 2008, net sales for the quarter ended
September 26, 2009 decreased $15.9 million or 41.4% in Asia, $5.3 million or 64.3% in the Americas, and $0.8 million or 26.8% in Europe. These decreases reflect the impact of the global economic downturn experienced in each of our markets
throughout 2009 and into fiscal 2010.

Gross Profit

Gross profit for the quarter ended September 26, 2009 and September 27, 2008 was as follows:



|                                   |  |                      |       |                |              |   |              |   |                |  |      |  
|---------------------------------- |  | -------------------- | ----- | -------------- | ------------ | - | ------------ | - | -------------- |  | ---- | -
|                                   |  | Fiscal quarter ended |      
|                                   |  | Sep 26, 2009         |       |                | Sep 27, 2008 |  
|(In thousands, except percentages) |  | Gross Profit         |       | % of Net Sales |              |   | Gross Profit |   | % of Net Sales | 
|Gross profit                       |  | $                    | 9,426 |                | 34.1         | % |              | $ | 21,072         |  | 42.5 | %
|                                   |  |                      |       |                |              |   |              |   |                |  |      |  

Gross profit for the quarter ended September 26, 2009 was $9.4 million, a decrease of $11.6
million compared to gross profit of $21.1 million for the quarter ended September 27, 2008. Gross profit as a percentage of net sales decreased to 34.1% for the quarter ended September 26, 2009 from 42.5% for the quarter ended
September 27, 2008. These decreases were primarily related to lower revenue levels along with an associated reduction in production capacity utilization. In response to the reduction in business, management implemented cost reduction efforts
throughout fiscal 2009, including reductions in manufacturing labor and overhead, which partially mitigated the impact of lower production volumes.



15



---

##### Table of Contents

Operating Expenses

Operating expenses for the quarter ended September 26, 2009 and September 27, 2008 were as follows:



|                                      |  |                      |        |                |              |   |         |   |                |  |      |  
|------------------------------------- |  | -------------------- | ------ | -------------- | ------------ | - | ------- | - | -------------- |  | ---- | -
|                                      |  | Fiscal quarter ended |       
|                                      |  | Sep 26, 2009         |        |                | Sep 27, 2008 |  
|(In thousands, except percentages)    |  | Expense              |        | % of Net Sales |              |   | Expense |   | % of Net Sales | 
|Selling, service and administration   |  | $                    | 11,355 |                | 41.1         | % |         | $ | 13,746         |  | 27.7 | %
|Research, development and engineering |  |                      | 7,441  |                | 26.9         |   |         |   | 8,446          |  | 17.0 |  
|Restructuring costs                   |  |                      |       |                |             |   |         |   | 1,174          |  | 2.4  |  
|                                      |  |                      |        |                |              |   |         |   |                |  |      |  
|                                      |  | $                    | 18,796 |                | 68.0         | % |         | $ | 23,366         |  | 47.1 | %
|                                      |  |                      |        |                |              |   |         |   |                |  |      |  

Selling, Service and Administration

Selling, service and administration (SS&A) primarily consists of labor and other employee-related expenses including share-based compensation expense,
travel expense, professional fees, sales commissions and facilities costs. SS&A expenses were $11.4 million for the quarter ended September 26, 2009, a decrease of $2.4 million compared to $13.7 million in the quarter ended
September 27, 2008. The decrease in SS&A expenses was primarily attributable to restructuring and cost management activities completed in 2009. These actions have included company-wide reductions in force and related decreases in
compensation and labor-related costs. Additionally, we have implemented several temporary cost reduction measures including salary reductions, furloughs, and elimination of the Company match of 401(k) contributions. The impact of these reductions
was partially offset by an increase of $0.8 million in SS&A share-based compensation expense. Share-based compensation expense increased compared to the same quarter of the prior year primarily due to the incremental cost of the Companys
annual stock grant. In our third quarter, we expect SS&A expenses to increase as the quarter will include fourteen weeks rather than the usual thirteen weeks and also due to the partial reinstatement of temporary pay reductions.

Research, Development and Engineering

Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment costs and facilities costs. RD&E expenses totaled $7.4
million for the quarter ended September 26, 2009 compared to $8.5 million for the quarter ended September 27, 2008. This decrease was primarily due to reductions in employee-related expenses resulting from our cost containment actions, and
to a lesser extent, lower project materials expense. Engineering project expenses can fluctuate from quarter-to-quarter depending upon the various project timelines and content. In our third quarter, we expect RD&E expenses to increase as the
quarter will include fourteen weeks rather than the usual thirteen weeks and also due to the partial reinstatement of temporary pay reductions.

Restructuring Costs

No restructuring expenses were incurred during the quarter ended September 26, 2009. During the
quarter ended September 27, 2008, $1.2 million of restructuring expenses were incurred as a result of reductions in workforce taken in that quarter in response to lower customer demand, resulting from weakness in the memory market and
reductions in customer capital spending.

Non-operating Income and Expense

Other-than-temporary Impairment of Auction Rate Securities

No other-than-temporary impairment charges related to our auction rate securities (ARS) were recorded during the quarter ended September 26, 2009. During the quarter ended September 27, 2008,
$5.4 million of impairment charges were incurred as instability in the global financial markets impacted the estimated fair values of our ARS. Given the continued challenges in the financial markets and the prolonged credit crisis, we cannot
reasonably predict when or if these ARS will become liquid. See Note 4 Fair Value Measurements for further discussion.



16



---

##### Table of Contents

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 fees, ARS valuation fees and other miscellaneous non-operating items. Net interest and other income for the quarter ended September 26, 2009 and September 27, 2008 were as follows:



|                                   |  |                              |     |                |              |   |                              |   |                |  |     |  
|---------------------------------- |  | ---------------------------- | --- | -------------- | ------------ | - | ---------------------------- | - | -------------- |  | --- | -
|                                   |  | Fiscal quarter ended         |    
|                                   |  | Sep 26, 2009                 |     |                | Sep 27, 2008 |  
|(In thousands, except percentages) |  | Interest andOther Income,Net |     | % of Net Sales |              |   | Interest andOther Income,Net |   | % of Net Sales | 
|Interest and other income, net     |  | $                            | 357 |                | 1.3          | % |                              | $ | 1,117          |  | 2.2 | %
|                                   |  |                              |     |                |              |   |                              |   |                |  |     |  

Interest and other income, net, for the quarter ended September 26, 2009 decreased $0.8 million
compared to the quarter ended September 27, 2008. The decrease was primarily attributable to a $0.7 million decrease in interest income attributable to declines in market interest rates during this period.

Income Taxes

The income tax benefit
for the quarter ended September 26, 2009 was $2.9 million on pretax loss of $9.0 million, an effective tax rate of 32.1%. Comparatively, the income tax benefit was $2.4 million on a pretax loss of $6.6 million for the quarter ended
September 27, 2008, an effective tax rate of 37.3%.

Our effective tax rate is subject to fluctuation based upon the occurrence and
timing of numerous discrete events such as changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination, finalization of income tax returns and also due
to the relationship of fixed deductions to overall changes in pretax income or loss. 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 twelve months as the result of examinations or lapsed statutes of limitation.

Net Loss

Net losses for the quarter
ended September 26, 2009 and September 27, 2008 were as follows:



|                                   |  |                      |        |   |                |       |    |          |   |        |                |  |      |   
|---------------------------------- |  | -------------------- | ------ | - | -------------- | ----- | -- | -------- | - | ------ | -------------- |  | ---- | --
|                                   |  | Fiscal quarter ended |       
|                                   |  | Sep 26, 2009         |        |   | Sep 27, 2008   |      
|(In thousands, except percentages) |  | Net Loss             |        |   | % of Net Sales |       |    | Net Loss |   |        | % of Net Sales | 
|Net loss                           |  | $                    | (6,120 | ) |                | (22.1 | )% |          | $ | (4,109 | )              |  | (8.3 | )%
|                                   |  |                      |        |   |                |       |    |          |   |        |                |  |      |   

Net loss for the quarter ended September 26, 2009 was $6.1 million, or $0.22 per basic and
diluted share, compared to net loss of $4.1 million, or $0.15 per basic and diluted share for the quarter ended September 27, 2008. The decrease was primarily the result of lower revenues and reduced gross profit.



17



---

##### Table of Contents

Two Quarters Ended September 26, 2009 Compared to Two Quarters Ended September 27, 2008

The following table presents results of operations data as a percentage of net sales for the two quarters ended September 26, 2009 and
September 27, 2008:



|                                                           |  |                           |    |  |              |   
|---------------------------------------------------------- |  | ------------------------- | -- |  | ------------ | --
|                                                           |  | Two fiscal quarters ended |   
|                                                           |  | Sep 26, 2009              |    |  | Sep 27, 2008 |   
|Net sales                                                  |  | 100.0                     | %  |  | 100.0        | % 
|Cost of sales                                              |  | 69.4                      |    |  | 59.2         |   
|                                                           |  |                           |    |  |              |   
|Gross margin                                               |  | 30.6                      |    |  | 40.8         |   
|Selling, service and administration                        |  | 46.5                      |    |  | 25.3         |   
|Research, development and engineering                      |  | 29.6                      |    |  | 15.9         |   
|Restructuring costs                                        |  |                          |    |  | 1.7          |   
|Merger termination proceeds, net                           |  | (9.0                      | )  |  |             |   
|                                                           |  |                           |    |  |              |   
|Operating loss                                             |  | (36.5                     | )  |  | (2.1         | ) 
|Other-than-temporary impairment of auction rate securities |  |                          |    |  | (9.2         | ) 
|Interest and other income, net                             |  | 1.4                       |    |  | 1.7          |   
|                                                           |  |                           |    |  |              |   
|Loss before income taxes                                   |  | (35.1                     | )  |  | (9.6         | ) 
|Benefit from income taxes                                  |  | (11.9                     | )  |  | (3.6         | ) 
|                                                           |  |                           |    |  |              |   
|Net loss                                                   |  | (23.2                     | )% |  | (6.0         | )%
|                                                           |  |                           |    |  |              |   

Net Sales

Net sales for the two quarters ended September 26, 2009 of $50.2 million decreased by $63.4 million or 55.8% over net sales for the two quarters ended September 27, 2008. Revenue decreased in
each of our product groups, reflecting the impact to customer demand resulting from the global economic recession. Our worldwide customers have been severely affected by depressed consumer demand for consumer electronics that started in calendar
2008 and has continued throughout calendar 2009.

Net sales by product group for the two quarters ended September 26, 2009 and
September 27, 2008 were as follows:



|                                         |  |                           |        |                |              |   |           |   |                |  |       |  
|---------------------------------------- |  | ------------------------- | ------ | -------------- | ------------ | - | --------- | - | -------------- |  | ----- | -
|                                         |  | Two fiscal quarters ended |       
|                                         |  | Sep 26, 2009              |        |                | Sep 27, 2008 |  
|(In thousands, except percentages)       |  | Net Sales                 |        | % of Net Sales |              |   | Net Sales |   | % of Net Sales | 
|Semiconductor Group (SG)                 |  | $                         | 12,974 |                | 25.8         | % |           | $ | 34,248         |  | 30.1  | %
|Passive Components Group (PCG)           |  |                           | 11,248 |                | 22.4         | % |           |   | 19,994         |  | 17.6  | %
|Interconnect/Micro-machining Group (IMG) |  |                           | 26,019 |                | 51.8         | % |           |   | 59,392         |  | 52.3  | %
|                                         |  |                           |        |                |              |   |           |   |                |  |       |  
|                                         |  | $                         | 50,241 |                | 100.0        | % |           | $ | 113,634        |  | 100.0 | %
|                                         |  |                           |        |                |              |   |           |   |                |  |       |  

SG sales in the two quarters ended September 26, 2009 decreased $21.3 million or 62.1% compared
to the two quarters ended September 27, 2008. The decrease in sales was due to continued weakness in the memory markets, as customer utilization of existing systems is below calendar 2008 capacity levels and has reduced the demand for new
memory repair capital equipment.

PCG sales in the two quarters ended September 26, 2009 decreased $8.7 million or 43.7% compared to the
two quarters ended September 27, 2008. The decrease in PCG sales was driven by higher sales volumes in the first quarter of 2009 resulting from capacity buys from key customers in that quarter. Following that point, we saw demand for our
products drop as lower consumer demand and utilization rates impacted our customers.

IMG sales in the two quarters ended September 26,
2009 decreased $33.4 million or 56.2% compared to the two quarters ended September 27, 2008. The decrease was primarily due to strong sales that occurred in the two quarters ended September 27, 2008 for our micro-machining products driven
by initial demand for the Model 5800 released during the first quarter of 2009.



18



---

##### Table of Contents

Net sales by geographic region for the two quarters ended September 26, 2009 and September 27,
2008 were as follows:



|                                   |  |                           |        |                |              |   |           |   |                |  |       |  
|---------------------------------- |  | ------------------------- | ------ | -------------- | ------------ | - | --------- | - | -------------- |  | ----- | -
|                                   |  | Two fiscal quarters ended |       
|                                   |  | Sep 26, 2009              |        |                | Sep 27, 2008 |  
|(In thousands, except percentages) |  | Net Sales                 |        | % of Net Sales |              |   | Net Sales |   | % of Net Sales | 
|Asia                               |  | $                         | 38,652 |                | 76.9         | % |           | $ | 82,922         |  | 73.0  | %
|Americas                           |  |                           | 7,204  |                | 14.4         | % |           |   | 21,085         |  | 18.6  | %
|Europe                             |  |                           | 4,385  |                | 8.7          | % |           |   | 9,627          |  | 8.4   | %
|                                   |  |                           |        |                |              |   |           |   |                |  |       |  
|                                   |  | $                         | 50,241 |                | 100.0        | % |           | $ | 113,634        |  | 100.0 | %
|                                   |  |                           |        |                |              |   |           |   |                |  |       |  

Compared to the two quarters ended September 27, 2008, net sales for the two quarters ended
September 26, 2009 decreased $44.3 million or 53.4% in Asia, $13.9 million or 65.8% in the Americas, and $5.2 million or 54.5% in Europe. The decreases in each of these regions reflect the impact of the global economic downturn.

Gross Profit

Gross profit for the two
quarters ended September 26, 2009 and September 27, 2008 was as follows:



|                                   |  |                           |        |                |              |   |              |   |                |  |      |  
|---------------------------------- |  | ------------------------- | ------ | -------------- | ------------ | - | ------------ | - | -------------- |  | ---- | -
|                                   |  | Two fiscal quarters ended |       
|                                   |  | Sep 26, 2009              |        |                | Sep 27, 2008 |  
|(In thousands, except percentages) |  | Gross Profit              |        | % of Net Sales |              |   | Gross Profit |   | % of Net Sales | 
|Gross profit                       |  | $                         | 15,387 |                | 30.6         | % |              | $ | 46,363         |  | 40.8 | %
|                                   |  |                           |        |                |              |   |              |   |                |  |      |  

Gross profit for the two quarters ended September 26, 2009 was $15.4 million, a decrease of
$31.0 million compared to gross profit of $46.4 million for the two quarters ended September 27, 2008. Gross profit as a percentage of net sales decreased to 30.6% for the two quarters ended September 26, 2009 from 40.8% for the two
quarters ended September 27, 2008. These decreases were primarily related to decreased revenue levels along with an associated reduction in production capacity utilization. In response to the reductions in business, management implemented cost
reduction efforts throughout 2009, including reductions in manufacturing labor and overhead, which partially mitigated the impact of lower production volumes.

Operating Expenses

Operating expenses for the two quarters ended September 26,
2009 and September 27, 2008 were as follows:



|                                      |  |                           |        |   |                |      |   |         |   |                |  |      |  
|------------------------------------- |  | ------------------------- | ------ | - | -------------- | ---- | - | ------- | - | -------------- |  | ---- | -
|                                      |  | Two fiscal quarters ended |       
|                                      |  | Sep 26, 2009              |        |   | Sep 27, 2008   |     
|(In thousands, except percentages)    |  | Expense                   |        |   | % of Net Sales |      |   | Expense |   | % of Net Sales | 
|Selling, service and administration   |  | $                         | 23,326 |   |                | 46.5 | % |         | $ | 28,846         |  | 25.3 | %
|Research, development and engineering |  |                           | 14,896 |   |                | 29.6 |   |         |   | 18,104         |  | 15.9 |  
|Restructuring costs                   |  |                           |       |   |                |     |   |         |   | 1,923          |  | 1.7  |  
|Merger termination proceeds, net      |  |                           | (4,516 | ) |                | (9.0 | ) |         |   |               |  |     |  
|                                      |  |                           |        |   |                |      |   |         |   |                |  |      |  
|                                      |  | $                         | 33,706 |   |                | 67.1 | % |         | $ | 48,873         |  | 42.9 | %
|                                      |  |                           |        |   |                |      |   |         |   |                |  |      |  

Selling, Service and Administration

Selling, service and administration (SS&A) expenses primarily consist of labor and other employee-related expenses including share-based compensation
expense, travel expenses, professional fees, sales commissions and facilities costs. SS&A expenses were $23.3 million for the two quarters ended September 26, 2009 compared to $28.8 million for the two quarters ended September 27,
2008. The decrease in SS&A expenses was primarily attributable to restructuring and cost management activities completed in 2009. These actions have included company-wide reductions in force and related decreases in compensation,



19



---

##### Table of Contents

labor, and travel-related costs. Additionally, we implemented several temporary cost reduction measures, including salary reductions, furloughs, and elimination of the Company match of 401(k)
contributions. The impact of these reductions was partially offset by an increase of $1.7 million in SS&A share-based compensation expense. Share-based compensation expense increased primarily due to an immediate vesting of annual grants for the
board of directors in May of 2009 and the incremental cost of the Companys annual stock grant. In our third quarter, we expect SS&A expenses to increase as the quarter will include fourteen weeks rather than the usual thirteen weeks and
also due to the partial reinstatement of temporary pay reductions.

Research, Development and Engineering

Research, development and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project
materials, equipment costs and facilities costs. RD&E expenses totaled $14.9 million for the two quarters ended September 26, 2009, which represents a decrease of $3.2 million compared to $18.1 million for the two quarters ended
September 27, 2008. This decrease was primarily due to reductions in employee-related expense resulting from our cost containment actions, and to a lesser extent, lower project materials expense. Engineering project expenses can fluctuate from
quarter-to-quarter depending upon the various project timelines and content. In our third quarter, we expect RD&E expenses to increase as the quarter will include fourteen weeks rather than the usual thirteen weeks and also due to the partial
reinstatement of temporary pay reductions.

Restructuring Costs

No restructuring expenses were incurred during the two quarters ended September 26, 2009. During the two quarters ended September 27, 2008, $1.9 million of restructuring expenses were incurred
as a result of reductions in workforce taken in response to lower customer demand, resulting from weakness in the memory market and reductions in customer capital spending.

Merger Termination Proceeds, net

In the first quarter of 2010, we recorded a net benefit
of $4.5 million in operating expenses related to a merger termination fee. This amount represents the receipt of a $5.4 million merger termination fee offset by an additional $0.9 million of merger transaction costs.

Non-operating Income and Expense

Other-than-temporary Impairment of Auction Rate Securities

No other-than-temporary impairment charges related to our auction
rate securities (ARS) were recorded during the two quarters ended September 26, 2009. During the two quarters ended September 27, 2008, we recorded $10.5 million of other-than-temporary impairment charges as instability in the global
financial markets impacted the estimated fair values of our ARS. Given the continued challenges in the financial markets and the prolonged credit crisis, we cannot reasonably predict when or if these ARS will become liquid. See Note 4 Fair
Value Measurements for further discussion.

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 fees, ARS valuation fees and other miscellaneous non-operating items. Net interest and other income for the two quarters ended
September 26, 2009 and September 27, 2008 were as follows:



|                                   |  |                              |     |                |              |   |                              |   |                |  |     |  
|---------------------------------- |  | ---------------------------- | --- | -------------- | ------------ | - | ---------------------------- | - | -------------- |  | --- | -
|                                   |  | Two fiscal quarters ended    |    
|                                   |  | Sep 26, 2009                 |     |                | Sep 27, 2008 |  
|(In thousands, except percentages) |  | Interest andOther Income,Net |     | % of Net Sales |              |   | Interest andOther Income,Net |   | % of Net Sales | 
|Interest and other income, net     |  | $                            | 699 |                | 1.4          | % |                              | $ | 1,977          |  | 1.7 | %
|                                   |  |                              |     |                |              |   |                              |   |                |  |     |  



20



---

##### Table of Contents

Interest and other income, net, for the two quarters ended September 26, 2009 decreased $1.3 million
compared to the two quarters ended September 27, 2008. The decrease was primarily attributable to a $1.5 million decrease in interest income due to declines in market interest rates over this period.

Income Taxes

The income tax benefit
recorded for the two quarters ended September 26, 2009 was $6.0 million on pretax loss of $17.6 million, an effective rate of 33.9%. Comparatively, the income tax benefit was $4.1 million on a pretax loss of $11.0 million for the two quarters
ended September 27, 2008, an effective tax rate of 37.6%.

Our effective tax rate is subject to fluctuation based upon the occurrence and
timing of numerous discrete events such as 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 twelve months as the result of examinations or lapsed statutes of limitation.

Net Loss

Net loss for the two quarters ended September 26, 2009 and the two quarters ended September 27, 2008 were as follows:



|                                   |  |                           |         |   |                |       |    |          |   |        |                |  |      |   
|---------------------------------- |  | ------------------------- | ------- | - | -------------- | ----- | -- | -------- | - | ------ | -------------- |  | ---- | --
|                                   |  | Two fiscal quarters ended |        
|                                   |  | Sep 26, 2009              |         |   | Sep 27, 2008   |      
|(In thousands, except percentages) |  | Net Loss                  |         |   | % of Net Sales |       |    | Net Loss |   |        | % of Net Sales | 
|Net loss                           |  | $                         | (11,650 | ) |                | (23.2 | )% |          | $ | (6,867 | )              |  | (6.0 | )%
|                                   |  |                           |         |   |                |       |    |          |   |        |                |  |      |   

Net loss for the two quarters ended September 26, 2009 was $11.7 million, or $0.43 per basic and
diluted share, compared to net loss for the two quarters ended September 27, 2008 of $6.9 million, or $0.25 per basic and diluted share. The decrease was primarily the result of the reduction in revenues and gross profit, partially offset by
the benefit from cost containment actions and the net merger termination proceeds, as discussed above.

Financial Condition and Liquidity

At September 26, 2009, our principal sources of liquidity were cash and cash equivalents of $85.3 million, current marketable
investments of $66.8 million and accounts receivable of $22.1 million. Also, we held $2.4 million of restricted cash which represented collateral for a commercial letter of credit. At September 26, 2009, we had a current ratio of 8.2 and held
no long-term debt. Working capital of $241.7 million was down slightly compared to the March 28, 2009 balance of $246.9 million.

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. Repurchases under the program
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.
We did not repurchase any shares under this program during the quarter ended September 26, 2009. As of September 26, 2009, a total of 372,825 shares have been repurchased for $5.3 million under this authorization at an average price of
$14.16 per share, which was 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. There is
no fixed completion date for the repurchase program.

As of September 26, 2009, we held a total of $15.6 million invested in auction rate
securities (ARS) at par value. Additionally, we held $4.0 million of par value ARS which were converted by the bond issuer to its preferred stock during the third quarter of fiscal 2009. 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 time of
purchase in fiscal 2007, these ARS were rated AAA and AA. The contractual maturities of these securities range up to calendar year 2050, and several securities



21



---

##### Table of Contents

and the preferred stock do not have stated maturities. 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 fiscal 2008, our ARS began to experience failed auctions.

Since that time, none of these securities have traded through the auction process and very few market transactions for these securities have been observed. Additionally, the bond insurers of the ARS and preferred stock experienced credit
rating downgrades throughout fiscal 2009. Consequently, it was determined that the declines in fair value of these securities during fiscal 2009 represented other-than-temporary impairments in accordance with U.S. generally accepted accounting
principles. Accordingly, at the end of each quarter of fiscal 2009, the cost bases of these securities were written down to their estimated fair values with other-than-temporary impairment charges totaling $13.6 million, of which $5.4 million was
recorded during the second quarter of fiscal 2009.

As of the beginning of the first quarter of fiscal 2010, in accordance with the adoption
of the Accounting Standards Codification (ASC) Topic 320 Investments - Debt and Equity Securities (ASC Topic 320), we recorded a cumulative-effect adjustment to increase the opening balance of retained earnings by $0.4 million, which
represented the non-credit portion of the ARS loss, previously recorded as an other-than-temporary impairment in the statement of operations. The credit loss portion of the ARS was determined by direct estimation of the change in fair value
attributable to market movements. We utilized market indices representing investments of constant credit quality over time and measured the index yield, which is considered attributable to non-credit related factors, at the beginning and end of the
period. The effect of this change in yield on the value of the security was measured and subtracted from the total change in fair value to arrive at the estimated change in value attributable to changes in credit quality. We also recorded fair value
adjustments to accumulated other comprehensive income of $1.1 million at the end of the first quarter of fiscal 2010 and $1.4 million in the second quarter of 2010 to reflect the estimated increase in fair value of the ARS. The net effect of these
adjustments and the $0.4 million cumulative-effect adjustment resulted in total unrealized gains on ARS as of September 26, 2009 of approximately $2.2 million. The $8.6 million estimated fair value of these securities is classified as a
non-current asset on the Condensed Consolidated Balance Sheet at September 26, 2009, consistent with the classification at September 27, 2008 and each subsequent reporting period.

We currently continue to receive all interest and preferred stock dividend payments when due. Given the continued challenges in the financial markets and
the prolonged credit crisis, we cannot reasonably predict if or when these securities will become liquid.

Sources and Uses of Cash for the
Quarter Ended September 26, 2009

Net cash flows used in operating activities totaled $1.2 million for the quarter ended
September 26, 2009. Significant impacts to cash flows for the period were the net loss of $6.1 million, adjusted for non-cash items totaling $1.8 million, offset by net improvements within working capital. Increases in accounts payable and
accrued liabilities provided operating cash of $3.3 million and net decreases in inventories provided operating cash of $2.9 million, while increases in trade receivables consumed $2.0 million and other working capital increases consumed $1.1
million.

For the quarter ended September 26, 2009, net cash used in investing activities of $38.5 million was primarily due to the
purchase of securities of $71.4 million offset by $35.3 million in proceeds from sales and maturities of securities. Net cash provided by financing activities of $0.1 million was attributable to proceeds from the exercise of stock options and stock
plans.

Sources and Uses of Cash for the Two Quarters Ended September 26, 2009

Net cash flows used in operating activities totaled $2.1 million for the two quarters ended September 26, 2009. Significant impacts to cash flows for
the period were the net loss of $11.7 million, adjusted for non-cash items totaling $3.6 million, offset by net improvements within working capital. Net decreases in inventories provided operating cash of $9.2 million while increases in trade
receivables consumed $2.7 million and other working capital increases consumed $0.6 million.



22



---

##### Table of Contents

For the two quarters ended September 26, 2009, net cash used in investing activities of $67.2 million
was primarily due to the purchase of securities of $117.7 million offset by $53.3 million in proceeds from sales and maturities of securities. Net cash used in financing activities of $0.1 million was attributable to $0.6 million share repurchases
partially offset by proceeds from the exercise of stock options and stock plans.

We believe that our existing cash, cash equivalents and
marketable securities are adequate to fund our operations, share repurchase program 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 28, 2009.

Fair Value Measurements

Effective
March 29, 2009, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157 pertaining to nonfinancial assets and liabilities. The Company had adopted the provisions of SFAS No. 157 pertaining to
financial assets and liabilities as of March 30, 2008. The adoption of SFAS No. 157 did not have a material impact on the Companys financial statements. SFAS No. 157 was incorporated into the Accounting Standards Codification
(ASC) within ASC Topic 820 Fair Value Measurements and Disclosures (ASC Topic 820).

In April 2009, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) FAS No. 157-4; FSP FAS No. 115-2 and FAS No. 124-2; and FSP No. 107 and APB No. 28-1. FSP FAS No. 157-4 provides guidance on how to determine the fair value of
assets and liabilities under SFAS No. 157 when there is no active market, and reaffirms the SFAS No. 157 objective to reflect an assets sale price in an orderly transaction at the date of the financial statements. FSP FAS
No. 157-4 was incorporated into the ASC within ASC Topic 820. FSP FAS No. 115-2 and FAS No. 124-2 modifies the requirements for recognizing other-than-temporarily-impaired debt securities and revises the existing impairment model for
such securities, by distinguishing between credit and non-credit components of impaired debt securities that are not expected to be sold. FASP FAS No. 115-2 and FAS No. 124-2 was incorporated into the ASC within ASC Topic 320. FSP FAS
No. 107-1 and APB No. 28-1 enhances disclosures about fair value for instruments under the scope of SFAS No. 157 for both interim and annual periods. FASP FAS No. 107-1 and APB No. 28-1 was incorporated into the ASC within
ASC Topic 825 Financial Instruments. The Company adopted these Staff Positions as of the first quarter of 2010.

Business
Combinations

The Company adopted SFAS No. 141R beginning in the first quarter of 2010. SFAS No. 141R was incorporated into the
ASC within ASC Topic 805 Business Combinations. The Company will apply the provisions of this statement prospectively to business combinations for which the acquisition date is subsequent to March 29, 2009.

Contractual Obligations

There have been no
significant changes in our contractual obligations subsequent to those reported in our 2009 Annual Report on Form 10-K for the year ended on March 28, 2009.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the market risk disclosure contained in our 2009 Annual Report on Form 10-K for the year ended on March 28, 2009. 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



23



---

##### Table of Contents

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 during the quarter ended September 26, 2009 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 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 $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 initially 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. Because we had amended our
claims in the cancellation action as described below, the Court asked the Court-appointed expert to respond to questions regarding the experts initial opinion. The Court-appointed expert conducted an additional inspection of each of these
systems on September 21, 2009, and will re-evaluate whether the systems infringe after we and All Ring submit briefs on this issue.

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 us to cancel two of the claims in the 207469 patent. 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 (MOEA) on September 12, 2008. On March 23, 2009, the MOEA dismissed the IPOs cancellation decision solely on procedural grounds. The MOEA remanded the case to the
IPO with a request that the IPO issue another decision within six months that rectifies the procedural defects of the IPOs earlier decision. On July 22, 2009, the IPO issued a decision dismissing All Rings cancellation action. All
Ring appealed the IPOs decision to the MOEA in August 2009.



24



---

##### Table of Contents

Pursuant to the Courts PAO and PIO, we were required to post Taiwan dollar security bonds with the
Court. In July 2009, we substituted a letter of credit as a partial substitution and received back $2.0 million of the security bonds from the Court. The letter of credit is collateralized by $2.4 million of restricted cash. The remaining security
bond balance, valued at approximately $7.1 million, is included in other assets on the Condensed Consolidated Balance Sheet at September 26, 2009. The restricted cash balance of $2.4 million is included in the Condensed Consolidated Balance
Sheet at September 26, 2009 as a current asset.

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

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 increased
significantly and expanded to general microelectronics and other markets during 2009 driven by the financial and credit markets and subsequent global economic weakening, resulting in a decrease in orders for all of our product groups in the second,
third and fourth quarters of 2009, with virtually no SG systems orders in the third and fourth quarters of 2009 and a low level of orders during the first two quarters of 2010. 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 would 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. These factors could cause us to use greater amounts of cash in our operating and investing activities, thereby reducing our
existing cash and investment balances. 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.

In the current environment, we also implemented several temporary cost reduction
measures, including salary reductions, furloughs and elimination of our match of 401(k) contributions. These reductions are temporary in nature and will not be sustained over a long period of time. For example, on October 1, 2009, the Company
reinstated a portion of the temporary salary reduction program. Accordingly, our current level of employee-related expenses is expected to increase in the future.



25



---

##### Table of Contents

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 financial crisis
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, historically one of our top 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, including those that are able to compete with new technological advancements;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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.



26



---

##### Table of Contents

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 2009
accounted for approximately 50% of total net sales in 2009, with one customer accounting for approximately 21% of total net sales. None of our customers have 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, as evidenced by one
customer accounting for approximately 21% of net sales in 2009. 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, historically one of our top 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. For example, for many years, the semiconductor memory industry has employed alternative redundancy technologies. The adoption by our customers of
non-laser based redundancy technology could have a material adverse effect on demand for our SG products. 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 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.



27



---

##### Table of Contents

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, natural disasters or other causes. 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 and our technology roadmap. If these projections are incorrect, or our technology strategy changes,
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. We also order materials based on our technology roadmap which we expect to be utilized in new products. 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. For example, at
September 26, 2009, we had $77.2 million of inventory reflected on our Condensed Consolidated Balance Sheet, much of which we purchased or committed to purchase prior to the time the severity of the current economic downturn became apparent. 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 would negatively affect our financial results. Also, if we alter our technology or product
development strategy, we may have inventory which may not be usable under the new strategy, which may result in material accounting charges. For example, during 2009, we wrote-off $4.1 million of material from a research, development, and
engineering program due to a change in our product development strategy.



28



---

##### Table of Contents

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 decline. 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 facilities expose us to employer-related risks in foreign countries.

We have established direct sales and service organizations throughout the world. We have also established research and development facilities in China and
Taiwan. 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.



29



---

##### Table of Contents

We may make acquisitions in the future, and these acquisitions may subject us to risks associated with
integrating these businesses into our current business.

We may make acquisitions of, or significant investments in, other businesses
with complementary products, services or technologies. Acquisitions involve 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 enterprise resource planning (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 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 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 an acquisition on a timely basis or at all. In addition, if we issue common stock to pay for an 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. If we use cash to pay for an acquisition, the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. If we need to
borrow funds in connection with an acquisition, we would be required to use cash to service the debt and to comply with financial and other covenants. In addition, the accounting for an acquisition could result in significant charges resulting from
amortization of intangible assets we acquire, and new accounting guidelines, effective beginning 2010, will require that acquisition transaction costs be expensed as incurred rather than capitalized.

We may also make 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 81% of net sales in 2009, with 70% 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;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ------------------------------------------------------------------------------------------------



30



---

##### Table of Contents

| |  |  | 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 because 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 and are currently
under audit by the United States Internal Revenue Service. 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.

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 bases of these securities to their estimated fair value with other-than-temporary impairment charges to earnings and we may have to write them
down further in the future.

As of September 26, 2009, we held a total of $15.6 million invested in ARS at par value.
Additionally, we held $4.0 million of par value ARS which were converted by the bond issuer to its preferred stock during the third quarter of 2009. 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 securities. 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. 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.



31



---

##### Table of Contents

Since that time, none of these securities have traded through the auction process and very few market
transactions for these securities have been observed. Additionally, the bond insurers of the ARS and preferred stock experienced credit rating downgrades throughout 2009. Consequently, it was determined that the declines in fair value of these
securities during 2009 represented other-than-temporary impairments in accordance with U.S. generally accepted accounting principles. Accordingly, at the end of each quarter of 2009, the cost bases of these securities were written down to their
estimated fair values with other-than-temporary impairment charges totaling $13.6 million, of which $5.4 million was recorded during the second quarter of 2009. We also recorded fair value adjustments to accumulated other comprehensive income of
$1.1 million at the end of the first quarter of 2010 and $1.4 million in the second quarter of 2010 to reflect the estimated increase in fair value of the ARS. The $8.6 million estimated fair value of these securities is classified as a non-current
asset on the Condensed Consolidated Balance Sheet at September 26, 2009, consistent with the classification at September 27, 2008 and each subsequent reporting period.

Given the continued challenges in the global financial markets and the prolonged credit crisis, we cannot reasonably predict when or if these securities will become liquid, and 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 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.

It is also 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.

Item 4. Submission of Matters to a Vote of Security Holders

The 2009 Annual Meeting of Shareholders of the Company was held pursuant to notice at 2:00 p.m. Pacific time on August 13, 2009 at the Companys offices in Portland, Oregon to consider and vote upon:



|           |  |                                                                                                                                                                              
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Proposal 1 |  | To elect two directors to a term of three years.                                                                                                                             
|           | 
|Proposal 2 |  | To approve a proposed amendment to ESIs 1990 Employee Stock Purchase Plan to increase the number of shares reserved for issuance under the plan from 1,900,000 to 3,400,000.
|           | 
|Proposal 3 |  | To ratify the appointment of KPMG LLP as ESIs independent registered public accounting firm for the fiscal year ending April 3, 2010.                                       



32



---

##### Table of Contents

The results of the voting on these proposals were as follows:

Proposal 1



|                     |  |            |  |           
|-------------------- |  | ---------- |  | ----------
|Election of Director |  | For        |  | Withheld  
|Jon D. Tompkins      |  | 14,004,661 |  | 11,599,191
|Richard J. Faubert   |  | 14,028,931 |  | 11,574,921



|           |  |            |  |           |  |         |  |                
|---------- |  | ---------- |  | --------- |  | ------- |  | ---------------
|           |  | For        |  | Against   |  | Abstain |  | Brokernon-votes
|Proposal 2 |  | 19,177,162 |  | 3,491,520 |  | 987,751 |  | 1,947,419      



|           |  |            |  |         |  |        
|---------- |  | ---------- |  | ------- |  | -------
|           |  |            | 
|           |  | For        |  | Against |  | Abstain
|Proposal 3 |  | 25,311,237 |  | 284,581 |  | 8,034  

Item 6. Exhibits

This list is intended to constitute the exhibit index.



| | 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 | Articles of Amendment to Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.1 of the Companys Current Report on form 8-K filed on
May 19, 2009 (the May 19 8-K).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3.5 | 2009 Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.2 of the May 19 8-K.
| | --- | ---------------------------------------------------------------------------------------------



| | 4.1 | Rights Agreement, dated as of May 18, 2009, between Electro Scientific Industries, Inc. and Mellon Investor Services LLC. Incorporated by reference to Exhibit 4.1
of the May 19 8-K.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 10.1 | Form of Stock Appreciation Rights Agreement.
| | ---- | --------------------------------------------



| | 31.1 | Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
| | ---- | ----------------------------------------------------------------------------------------------------------



| | 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.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------



33



---

##### 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: November 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)                 



34