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 July 1, 2012


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 000-24838





MATTSON TECHNOLOGY, INC.


(Exact name of Registrant as Specified in its Charter)


Delaware77-0208119(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification Number)





47131 Bayside Parkway


Fremont, California 94538


(Address of Principal Executive Offices including Zip Code)


(510) 657-5900


(Registrant's Telephone Number, Including Area Code)


____________________________________________________________________________


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 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 x NO  ̈


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ̈Accelerated filerxNon-accelerated filer ̈Smaller reporting company ̈(Do not check if a 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


At August 3, 2012 there were 58,595,450 shares of common stock outstanding.




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Note: PDF provided as a courtesy





MATTSON TECHNOLOGY, INC.


______________________________


TABLE OF CONTENTS


PagePART I. FINANCIAL INFORMATIONItem 1.Financial Statements (unaudited):Condensed Consolidated Statements of Operations for the Three and Six Months Ended July1, 2012 and July 3, 20112Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended July 1, 2012 and July 3, 20113Condensed Consolidated Balance Sheets as of July 1, 2012 and December 31, 20114Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2012 and July 3, 20115Notes to Condensed Consolidated Financial Statements6Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations17Item 3.Quantitative and Qualitative Disclosures About Market Risk24Item 4.Controls and Procedures25PART II. OTHER INFORMATIONItem 1.Legal Proceedings26Item 1A.Risk Factors26Item 2.Unregistered Sales of Equity Securities and Use of Proceeds36Item 3.Default Upon Senior Securities36Item 4.Mine Safety Disclosures36Item 5.Other Information36Item 6.Exhibits37Signatures38


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PART I. FINANCIAL INFORMATION


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|Item 1. | Financial Statements (unaudited)

MATTSON TECHNOLOGY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited, in thousands, except per share amounts)


Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011Net sales$34,884$51,259$85,388$98,308Cost of sales21,62937,27555,19971,443Gross profit13,25513,98430,18926,865Operating expenses:Research, development and engineering5,7916,64512,42113,160Selling, general and administrative9,70511,38020,57222,892Restructuring charges831(13)1,551(78)Total operating expenses16,32718,01234,54435,974Loss from operations(3,072)(4,028)(4,355)(9,109)Interest income (expense), net39587037Other income (expense), net(277)(969)105(2,475)Loss before income taxes(3,310)(4,939)(4,180)(11,547)Provision for (benefit from) income taxes36274285(60)Net loss$(3,346)$(5,213)$(4,465)$(11,487)Net loss per share:Basic and diluted$(0.06)$(0.10)$(0.08)$(0.22)Shares used in computing net loss per share:Basic and diluted58,50754,55058,46352,395


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


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MATTSON TECHNOLOGY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(Unaudited, in thousands)


Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011Net loss$(3,346)$(5,213)$(4,465)$(11,487)Other comprehensive income (loss), net of taxForeign currency translation adjustments(189)859(85)2,687Unrealized investment gain—11615118Other comprehensive income (loss)(189)975(70)2,805Comprehensive loss$(3,535)$(4,238)$(4,535)$(8,682)





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


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MATTSON TECHNOLOGY, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited, in thousands, except par value)


July 1, 2012December 31, 2011ASSETSCurrent assetsCash and cash equivalents$28,870$31,073Restricted cash1,8771,877Accounts receivable, net of allowance for doubtful accounts of $619 as of July 1, 2012 and $684 as of December 31, 201119,02825,278Advance billings2,4185,071Inventories36,58129,203Prepaid expenses and other current assets6,7839,024Total current assets95,557101,526Property and equipment, net7,68710,552Intangibles, net625750Other assets7401,015Total assets$104,609$113,843LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable$15,494$16,785Accrued compensation and benefits5,9245,781Deferred revenue-current9,98212,117Other current liabilities8,91810,666Total current liabilities40,31845,349Deferred revenues, non-current3,4993,158Other long-term liabilities4,1825,191Total liabilities47,99953,698Commitments and contingencies (Note 6)Stockholders' equity:Preferred stock, 2,000 shares authorized; none issued and outstanding——Common stock, par value $0.001, 120,000 shares authorized; 62,744 shares issued and 58,654 shares outstanding as of July 1, 2012; 62,547 shares issued and 58,366 shares outstanding as of December 31, 20116363Additional paid-in capital651,110650,110Accumulated other comprehensive income20,40220,472Treasury stock, 4,181 shares as of July 1, 2012 and December 31, 2011(37,986)(37,986)Accumulated deficit(576,979)(572,514)Total stockholders' equity56,61060,145Total liabilities and stockholders' equity$104,609$113,843


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


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MATTSON TECHNOLOGY, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited, in thousands)


Six Months EndedJuly 1, 2012July 3, 2011Cash flows from operating activities:Net loss$(4,465)$(11,487)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Allowance for doubtful accounts(65)308Depreciation and amortization1,7813,227Stock-based compensation7571,403Deferred income taxes117—Changes in assets and liabilities:Accounts receivable6,3916,742Advance billings2,653(886)Inventories(5,778)3,794Prepaid expenses and other current assets2,225824Other assets177212Accounts payable(1,188)(5,004)Accrued liabilities(1,579)4,865Deferred revenue(1,794)1,223Income taxes payable, non-current and other liabilities(974)(170)Net cash provided by (used in) operating activities(1,742)5,051Cash flows from investing activities:Maturities of available-for-sale investments—2,151Decrease in restricted cash—1,196Purchases of property and equipment(731)(496)Net cash provided by (used in) investing activities(731)2,851Cash flows from financing activities:Proceeds from stock plans, net24213,128Net cash provided by financing activities24213,128Effect of exchange rate changes on cash and cash equivalents282,152Net increase (decrease) in cash and cash equivalents(2,203)23,182Cash and cash equivalents, beginning of period31,07316,863Cash and cash equivalents, end of period$28,870$40,045


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


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MATTSON TECHNOLOGY, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





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|1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations


Mattson Technology, Inc. was incorporated in California in 1988 and reincorporated in Delaware in 1997. We design, manufacture, market and globally support semiconductor wafer processing equipment used in the fabrication of integrated circuits.


Basis of Presentation


The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly each of the statement of financial position as of July 1, 2012 , the results of operations for the three and six months ended July 1, 2012 and July 3, 2011 and the statements of cash flows for the six months ended July 1, 2012 and July 3, 2011, as applicable, have been made. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2011 , which are included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2012. Certain prior year amounts have been reclassified to conform to the current presentation.


The condensed consolidated financial statements include the accounts of Mattson Technology, Inc. and our wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.


The results of operations for the three and six months ended July 1, 2012 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2012 .


Fiscal Year


Our fiscal year ends on December 31. We close our first fiscal quarter on the Sunday closest to March 31. Our second and third fiscal quarters are each 13 weeks long and our fourth quarter closes on December 31.


Use of Estimates


The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. We evaluate our estimates on an ongoing basis, including those related to the useful lives and fair value of long-lived assets, estimates used to determine facility lease loss liabilities, measurement of warranty obligations, valuation allowances for deferred tax assets, the fair value of stock-based compensation, estimates for allowance for doubtful accounts, and valuation of excess and obsolete inventories. Our estimates and assumptions can be subjective and complex and consequently actual results could differ materially from those estimates.


Reclassifications


For presentation purposes, certain prior period amounts have been reclassified to conform to the reporting in the current period financial statements. We reclassified certain prior period costs, including approximately $1.4 million and $2.5 million for the three and six months ended July 3, 2011, related to our spare parts business from selling, general and administrative expense to cost of sales, as they more appropriately reflect costs associated with revenue generating activities. These reclassifications do not affect our net income, cash flows or stockholders' equity.


Liquidity and Management Plans


As of July 1, 2012 we had cash, cash equivalents and restricted cash of $30.7 million and working capital of $55.2 million . We believe that our cash balances will be sufficient to fund our working and other capital requirements over the course of the next twelve months. Our operations require careful management of our cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in our net sales, gross profits and operating expenses, as well as changes in our operating assets and liabilities. The cyclicality of the semiconductor industry makes it difficult to predict our


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future liquidity needs with certainty. Any upturn in the semiconductor industry would result in short-term uses of cash to fund inventory purchases.  In addition, the ineffectiveness of our cost reduction efforts may cause us to incur additional losses in the future and lower our cash balances. We may need additional funds to support our working capital requirements and operating expenses, or for other requirements. Historically, we have relied on a combination of fundraising from the sale and issuance of equity securities (such as our common stock offering in May 2011), and cash generated from product, service and royalty revenues to provide funding for our operations. In addition, our stock may be subject to eventual delisting from NASDAQ if we do not maintain a minimum $1.00 per share trading price. We will continue to review our expected cash requirements and take appropriate cost reduction measures to ensure that we have sufficient liquidity. However, though we will pursue these measures, we are largely dependent upon improvement in the semiconductor equipment industry specifically, and general continued improvement in the economy as a whole, to increase our sales in order to improve our profitability and cash position. We periodically review our liquidity position and may decide to raise additional funds, and may seek such funding from a combination of sources including issuance of equity or debt securities through public or private financings. These financing options may not be available on a timely basis, or on terms acceptable to us, and could be dilutive to our stockholders. If adequate funds are not available on acceptable terms, our ability to achieve our intended long-term business objectives could be limited.


Recent Accounting Pronouncements


In September 2011, the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other - Testing Goodwill for Impairment to simplify goodwill impairment testing by permitting an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. We adopted this accounting guidance on January 1, 2012, and this adoption did not have a material impact on our financial statements and disclosures.


In June 2011, the FASB issued ASU No. 2011-05, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders' equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income that contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  In December 2011, the FASB issued additional guidance that defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income. The deferral is temporary until the FASB reconsiders the operational concerns and needs of financial statement users. We adopted ASU No. 2011-05 on January 1, 2012, although the adoption of this update did not have an impact on our financial statements other than to change the manner in which comprehensive income is presented.


In May 2011, the FASB issued ASU No. 2011-04, an amendment to ASC 820, Fair Value Measurements , providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. We adopted this amendment on January 1, 2012, the adoption of which did not have a material effect on our financial statement and disclosures.


There were no other recent accounting pronouncements or changes in accounting pronouncements during the six months ended July 1, 2012 , compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 , that are of significance or potential significance to us.





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|2. | BALANCE SHEET DETAILS

Restricted Cash


We had restricted cash of $1.9 million as of July 1, 2012 and December 31, 2011 , respectively, which is related to secured standby letters of credit provided to certain landlords and vendors. See Note 6. Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.


Components of inventories as of July 1, 2012 and December 31, 2011 are shown below (in thousands):


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July 1, 2012December 31, 2011Inventories, net:Purchased parts and raw materials$20,757$17,693Work-in-process7,1507,266Finished goods8,6744,244$36,581$29,203


Amounts in the table are presented net of inventory valuation charges for excess and or obsolete inventories. For the three months ended July 1, 2012 and July 3, 2011, we recorded net benefits of approximately $0.7 million and $0.5 million respectively.  For the six months ended July 1, 2012 and July 3, 2011, we recorded net benefits of approximately $1.3 million and $1.1 million respectively.


Components of prepaid expenses and other current assets as of July 1, 2012 and December 31, 2011 are shown below (in thousands):


July 1, 2012December 31, 2011Prepaid expenses and other current assets:Prepaid value-added tax$2,388$2,996Retirement insurance - foreign employees1,1871,185Other current assets3,2084,843$6,783$9,024


Components of property and equipment as of July 1, 2012 and December 31, 2011 are shown below (in thousands):


July 1, 2012December 31, 2011Property and equipment, net:Machinery and equipment$42,328$45,174Furniture and fixtures9,67610,002Leasehold improvements17,39317,75969,39772,935Less: accumulated depreciation(61,710)(62,383)$7,687$10,552


Components of other current liabilities as of July 1, 2012 and December 31, 2011 are shown below (in thousands):


July 1, 2012December 31, 2011Other current liabilities:Warranty$2,915$3,419Value-added tax1,4202,073Restructuring1,3071,230Other3,2763,944$8,918$10,666





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|3. | FAIR VALUE

We measure certain assets and liabilities at fair value, which is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The authoritative guidance on fair value measurements establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


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Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.


Level 2. Include other inputs that are directly or indirectly observable in the marketplace.


Level 3 . Unobservable inputs that are supported by little or no market activities.


Our money market funds and investment instruments are classified within Level 1 of the fair value hierarchy, as these instruments are valued using quoted market prices. Specifically, we value our investments in money market securities, certificates of deposit and plan assets under our deferred compensation plan based on quoted market prices in active markets. As of July 1, 2012 and December 31, 2011 , we had no assets or liabilities classified within Level 2 or Level 3 and there were no transfers of instruments between Level 1 and Level 2 regarding fair value measurement.


Cash and cash equivalents, short-term investments and restricted cash are carried at fair value. Accounts receivable and accounts payable are valued at their carrying amounts, which approximate fair value due to their short-term nature.


Assets and Liabilities Measured at Fair Value on a Recurring Basis


Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments as of July 1, 2012 and December 31, 2011 (in thousands):


July 1, 2012December 31, 2011Fair Value Measurements atReporting Date UsingFair Value Measurements atReporting Date Using(Level 1)Total(Level 1)TotalAssets measured at fair value:Cash equivalents:Money market funds$16,036$16,036$13,039$13,039Other assets:Equity instruments4343168168Total assets measured at fair value$16,079$16,079$13,207$13,207Liabilities measured at fair value:Other liabilities:Deferred compensation$43$43$168$168Total liabilities measured at fair value$43$43$168$168


Equity instruments in the preceding table represent plan assets under our deferred compensation plan, which offset corresponding deferred compensation plan liabilities as of the dates presented.





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|4. | INTANGIBLE ASSETS

Identified intangible assets consisted of the following as of July 1, 2012 and December 31, 2011 (in thousands):


July 1, 2012December 31, 2011Intangibles, net:Developed technology$1,250$1,250Accumulated amortization(625)(500)$625$750





For the three months ended July 1, 2012 and July 3, 2011, amortization expense for intangibles was 0.06 million each period.  For the six months ended July 1, 2012 and July 3, 2011, amortization expense for intangibles was 0.13 million each period.








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|5. | RESTRUCTURING CHARGES

In December 2011, we initiated a cost reduction plan ("2011 Restructuring Plan"), which included the transition of our


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operations in Canada to our German facility, moving a portion of our outsourced spare parts logistics operations in-house, workforce reductions, elimination of certain contractors, and renegotiating certain contracts.  In the first quarter of 2012, we initiated a second phase of the 2011 Restructuring Plan, which includes a reduction in force; lower level of investments in customer evaluation systems; renegotiating key contracts with outside service providers; production material cost savings; additional reduction in outside contractors; and reduced spending in discretionary areas.  Total estimated one-time costs for the first two phases are $3.5 million to $4.5 million with an estimated remaining range of $0.4 million to $1.0 million to be incurred in the second half of 2012.


In addition, we will continue to address the near term weakness in our sector by focusing on additional cost reductions throughout the remainder of 2012. These reductions will be implemented throughout the third and fourth quarters and will entail a broader reduction in force and a global restructuring that will consolidate certain functions to enable better leverage of the corporate infrastructure and the optimization of our business model.  The estimated restructuring costs for these activities are still under evaluation while the related restructuring plans are finalized.


The beginning restructuring reserve balance includes $0.9 million of contract termination costs established prior to 2011, which related to future rent obligations associated with two vacated leased facilities net of sublease income. During the three months ended July1, 2012, we expensed $0.8 million in employee severance and other expenses, paid $0.9 million of employee severance and other expenses, and paid $0.4 million of contract termination costs under the 2011 Restructuring Plan. During the six months ended July 1, 2012 we recorded $1.6 million of employee severance and other expenses.  We paid $1.5 million in employee severance and other expenses and paid $0.9 million in contract termination costs related to the 2011 restructuring plan.  To date, we have recorded $3.3 million related to this plan.


The following table summarizes changes in the restructuring accrual for the three and six months ended July 1, 2012 (in thousands):


Three Months Ended July 1, 2012Six Months Ended July 1, 2012EmployeeSeveranceCostsContractTerminationCostsOtherCostsTotalEmployeeSeveranceCostsContractTerminationCostsOtherCostsTotalBeginning balance$264$2,148$—$2,412$82$2,661$—$2,743Expensed729—1028311,315—2361,551Payments(833)(420)(102)(1,355)(1,295)(929)(236)(2,460)Reserve adjustments(10)——(10)53(14)—39Foreign currency changes—(21)—(21)(5)(11)—(16)Ending balance$150$1,707$—$1,857$150$1,707$—$1,857


As of July 1, 2012 , $1.3 million of the restructuring accrual was classified as short-term and recorded within accrued liabilities in the Condensed Consolidated Balance Sheets, and the remaining $0.6 million of the restructuring accrual was classified as long-term and recorded within other liabilities in the Condensed Consolidated Balance Sheets.





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|6. | COMMITMENTS AND CONTINGENCIES

Warranty


The warranty offered by us on our system sales is generally twelve months, except where previous customer agreements state otherwise, and excludes certain consumable maintenance items. A provision for the estimated cost of warranty, based on historical costs, is recorded as cost of sales when the revenue is recognized. Our warranty obligations require us to repair or replace defective products or parts during the warranty period at no cost to the customer. The actual system performance and/or field warranty expense profiles may differ from historical experience, and in those cases, we adjust our warranty accruals accordingly.


The following table summarizes changes in our product warranty accrual for the three and six months ended July 1, 2012 and July 3, 2011 (in thousands):


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Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011Beginning balance$2,693$2,954$3,419$2,539Warranties issued in the period6649881,6062,077Costs to service warranties(1,222)(617)(2,435)(1,610)Warranty accrual adjustments7807603251,079Ending balance$2,915$4,085$2,915$4,085


Guarantees


In the ordinary course of business, our bank provides standby letters of credit or other guarantee instruments on our behalf to certain parties as required. The standby letters of credit are secured by certificates of deposit, which are classified as restricted cash in the accompanying Condensed Consolidated Balance Sheets. We have never recorded any liability in connection with these guarantee arrangements beyond what is required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under such guarantee arrangements. As of July 1, 2012 , the maximum potential amount that we could be required to pay was $1.9 million , the total amount of outstanding standby letters of credit, which were secured by $1.9 million in money market collateral accounts. This amount was recorded as restricted cash as of July 1, 2012 .


In connection with our acquisition of Vortek Industries, Ltd. ("Vortek") in 2004, we became party to an agreement between Vortek and the Canadian Minister of Industries (the "Minister") relating to an investment in Vortek by Technology Partnerships Canada. Under the agreement, as amended, we, or Vortek (renamed Mattson Technology, Canada, Inc. ("MTC")) agreed to various terms, including (i) payment by us of a royalty to the Minister of 1.4 percent of net sales from certain Flash RTP products, up to a total of C$14.3 million (approximately $13.9 million based on the applicable exchange rate as of July 1, 2012 ), (ii) MTC through October 27, 2009 maintaining a specified average workforce of employees in Canada, making certain investments and complying with certain manufacturing, and (iii) certain other covenants concerning protection of intellectual property rights. Under the provisions of this agreement, if MTC is dissolved, files for bankruptcy or we, or MTC, do not materially satisfy the obligations pursuant to any material terms or conditions, the Minister could demand payment of liquidated damages in the amount of C$14.3 million less any royalties paid to the Minister. As of October 27, 2009, we were no longer subject to covenant (ii), as discussed above but are still subject to the remaining terms and conditions until the earlier of payment of royalty of C$14.3 million (approximately $13.9 million based on the applicable exchange rate as of July 1, 2012 ) or through December 31, 2020.  The movement of our Canadian operations to Germany will not result in the dissolution of MTC.


We are a party to a variety of agreements, pursuant to which we may be obligated to indemnify other parties with respect to certain matters. Typically, these obligations arise in the context of contracts under which we may agree to hold other parties harmless against losses arising from a breach of representations or with respect to certain intellectual property, operations or tax-related matters. Our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have defenses to asserted claims and/or recourse against third parties for payments made. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these agreements have not had a material effect on our financial position, results of operations or cash flows. We believe if it were to incur a loss in any of these matters, such loss would not have a material effect on our financial position, results of operations or cash flows.


We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and certain senior officers. We have not recorded a liability associated with these indemnification agreements, as we historically have not incurred any material costs associated with such indemnification agreements. Costs associated with such indemnification agreements may be mitigated, in whole or only in part, by insurance coverage that we maintain.


Government Agencies


As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S. these laws include the International Traffic in Arms Regulations ("ITAR") administered by the State Department's Directorate of Defense Trade Controls, the Export Administration Regulations ("EAR") administered by the Bureau of Industry and Security ("BIS"), and trade sanctions against


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embargoed countries and destinations administered by the U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC"). The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called "dual use" items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. In addition, we must comply with certain requirements related to documentation, record keeping, plant visits and hiring of foreign nationals.


As previously reported, in 2008 we self-disclosed to BIS certain inadvertent EAR violations. In April 2012, we entered into a settlement agreement with BIS that resolved in full all matters contained in our voluntary self-disclosure. Under the settlement, we agreed to a civil penalty of $850,000 of which we paid $250,000 in May 2012 with the remaining $600,000 suspended for a period of one year and will be waived provided that no violations occur during that period.


Litigation


In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we cannot be certain of this. The defense of claims or actions against us, even if without merit, could result in the expenditure of significant financial and managerial resources.


We record a legal liability when we believe it is both probable that a liability has been incurred, and the amount can be reasonably estimated. We monitor developments in our legal matters that could affect the estimate we have previously accrued. Significant judgment is required to determine both probability and the estimated amount.





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|7. | EMPLOYEE STOCK PLANS

On May 10, 2012, our shareholders approved our 2012 Equity Incentive Plan (the "2012 Plan"), which amended and restated the 2005 Equity Incentive Plan to increase our common stock available for grant under the plan by 2.5 million shares.


Options to purchase common stock granted under the 2012 Plan generally have terms not exceeding seven years. Options to purchase stock under our equity incentive plans are generally granted at exercise prices that are at least 100 percent of the fair market value of our common stock on the date of grant. Generally, 25 percent of the options vest on the first anniversary of the vesting commencement date, and the remaining options vest 1/36 per month for the next 36 months thereafter.


Stock Options


The following table summarizes the stock option activity under all of our equity incentive plans for the six months ended July 1, 2012 :


Number of SharesWeighted-AverageExercisePriceWeighted Average Remaining TermAggregated Intrinsic Value(thousands)(years)(thousands)Outstanding at December 31, 20116,489$4.37Granted1,260$2.78Exercised(132)$1.13Canceled or forfeited(596)$4.68Outstanding at July 1, 20127,021$4.123.9$827Vested and expected to vest at July 1, 20126,513$4.243.8$798Exercisable at July 1, 20124,336$5.102.7$633


The following table provides information pertaining to the our stock options for the six months ended July 1, 2012 and July 3, 2011 (in thousands, except weighted-average fair values):


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Six Months EndedJuly 1, 2012July 3, 2011Weighted-average fair value of options granted$1.78$2.39Intrinsic value of options exercised$197$69Cash received from options exercised$150$48


The aggregate intrinsic value represent the pre-tax differences between the exercise price of stock options and the quoted market price of our stock on July 1, 2012 and July 3, 2011, respectively, for all in-the-money options. There were approximately 1.0 million shares of common stock subject to in-the-money options that were exercisable as of July 1, 2012.


Restricted Stock Units


The 2012 Plan provides for grants of time-based and performance-based RSUs.





Time-Based Restricted Stock Units





Generally, 25 percent of the time-based RSUs vest on each anniversary of the vesting commencement date or date of grant. On occasion, we grant time-based RSUs for varying purposes with different vesting schedules. Time-based RSUs granted under the 2012 Plan are counted against the total number of shares of common stock available for grant under the plan at 1.75 shares of common stock for every one share of common stock subject thereto.





During the three and six months ended July 1, 2012 and July 3, 2011, we did not grant any time-based RSUs. The associated stock-based compensation expense on time-based RSUs is determined based on the fair value of our common stock on the date of grant of the RSU and recognized over the vesting period.  As of July 1, 2012, we had approximately 5,000 time-based RSUs outstanding.





Performance-Based Restricted Stock Units





The vesting of performance-based RSUs is contingent on our achievement of certain predetermined financial goals and in some cases, the achievement of certain market performance measures. The amount of stock-based compensation expense recognized in any one period can vary based on the achievement or anticipated achievement of these specific performance goals. If a performance goal is not met or is not expected to be met, no compensation cost would be recognized on the underlying RSUs, and any previously recognized compensation expense on those RSUs would be reversed.





As of December 31, 2011 , we had 0.2 million performance-based RSUs outstanding.  During the first quarter of 2012, all of these performance-based RSUs expired.  We did not record any compensation expense related to these performance-based RSUs during the three and six months ended July 1, 2012 and July 3, 2011 since the performance targets were not met.


The following table summarizes restricted stock units ("RSUs") activity under all of our equity incentive plans for the six months ended July 1, 2012 :


Number of SharesWeighted Average Grant Date Fair Value(thousands)Outstanding at December 31, 2011246$3.50Granted—N/AReleased(13)$5.80Expired(228)$3.32Outstanding at July 1, 20125$5.83





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|8. | STOCK-BASED COMPENSATION

We account for stock-based compensation in accordance with the applicable authoritative guidance, which requires the


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measurement of stock-based compensation on the date of grant based on the fair value of the award, and the recognition of the expense over the requisite service period for the employee. Compensation related to restricted stock units is the intrinsic value on the date of grant, which is the closing price of our common stock less the employee exercise price, if any. Compensation related to stock options is determined using a stock option valuation model.


Valuation Assumptions


We use the Black-Scholes valuation model to determine the fair value of stock options. The Black-Scholes model requires the input of highly subjective assumptions, which are summarized in the table below for the three and six months ended July 1, 2012 and July 3, 2011 :


Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011Expected dividend yield————Expected stock price volatility81%77%81%77%Risk-free interest rate0.7%1.7%0.8%2.1%Expected life of options in years5555


We estimate the expected life of options based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. Expected volatility is based on the historical volatility of our common stock; and the risk-free interest rate is the rate on a U.S. Treasury Bill, with a maturity approximating the expected life of the option. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, the expected dividend yield is zero .


Our stock-based compensation in the three and six months ended July 1, 2012 and July 3, 2011 was as follows (in thousands):


Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011Stock-based compensation by type of award:Stock options$343$640$732$1,320Restricted stock units4301568Employee stock purchase plan551015$352$675$757$1,403Stock-based compensation by category of expense:Cost of sales$17$22$32$56Research, development and engineering74115147241Selling, general and administrative2615385781,106$352$675$757$1,403





We did not capitalize any stock-based compensation as inventory in the three and six months ended July 1, 2012 and July 3, 2011 , as such amounts were immaterial. As of July 1, 2012 , we had $3.1 million in unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock options which will be recognized over a weighted-average period of 2.9 years.





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|9. | GEOGRAPHIC AND CUSTOMER CONCENTRATION INFORMATION

We have one operating segment in which we design, manufacture and market advanced fabrication equipment for the semiconductor manufacturing industry. The authoritative guidance on segment reporting and disclosure defines operating segment as a component of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. As our business is completely focused on one industry segment, the design, manufacture and marketing of advanced fabrication equipment to the semiconductor manufacturing industry, management believes that we have one reportable segment. Our net sales and profits are


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generated from the sales of systems and services in this one segment. For the purposes of evaluating our reportable segments, our Chief Executive Officer is the chief operating decision maker, as defined in the applicable authoritative guidance.


The following table summarizes net sales by geographic areas based on the installation locations of the systems and the location of services rendered (in thousands except percentage):


Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011AmountPercentAmountPercentAmountPercentAmountPercentNet sales:United States$2,0746$1,7403$12,24414$2,8233Korea18,7985421,3884243,0565143,52144Taiwan4,0871214,3782812,0301423,33224China2,34373,64373,900510,21810Other Asia3,814116,420136,322710,62511Europe and others3,768103,69077,83697,7898$34,884100$51,259100$85,388100$98,308100


For the three and six months ended July 1, 2012, one customer accounted for 10% or more of our total net sales.   Sales to this customer represented approximately 49 percent and 56 percent of our total net sales for the three and six months ended July 1, 2012, respectively.


In the three and six months ended July 3, 2011, two customers accounted for 10% or more of our total net sales. Sales to these customers represented approximately 38 percent and 14 percent of our total net sales for the three months ended July 3, 2011, respectively.  Sales to these customers represented approximately 39 percent and 14 percent of our total net sales for the six months ended July 3, 2011, respectively.


At July 1, 2012 , three customers accounted 10% or more of our net accounts receivable, representing approximately 49 percent, 15 percent and 12 percent of our total net accounts receivable, respectively. At December 31, 2011 , three customers accounted for 10% or more of our net accounts receivable, representing approximately 48 percent, 15 percent and 13 percent of our total net accounts receivable, respectively.


Geographical information relating to our property and equipment, net, as of July 1, 2012 and December 31, 2011 was as follows (in thousands):


July 1, 2012December 31, 2011Property and equipment, net:United States$4,571$5,306Germany2,3762,396Canada2122,281Others528569$7,687$10,552





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|10. | INCOME TAXES

On a quarterly basis, we record our income tax expense or benefit based on our year-to-date results and expected remaining year-to-date operations.


We recorded an income tax provision of $0.04 million and $0.3 million for the three and six months ended July 1, 2012 , respectively. We recorded a $0.3 million income tax expense and a $0.1 million income tax benefit for the three and six months ended July 3, 2011 , respectively.  The net tax provision for the three and six months ended July 1, 2012 is the result of the mix of profits earned by us, in tax jurisdictions with a broad range of income tax rates. The $0.1 million tax benefit for the six months ended July 3, 2011 includes a $0.4 million tax benefit related to the release of uncertain tax benefits due to a lapse of the statute of limitations.


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|11. | NET LOSS PER SHARE

We present both basic and diluted net loss per share on the face of our condensed consolidated statements of operations in accordance with the authoritative guidance on earnings per share. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Since we had net losses in the three and six months ended July 1, 2012 and July 3, 2011 , none of the stock options and restricted stock units were included in the computation of diluted shares for these periods, as inclusion of such shares would have been anti-dilutive.


The following table summarizes the incremental shares of common stock from potentially dilutive securities, calculated using the treasury stock method (in thousands):


Three Months EndedSix Months EndedJuly 1, 2012July 3, 2011July 1, 2012July 3, 2011Weighted-average common shares outstanding - basic58,50754,55058,46352,395Effect of diluted potential common shares from stock options and restricted stock units————Weighted-average common shares outstanding - diluted58,50754,55058,46352,395


All outstanding options to purchase our common stock and restricted stock units are potentially dilutive securities. As of July 1, 2012 and July 3, 2011 , the combined total of options to purchase common stock and restricted stock units outstanding were 7.0 million and 7.2 million , respectively.  However, since we had net losses for the three and six months ended July 1, 2012 and July 3, 2011, no potentially dilutive securities were included in the computation of diluted shares for those years as inclusion of such shares would have been anti-dilutive.  Accordingly, basic and diluted net loss per share were the same in each period reported.





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|ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDIDTION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q contains forward-looking statements, which are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industry. Our forward-looking statements may include statements that relate to our future revenue, earnings, cash flow and cash position; growth of the industry and the size of our served available market; the timing of significant customer orders for our products; customer acceptance of delivered products and our ability to collect amounts due upon shipment and upon acceptance; end-user demand for semiconductors, including the growing mobile device industry; customer demand for semiconductor manufacturing equipment; our ability to timely manufacture, deliver and support ordered products; our ability to bring new products to market, to gain market share with such products and the overall mix of our products; customer rate of adoption of new technologies; risks inherent in the development of complex technology; the timing and competitiveness of new product releases by our competitors; margins; product development plans and levels of research, development and engineering activity; our ability to align our cost structure with market conditions, including outsourcing plans, operating expenses, and the expected effects, cost and timing of restructurings; tax expenses; excess inventory reserves, including the level of our vendor commitments compared to our requirements; economic conditions in general and in our industry; the impact of any litigation or investigation on our operating results or financial position; any offering and sale of securities pursuant to our shelf registration statement or otherwise; and the sufficiency of our financial resources to support future operations and capital expenditures. Forward-looking statements typically are identified by use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes" and similar expressions, although some forward-looking statements are expressed differently. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties include those set forth in Part II, Item 1A under "Risk Factors" and this Part I, Item 2 under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our actual results could differ materially from those anticipated by these forward-looking statements. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future event, or for any other reason. This discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes in our last filed Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K").





Overview


We are a supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits ("ICs"). Our manufacturing equipment is primarily used for semiconductor manufacturing utilizing innovative technology to deliver advanced processing capabilities and high productivity for the fabrication of current and next-generation ICs. We were incorporated in California in 1988 and reincorporated in Delaware in 1997.


Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. Because the demand for semiconductor devices is highly cyclical, the demand for wafer processing equipment is also highly cyclical. The semiconductor equipment industry is typically characterized by wide swings in operating results as the industry moves through its cycle.  Demand is also becoming prone to seasonality due to the buying patterns of customers dependent upon the consumer product industry.


We have made progress in our strategic growth initiatives and are strengthening our product positions. In the first half of 2012, the paradigmE etch system was released for production at a leading semiconductor logic/foundry facility. During the first half of 2012 the paradigmE also was selected by a major Asian CMOS image sensor foundry, expanding our etch position into a new growth market. We have continued our strategy to gain both market share and sales ranking in etch and strip, and we were the second-ranked supplier in the strip market based on 2011 annual sales. In the second quarter of 2012, we shipped the Millios system to two major foundry/logic semiconductor manufacturers.  In addition, our Helios XP rapid thermal annealing system moved into production at a leading NAND manufacturer.  Our Rapid Thermal Processing, (RTP) tools, the Helios XP and the Millios millisecond annealing system are now positioned at four major logic/foundry customers.





We have experienced industry weakness during the second quarter of 2012 and such weakness is anticipated to continue until 2013.  Our net sales for the second quarter of 2012 declined as compared to our initial expectations primarily due to a customer requested delay in shipments to a foundry.  We also experienced softening of the NAND business during the second quarter.  As a result, cash and cash equivalents at July 1, 2012 was lower than we originally anticipated primarily due to the system shipment delays during the quarter, as the cash had already been used to purchase the related inventory.


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We expect to continue to be challenged with significantly lower net sales in the second half of 2012. We are continuing to focus on cost reduction activities and are seeking to reduce our cash flow break-even point to the mid-$30 million quarterly net sales run rate by the end of 2012.


As of July 1, 2012, we had cash, cash equivalents and restricted cash of $30.7 million, working capital of $55.2 million and no debt.  With our current cash and liquidity position, we believe we have sufficient resources to meet our working capital requirements for the next twelve months.    We will continue to review our operations and take further cost reduction measures as necessary in order to minimize the cash used in operations and retain sufficient cash reserves for the next year, as described under "Restructuring Charges" below.  However, though we will pursue these measures, we are largely dependent upon improvement in the semiconductor equipment industry specifically, and general continued improvement in the economy as a whole, to increase our sales in order to improve our profitability and cash position.  In addition, our stock may be subject to eventual delisting from NASDAQ if we do not maintain a minimum $1.00 per share trading price.


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





Critical Accounting Policies and Use of Estimates


Management's discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods.


On an on-going basis, we evaluate our estimates and judgments, including those related to reserves for excess and obsolete inventory, warranty, bad debts, intangible assets, income taxes, restructuring costs, stock-based compensation, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. These form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.


There were no significant changes to our critical accounting policies during the six months ended July 1, 2012 . For information about critical accounting policies, see Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements, in our 2011 Form 10-K.





Results of Operations


A summary of our results of operations for three and six months ended July 1, 2012 and July 3, 2011 are as follows (in thousands except for percentages):





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Three Months EndedJuly 1, 2012July 3, 2011Increase (Decrease)AmountPercentAmountPercentAmountPercentNet sales$34,884100.0$51,259100.0$(16,375)(31.9)Cost of sales21,62962.037,27572.7(15,646)(42.0)Gross profit13,25538.013,98427.3(729)(5.2)Operating expenses:Research, development and engineering5,79116.66,64513.0(854)(12.9)Selling, general and administrative9,70527.811,38022.2(1,675)(14.7)Restructuring charges8312.4(13)—844n/m(1)Total operating expenses16,32746.818,01235.1(1,685)(9.4)Loss from operations(3,072)(8.8)(4,028)(7.9)956(23.7)Interest income (expense), net390.1580.1(19)n/m(1)Other income (expense), net(277)(0.8)(969)(1.9)692n/m(1)Loss before income taxes(3,310)(9.5)(4,939)(9.6)1,629(33.0)Provision for (benefit from) income taxes360.12740.5(238)n/m(1)Net loss$(3,346)(9.6)$(5,213)(10.2)$1,867(35.8)


(1) Not meaningful.


Six Months EndedJuly 1, 2012July 3, 2011Increase (Decrease)AmountPercentAmountPercentAmountPercentNet sales$85,388100.0$98,308100.0$(12,920)(13.1)Cost of sales55,19964.671,44372.7(16,244)(22.7)Gross profit30,18935.426,86527.33,32412.4Operating expenses:Research, development and engineering12,42114.513,16013.4(739)(5.6)Selling, general and administrative20,57224.122,89223.3(2,320)(10.1)Restructuring charges1,5511.8(78)(0.1)1,629n/m(1)Total operating expenses34,54440.535,97436.6(1,430)(4.0)Loss from operations(4,355)(5.1)(9,109)(9.3)4,754(52.2)Interest income (expense), net700.1370.233n/m(1)Other income (expense), net1050.1(2,475)(2.5)2,580n/m(1)Loss before income taxes(4,180)(4.9)(11,547)(11.7)7,367(63.8)Provision for (benefit from) income taxes2850.3(60)(0.1)345n/m(1)Net loss$(4,465)(5.2)$(11,487)(11.7)$7,022(61.1)


(1) Not meaningful.








Net Sales


A summary of our net sales for three and six months ended July 1, 2012 and July 3, 2011 are as follows (in thousands except for percentages):


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Three Months EndedSix Months EndedJuly 1,July 3Increase (Decrease)July 1,July 3Increase (Decrease)20122011AmountPercent20122011AmountPercentNet sales:United States$2,074$1,740$33419.2$12,244$2,823$9,421333.7International:Korea18,79821,388(2,590)(12.1)43,05643,521(465)(1.1)Taiwan4,08714,378(10,291)(71.6)12,03023,332(11,302)(48.4)China2,3433,643(1,300)(35.7)3,90010,218(6,318)(61.8)Other Asia3,8146,420(2,606)(40.6)6,32210,625(4,303)(40.5)Europe and others3,7683,690782.17,8367,789470.632,81049,519(16,709)(33.7)73,14495,485(22,341)(23.4)Total net sales$34,884$51,259$(16,375)(31.9)$85,388$98,308$(12,920)(13.1)


Net sales were $34.9 million for the three months ended July 1, 2012 ; a decrease of approximately $16.4 million compared to $51.3 million for the three months ended July 3, 2011.  Net sales were $85.4 million for the six months ended July 1, 2012 ; a decrease of approximately $12.9 million compared to $98.3 million for the six months ended July 3, 2011.  The decreases are primarily due to a customer requested delay in the shipment of systems to a foundry as well as a softening of the NAND business during the second quarter of 2012.


During the first six months of 2012, sales to customers in Asia continued to account for a significant portion of our total net sales. For the three months ended July 1, 2012 and July 3, 2011, international sales comprised approximately 94 and 97 percent, respectively, of our total net sales.  For the six months ended July 1, 2012 and July 3, 2011, international sales accounted for approximately 86 percent and 97 percent, respectively, of our total net sales.  We anticipate that international sales will continue to account for a significant portion of our net sales.





Cost of Sales and Gross Profit


A summary of our cost of sales and gross profit for three and six months ended July 1, 2012 and July 3, 2011 are as follows (in thousands except for percentages):


Three Months EndedSix Months EndedJuly 1,July 3Increase (Decrease)July 1,July 3Increase (Decrease)20122011AmountPercent20122011AmountPercentCost of sales$21,629$37,275$(15,646)(42.0)$55,199$71,443$(16,244)(22.7)Gross profit$13,255$13,984$(729)(5.2)$30,189$26,865$3,32412.4Gross margin38.0%27.3%35.4%27.3%


Our cost of sales consists of the costs associated with manufacturing our products, and includes the purchase of raw materials and related overhead, labor, warranty costs, charges for excess and obsolete inventory and costs incurred by our contract manufacturers in the production of our components, major sub-assemblies/modules and complete systems.


Gross margin rate improved from 27.3 percent in three months ended July 3, 2011 to 38.0 percent in the three months ended July 1, 2012. The increase in gross margin in 2012 was primarily due to a change in the product mix with fewer low margin tool sales, an increase in our higher margin spares and services businesses, coupled with a larger amount of net sales related to customer acceptance of previously shipped systems.


Gross margin rate improved from 27.3 percent in the six months ended July 3, 2011 to 35.4 percent in the six months ended July 1, 2012, primarily driven by a larger amount of net sales related to customer acceptance of previously shipped systems coupled with a favorable change in the mix of product shipments in the period.


Our gross margin rate has varied over the years and will continue to be affected by many factors, including competitive pressures, product mix, inventory reserves, economies of scale, material and other costs, overhead absorption levels and the


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timing of revenue recognition.





Research, Development and Engineering


A summary of our research, development and engineering expenses for three and six months ended July 1, 2012 and July 3, 2011 are as follows (in thousands except for percentages):


Three Months EndedSix Months EndedJuly 1,July 3Increase (Decrease)July 1,July 3Increase (Decrease)20122011AmountPercent20122011AmountPercentResearch, development and engineering$5,791$6,645$(854)(12.9)$12,421$13,160$(739)(5.6)Percentage of net sales16.6%13.0%14.5%13.4%


Research, development and engineering expenses consist primarily of salaries and related costs of employees engaged in research, development and engineering activities, costs of product development and depreciation on equipment used in the course of research, development and engineering activities.


Research, development and engineering expenses decreased $0.9 million in the three month ended July 1, 2012 compared to the three months ended July 3, 2011 largely due to a reduction in engineering materials, employee related expenses and depreciation expense. The decreases in employee related expenses in the three months ended July 1, 2012 compared to July 3, 2011 was primarily attributable to the cost reduction plans established in the fourth quarter of 2011 and the first quarter of 2012.  The decrease in depreciation expense on lab tools in the three months ended July 1, 2012 compared to the three months ended July 3, 2011 was the result of several assets being fully depreciated as of the end of 2011.


Research, development and engineering expenses decreased $0.7 million in the six month ended July 1, 2012 compared to the six months ended July 3, 2011 primarily due to a reduction in depreciation expense from lab tools that were fully depreciated as of the end of 2011.


Selling, General and Administrative


A summary of our selling, general and administrative expenses for three and six months ended July 1, 2012 and July 3, 2011 are as follows:


Three Months EndedSix Months EndedJuly 1,July 3Increase (Decrease)July 1,July 3Increase (Decrease)20122011AmountPercent20122011AmountPercentSelling, general and administrative$9,705$11,380$(1,675)(14.7)$20,572$22,892$(2,320)(10.1)Percentage of net sales27.8%22.2%24.1%23.3%


Selling, general and administrative expenses consist primarily of personnel-related expenses, as well as legal and professional fees, facilities expenses, insurance expenses, amortization of evaluation systems and certain information technology costs.


Selling, general and administrative expenses were $9.7 million in the three months ended July 1, 2012; a decrease of $1.7 million compared to $11.4 million in the three months ended July 3, 2011. The decrease in selling, general and administrative expenses was primarily attributable to lower expenses related to evaluation tools, lower stock-based compensation expenses, and a decrease in employee related expenses largely due to cost reduction plans established in the fourth quarter of 2011 and the first quarter of 2012.


Selling, general and administrative expenses were $20.6 million in the six months ended July 1, 2012; a decrease of $2.3 million compared to $22.9 million in the six months ended July 3, 2011. The decrease in selling, general and administrative expenses was primarily attributable to a decrease in depreciation expense related to fully depreciated assets, a decrease in facilities costs as a result of certain lease termination agreements entered into at the end of 2011, and a decrease in amortization and other costs associated with supporting our evaluation tools at customer sites, which was due in part to our ability to convert certain of these tools into sales during the past year.


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Restructuring Charges


In December 2011, we initiated a cost reduction plan ("2011 Restructuring Plan"), which included the transition of our operations in Canada to our German facility, moving a portion of our spare parts logistics operations in-house, workforce reductions, elimination of certain contractors, and renegotiating certain contracts.   In the first quarter of 2012, we initiated a second phase of the 2011 Restructuring Plan, which includes a reduction in force; lower level of investments in customer evaluation systems; renegotiating key contracts with outside service providers; production material cost savings; additional reduction in outside contractors; and reduced spending in discretionary areas.  Total estimated one-time costs for the first two phases are $3.5 million to $4.5 million with an estimated remaining range of $0.4 million to $1.0 million to be incurred in the second half of 2012.


In addition, we will continue to address the near term weakness in our sector by focusing on additional cost reductions throughout the remainder of 2012. These reductions will be implemented throughout the third and fourth quarters and will entail a broader reduction in force and a global restructuring that will consolidate certain functions to enable better leverage of the corporate infrastructure and the optimization of our business model.  The estimated restructuring costs for these activities are still under evaluation while the related restructuring plans are finalized.


The beginning restructuring reserve balance includes $0.9 million of contract termination costs established prior to 2011, which related to future rent obligations associated with two vacated leased facilities net of sublease income. During the three months ended July1, 2012, we expensed $0.8 million in employee severance and other expenses and paid $0.9 million of employee severance and other expenses, and paid $0.4 million of contract termination costs under the 2011 Restructuring Plan. During the six months ended July 1, 2012 we recorded $1.6 million of employee severance and other expenses.  We paid $1.5 million in employee severance and other expenses and paid $0.9 million in contract termination costs related to the 2011 restructuring plan.  To date, we have recorded $3.3 million related to this plan.


Other Income (Expense), net


Other income (expense), net was a $0.3 million expense for the three months ended July 1, 2012, and primarily consisted of foreign exchange losses relating to intercompany balances denominated in foreign currencies, and were primarily attributable to the impact of unfavorable exchange rates for the Japanese Yen and the Canadian dollar, against the U.S. dollar, partially offset by the favorable impact of the lower Euro exchange rate against the U.S. dollar.


Other income (expense), net was a $1.0 million expense for the three months ended July 3, 2011, which primarily consisted of foreign exchange losses related to intercompany liabilities denominated in Euro during the period when the U.S. dollar weakened two percent against the Euro.


Other income (expense), net was a $0.1 million income in the six months ended July 1, 2012 and primarily consisted of foreign exchange gain related to intercompany balances denominated in foreign currencies, and were primarily due to the impact of favorable exchange rate of Japanese Yen to the U.S. dollar partially offset by the impact of unfavorable exchange rate for the Euro to the U.S. dollar.


Other income (expense), net was a $2.5 million expense for the six months ended July 3, 2011, which primarily consisted of foreign exchange losses related to intercompany liabilities denominated in Euros during the period when the U.S. dollar weakened nine percent against the Euro.


Provision for Income Taxes


On a quarterly basis, we record our income tax expense or benefit based on our year-to-date results and expected remaining year-to-date operations.


We recorded $0.04 million and $0.3 million income tax provision for the three and six months ended July 1, 2012 , respectively. We recorded a $0.3 million income tax provision and a $0.1 million income tax benefit for the three and six months ended July 3, 2011 , respectively.  The net tax provision is the result of the mix of profits earned by us, in tax jurisdictions with a broad range of income tax rates. The $0.1 million tax benefit for the six months ended July 3, 2011 includes a $0.4 million tax benefit related to the release of uncertain tax benefits due to a lapse of the statute of limitations.














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Liquidity and Capital Resources


Six Months EndedJuly 1, 2012July 3, 2011Net cash provided by (used in) operating activities$(1,742)$5,051Net cash provided by (used in) investing activities(731)2,851Net cash provided by financing activities24213,128Effect of exchange rate changes on cash and cash equivalents282,152Net increase (decrease) in cash and cash equivalents$(2,203)$23,182


Our cash and cash equivalents and restricted cash were $30.7 million as of July 1, 2012, a decrease of approximately $2.2 million , compared to $33.0 million as of December 31, 2011. Working capital as of July 1, 2012 was $55.2 million , compared to $56.2 million as of December 31, 2011. Stockholders' equity as of July 1, 2012 was $56.6 million , compared to $60.1 million as of December 31, 2011.


Liquidity and Capital Resources Outlook


As of July 1, 2012, we had cash, cash equivalents and restricted cash of $30.7 million , working capital of $55.2 million  and  no debt. We believe that our cash balances will be sufficient to fund our working and other capital requirements over the course of the next twelve months.  Our operations require careful management of our cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in our net sales, gross profits and operating expenses, as well as changes in our operating assets and liabilities. The cyclicality of the semiconductor industry makes it difficult to predict our future liquidity needs with certainty. Any upturn in the semiconductor industry would result in short-term uses of cash to fund inventory purchases.  In addition, the ineffectiveness of our cost reduction efforts may cause us to incur additional losses in the future and lower our cash balances. We may need additional funds to support our working capital requirements and operating expenses, or for other requirements. Historically, we have relied on a combination of fundraising from the sale and issuance of equity securities (such as our common stock offering in May 2011) and cash generated from product, service and royalty revenues to provide funding for our operations. In addition, our stock may be subject to eventual delisting from NASDAQ if we do not maintain a $1.00 per share trading price.  We will continue to review our expected cash requirements and take appropriate cost reduction measures to ensure that we have sufficient liquidity. However, though we will pursue these measures, we are largely dependent upon improvement in the semiconductor equipment industry specifically, and general continued improvement in the economy as a whole, to increase our sales in order to improve our profitability and cash position.  We periodically review our liquidity position and may decide to raise additional funds, and may seek such funding from a combination of sources including issuance of equity or debt securities through public or private financings. These financing options may not be available on a timely basis, or on terms acceptable to us, and could be dilutive to our stockholders. If adequate funds are not available on acceptable terms, our ability to achieve our intended long-term business objectives could be limited.


Operating Activities


In the six months ended July 1, 2012, net cash used in operations was $1.7 million , comprised primarily of $4.5 million in net loss, offset by non-cash charges of $2.6 million and $0.1 million of cash increases reflected in the net change in assets and liabilities. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a $9.0 million decrease in accounts receivable and advance billings and a $2.2 million decrease in prepaid expenses and other current assets, partially offset by a $5.8 million increase in inventory, a $2.8 million decrease in accounts payable and accrued liabilities, a $1.8 million decrease in deferred revenue and a $1.0 million increase in income taxes payable and other non current liabilities. The decrease in accounts receivable and advance billings reflects the decrease in sales and business activities in the first six months of 2012 compared to the same period 2011. Non-cash charges consisted primarily of $1.8 million of depreciation and amortization and $0.8 million of stock-based compensation.


Net cash provided by operations of $5.1 million for the six months ended July 3, 2011 consisted primarily of a net loss of $11.5 million offset by $4.9 million of non-cash charges and $11.6 million of cash flow increases reflected in the net change in assets and liabilities. Non-cash charges consisted primarily of $3.2 million of depreciation and amortization, $1.4 million of stock-based compensation and $0.3 million for a provision for allowance for doubtful accounts. Cash flow increases resulting from the net change in assets and liabilities primarily consisted of a $6.8 million decrease in accounts receivable, a $4.9 million increase in accrued liabilities, a $3.8 million decrease in inventories, a $1.2 million increase in deferred revenue, a $0.8 million decrease in prepaid expenses and other current assets and a $0.2 million decrease in other assets, partially offset by a $5.0 million decrease in accounts payable, a $0.9 million increase in advanced billings and a $0.2 million decrease in income taxes


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payable, non-current and other liabilities.


Cash provided by operations may fluctuate in future periods as a result of a number of factors, including fluctuations in our net sales and operating results, amount of revenue deferred, inventory purchases, collection of accounts receivable and timing of payments.


Investing Activities


In the six months ended July 1, 2012, cash used in investing activities was $0.7 million , which represent our capital spending during the first six months of 2012.


Net cash provided by investing activities of $2.9 million for the six months ended July 3, 2011 consisted primarily of $2.2 million of proceeds from maturities of available-for-sale investments and $1.2 million from a decrease in restricted cash balances used to secure standby letters of credit provided to certain landlords and vendors, partially offset by $0.5 million of capital spending.


Financing Activities


Net cash provided by financing activities was $0.2 million , which consisted of proceeds from issuance of common stock under our employee stock plans.


Net cash provided by financing activities of $13.1 million for the six months ended July 3, 2011 consisted primarily of $13.0 million of proceeds from our public offering on May 16, 2011 of 7,820,000 shares of our common stock at a price to the public of $1.80 per share of common stock. The $13.0 million of proceeds is net of underwriting discounts and offering expenses of $1.1 million and does not include other estimated accrued offering costs of $0.3 million. We used the net proceeds from this offering for general corporate purposes, including working capital.


Off-Balance Sheet Arrangements


As of July 1, 2012, we did not have any significant "off-balance sheet" arrangements, as defined in Item 303 (a)(4)(ii) of Regulation S-K.


Contractual Obligations


Under U.S. GAAP, certain obligations and commitments are not required to be included in our Condensed Consolidated Balance Sheets. These obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity. For further discussion of our contractual obligations, see our 2011 Form 10-K.


Recent Accounting Pronouncements


Information with respect to recent accounting pronouncements may be found in Note 1 Basis of Presentation and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.





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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Interest Rate Risk


As of July 1, 2012, our portfolio consisted of $30.7 million in cash, cash equivalents and restricted cash. We did not have any short-term investments as of July 1, 2012. Our exposure to interest rate risk relates primarily to short-term investments, which we may purchase at different points in time, and the potential losses arising from changes in those interest rates. Our investment objective is to achieve the maximum return compatible with capital preservation and our liquidity requirements. Our strategy is to invest our cash in a manner that preserves capital, maintains sufficient liquidity to meet our cash requirements, and maximizes yields consistent with approved credit risk. We place our investments with high credit quality issuers and, by policy, limit the amount of our credit exposure to any one issuer. Our portfolio, which consisted primarily of money market funds and U.S. government and government-sponsored debt securities, includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We classify our cash equivalents and short-term investments in accordance with authoritative guidance on accounting for investments in debt and equity securities; consider investments in instruments purchased with an original maturity of 90 days or less to be cash equivalents; and classify our short-term investments as available-for-sale.


Our cash equivalents and short-term investment portfolios consist primarily of money market funds and U.S. government and government-sponsored debt securities. Our equity instruments are reported at fair value with unrealized gains and losses, net of tax, included in accumulated other comprehensive income within stockholders' equity in the accompanying Condensed


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Consolidated Balance Sheets.


Based on the size of the investment portfolio as of July 1, 2012, an immediate increase or decrease in interest rates of 100 basis points would not have a material adverse effect on the fair value of our investment portfolio.


Foreign Currency Risk


The functional currency of our foreign subsidiaries is their local currencies. Accordingly, all assets and liabilities of these foreign operations are translated using exchange rates in effect at the end of the period, and net sales and costs are translated using average exchange rates for the period. Gains or losses from translation of foreign operations are included as a component of accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets. Foreign currency transaction gains and losses are recognized in the accompanying Condensed Consolidated Statements of Operations as they are incurred. Because much of our net sales and capital spending are transacted in U.S. dollars, we are subject to fluctuations in foreign currency exchange rates that could have a material adverse effect on our overall financial position, results of operations or cash flows, depending on the strength of the U.S. dollar relative to the currencies of other countries in which we operate. Exchange rate fluctuations of greater than ten percent, primarily for the U.S. dollar relative to the Euro, Canadian dollar, Japanese Yen or South Korean won, could have a material impact on our financial statements. Additionally, foreign currency transaction gains and losses fluctuate depending upon the mix of foreign currency denominated assets and liabilities and whether the local currency of an entity strengthens or weakens during a period. As of July 1, 2012, our U.S. operations had approximately $3.6 million, net, in foreign denominated operating intercompany receivables. It is estimated that a ten percent fluctuation in the U.S. dollar relative to these foreign currencies would lead to a profit of $0.4 million (U.S. dollar strengthening), or a loss of $0.4 million (U.S. dollar weakening) on the translation of these intercompany payables, which would be recorded as other income (expense), net in our consolidated statement of operations.


In the six months ended July 1, 2012 and July 3, 2011, we recorded foreign currency exchange gain of $0.2 million and foreign currency loss of $1.8 million, respectively, in other income (expense), net in the accompanying Condensed Consolidated Statements of Operations.


We included a negative $0.1 million and a $2.7 million foreign currency translation adjustments in the accompanying Condensed Consolidated Statement of Comprehensive Loss for six months ended July 1, 2012 and July 3, 2011, respectively. The negative $0.1 million foreign exchange translation adjustment in the six months ended July 1, 2012 was primarily due to the strengthening of the U.S. dollar against the Euro and the Japanese Yen, which unfavorably impacted the net assets used in our foreign operations and held in local currencies.





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|ITEM 4. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures


Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of July 1, 2012 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.


Changes in Internal Control over Financial Reporting


There were no changes in our internal control over financial reporting that occurred during the quarter ended July 1, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Limitations on Effectiveness of Controls and Procedures


It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.


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PART II. OTHER INFORMATION


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|ITEM 1. | LEGAL PROCEEDINGS

In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we cannot be certain. Moreover, the defense of claims or actions against us, even if without merits, could result in the expenditure of significant financial and managerial resources.


Our involvement in any patent dispute, other intellectual property dispute or action to protect trade secrets and know-how could result in a material adverse effect on our business. Adverse determinations any litigation in which we may become involved could subject us to significant liabilities to third parties, require us to grant licenses to or seek licenses from third parties and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business.





ITEM 1A.     RISK FACTORS





Because of the following factors, as well as other variables affecting our operating results, cash flows and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in the future periods. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition.





We are dependent on our revenue and the success of our cost reduction measures to ensure adequate liquidity and capital resources during the next twelve months.





We have incurred operating losses and generated negative cash flows for the last four years. As of July 1, 2012, we had cash, cash equivalents and restricted cash of $30.7 million and working capital of $55.2 million . Our operations require careful management of our cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in our revenue, gross profits and operating expenses, as well as changes in our operating assets and liabilities. The cyclicality of the semiconductor industry makes it difficult for us to predict our future liquidity needs with certainty. Any upturn in the semiconductor industry would result in short-term uses of our cash to fund inventory purchases.  In addition, the ineffectiveness of our cost reduction efforts may cause us to incur additional losses in the future and lower our cash balances.





We may need additional funds to support our working capital requirements, and operating expenses, or for other requirements. Historically, we have relied on a combination of fundraising from the sale and issuance of equity securities (such as our common stock offering in May 2011) and cash generated from product, service and royalty revenues to provide funding for our operations. We will continue to review our expected cash requirements and take appropriate cost reduction measures to ensure that we have sufficient liquidity.  However, though we will pursue these measures, we are largely dependent upon improvement in the semiconductor equipment industry specifically, and general continued improvement in the economy as a whole, to increase our sales in order to improve our profitability and cash position.  We periodically review our liquidity position and may seek to raise additional funds from a combination of sources including issuance of equity or debt securities through public or private financings. In the event additional needs for cash arise, we may also seek to raise these funds externally through other means, such as the sale of assets. The availability of additional financing will depend on a variety of factors, including among others, market conditions, the general availability of credit, our credit ratings, and our ability to maintain our listing on NASDAQ. As a consequence, these financing options may not be available to us on a timely basis, or on terms acceptable to us, and could be dilutive to our stockholders.





Our current liquidity position may result in risks and uncertainties affecting our operations and financial position, including the following:





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|• | we may be required to reduce planned expenditures or investments;

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|• | we may be unable to compete in our newer or developing markets;

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|• | we may not be able to obtain and maintain normal terms with suppliers;

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|• | suppliers may require standby letters of credit before delivering goods and services, which will result in additional

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demands on our cash;


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|• | customers may delay or discontinue entering into contracts with us; and

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|• | our ability to retain management and other key individuals may be negatively affected.




Failure to generate sufficient cash flows from operations, raise additional capital or reduce spending could have a material adverse effect on our ability to achieve our intended long-term business objectives.





We are dependent on a highly concentrated customer base, and any delays, reduction or cancellation of purchases by these customers could harm our business. Additionally, we may not achieve anticipated revenue levels if we are not selected as “vendor of choice” for new or expanded customer fabrication facilities.





We derive most of our net sales from the sale of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business. For example, in the six months ending July 1, 2012 and the year ending December 31, 2011, our three largest customers accounted for approximately 70 percent, and 60 percent of our sales, respectively. We currently depend on one customer for a significant portion of our net sales, and the delay, significant reduction in, or loss of, orders from this customer would significantly reduce our revenue and adversely impact our operating results. See Item 1. Business-Customers of our 2011 Form 10-K for a detailed description of our customer concentration.





Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on product compatibility and proven performance. Changes in forecasts or the timing of orders from customers could expose us to the risks of inventory shortages or excess inventory, such as the delay in orders for certain Suprema strip systems to a foundry that we experienced in the second quarter of 2012, and for which we do not anticipate shipment to occur until 2013. In addition, customer order cancellations, which are occurring more regularly over time in our business, could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. Any such changes, delays and cancellations in orders in turn could cause our operating results to fluctuate. If customer relationships are disrupted due to an inability to deliver sufficient products or for any other reason, it could have a significant negative impact on our business.





Although we maintain a backlog of customer orders with expected shipment dates within the next 12 months, customers may request delivery delays or cancellations, as they have been doing more regularly over time in our business, including in the second quarter of 2012 as described above. Customers in some regions place orders a few weeks before the shipment. As a result, our backlog may not be a reliable indication of future net sales. If shipments of orders in backlog are canceled or delayed, net sales could fall below our expectations and the expectations of market analysts and investors.





A large percentage of our sales are concentrated among customers in the memory market. As a result, a downturn or an upturn in memory spending could impact us more than it would impact competitors who are more diversified with logic and foundry customers.





Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies upon equipment from this “vendor of choice” (VOC) for the specific production line application. In addition, the semiconductor manufacturer frequently will attempt to consolidate other capital equipment requirements with the same vendors. Accordingly, we may face narrow windows of opportunity to be selected as the VOC by significant new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product. If we are unable to achieve broader market acceptance of our systems and technology, we may be unable to maintain and grow our business and our operating results and financial condition will be adversely affected.





We face stiff competition in the semiconductor equipment industry.





The semiconductor equipment industry is both highly competitive and subject to rapid technological change. Significant competitive factors include the following:





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|• | system performance;

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|• | cost of ownership;

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|• | size of the installed base;

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|• | breadth of product line;

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|• | delivery speed; and

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|• | customer support.




Competitive pressure has been increasing in several areas. In addition to increased price competition, customers are waiting to make purchase commitments based on their end-user demand, which are then placed with requests for rapid delivery dates and increased product support. Some of our major competitors are larger than we are, have greater capital resources and may have a competitive advantage over us by virtue of having:





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|- | ----------------------
|• | broader product lines;




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|• | greater experience with handling manufacturing cycles;




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|• | substantially larger customer bases; and




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|• | substantially greater customer support, financial, technical and marketing resources.




Growth in the semiconductor equipment industry is increasingly concentrated in the largest companies, resulting in increasing industry consolidation, such as the recently completed merger of Lam Research and Novellus Systems. Semiconductor companies are consolidating their vendor base and prefer to purchase from vendors with a strong, worldwide support infrastructure.





In addition, to expand our sales we must often displace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that offer price or performance features that are superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, sale and on-site customer support of their product lines. We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively.





The cyclical nature of the semiconductor industry has caused us to experience losses and reduced liquidity, and it may continue to negatively impact our financial performance.





The semiconductor equipment industry is highly cyclical and periodically has severe and prolonged downturns, which causes our operating results to fluctuate significantly. We are exposed to the risks associated with industry overcapacity, including decreased demand for our products and increased price competition.





The semiconductor industry has historically experienced periodic downturns due to general economic changes or due to capacity growth temporarily exceeding growth in demand for semiconductor devices. Our business depends, in significant part, upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that open new or expand existing facilities. Periods of overcapacity and reductions in capital expenditures by our customers cause decreases in demand for our products. This could result in significant under-utilization in our factories. If existing customer fabrication facilities are not expanded and new facilities are not built, we may be unable to generate significant new orders and sales for our systems. During periods of declining demand for semiconductor manufacturing equipment, our customers typically reduce purchases, delay delivery of ordered products and/or cancel orders, resulting in reduced net sales and backlog, delays in revenue recognition and excess inventory for us. For example, we experienced a delay in the shipment of Suprema strip systems in the second quarter of 2012 as a result of softness in the industry that we expect to continue until 2013.  As a result, we had a reduction in our net sales in the quarter and, consequently, lower results of operations and cash from operations.   Increased price competition may also result as we compete for the smaller demand in the market, causing pressure on our gross margin and net income.





The weakness in the global economy may continue to negatively impact our financial performance.





The recessionary conditions of 2008 and 2009 in the global economy and the slowdown in the semiconductor industry impacted customer demand for our products and correspondingly, negatively impacted our financial performance. There remains high unemployment in developed countries, concerns regarding the availability of credit, uncertainty about a sustained economic recovery in the U.S. and fears of further economic deterioration in Europe and the developing world, which in turn, may lead to a global downturn. Any of these factors could have a negative impact on our business, or our financial condition.





Demand for semiconductor equipment depends on consumer spending. Continued economic uncertainty may lead to a


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decrease in consumer spending and may cause certain of our customers to cancel or delay orders. In addition, if our customers have difficulties in obtaining capital or financing, this could result in lower sales. Customers with liquidity issues could lead to charges to our bad debt expense, if we are unable to collect accounts receivables. These conditions could also affect our key suppliers, which could affect their ability to supply parts to us, and result in delays of the completion of our systems and the shipment of these systems to our customers.





Because of the economic downturn and the uncertainty of a full recovery, we are taking, and may have to take additional, actions to reduce costs. These actions have reduced, and could further reduce, our ability to invest in research and development at levels we believe are desirable. If we are unable to effectively align our cost structure with prevailing market conditions, we will experience additional losses and additional reductions in our cash and cash equivalents. If we are not able to suitably adapt to these economic conditions in a timely manner or at all, our performance, cash flows, results of operations and ability to access capital could be materially and adversely impacted.





We must continually anticipate technology trends, improve our existing products and develop new products in order to be competitive. The development of new or enhanced products involves significant risks, additional costs and delays in revenue recognition. Technical and manufacturing difficulties experienced in the introduction of new products could be costly and could adversely affect our customer relationships.





The markets in which our customers and we compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Consequently, our success depends upon our ability to anticipate future technology trends and customer needs, to develop new systems and processes that meet industry standards and customer requirements and that compete effectively on the basis of price and performance.





Our development of new products involves significant risk, since the products are very complex and the development cycle is long and expensive. The success of any new system we develop and introduce is dependent on a number of factors, including our ability to correctly predict customer requirements for new processes, to assess and select the potential technologies for research and development and to timely complete new system designs that are acceptable to the market. We may make substantial investments in new technologies before we can know whether they are technically or commercially feasible or advantageous, and without any assurance that revenue from future products or product enhancements will be sufficient to recover the associated development costs. Not all development activities result in commercially viable products. We may not be able to improve our existing systems or develop new technologies or systems in a timely manner. We may exceed the budgeted cost of reaching our research, development and engineering objectives, and planned product development schedules may require extension. Any delays or additional development costs could have a material adverse effect on our business and results of operations.





Our products are complex, and we may experience technical or manufacturing inefficiencies, delays or difficulties in the prototype introduction of new systems and enhancements, or in achieving volume production of new systems or enhancements that meet customer requirements. Our inability, or the inability of our supply chain partners, to overcome such difficulties, to meet the technical specifications of any new systems or enhancements or to manufacture and ship these systems or enhancements in volume and in a timely manner would materially adversely affect our business and results of operations, as well as our customer relationships.





Our revenue recognition policies require that during the initial evaluation phase of a new product, customer acceptance needs to be obtained before we can recognize revenue on the product. Customer acceptances may not be completed in a timely manner for a variety of reasons, whether or not related to the quality and performance of our products. Any delays in customer acceptance may result in revenue recognition delays and have an adverse impact on our results of operations.





We may from time to time incur unanticipated costs to ensure the functionality and reliability of our products early in their life cycles, and such costs can be substantial. If we encounter reliability or quality problems with our new products or enhancements, we could face a number of difficulties, including reduced orders, higher manufacturing costs, delays in collection of accounts receivable and additional service and warranty expenses, all of which could materially adversely affect our business and results of operations. The costs associated with our warranties may be significant, and in the event our projections and estimates of these costs are inaccurate, our financial performance could be seriously harmed. In addition, if we experience product failures at an unexpectedly high level, our reputation in the marketplace could be damaged, and our business would suffer.





Significant fluctuations in our operating results are difficult to predict due to our lengthy sales cycle, and our results may fall short of anticipated levels, which could cause our stock price to decline.





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Sales of our systems depend upon the decision of a prospective customer to increase or replace manufacturing capacity, typically involving a significant capital commitment. Accordingly, the decision to purchase our systems requires time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers' manufacturing facilities. Even after the customer determines that our systems meet their qualification criteria, we may experience delays finalizing system sales while the customer obtains approval for the purchase, constructs new facilities or expands its existing facilities. Consequently, the time between our first contact with a customer regarding a specific potential purchase and the customer's placing its first order may last from one to two years or longer. We may incur significant sales and marketing expenses during this evaluation period, in addition to tying up substantial inventory in customer product evaluations. The length of this period makes it difficult to accurately forecast future sales. Also, any unexpected delays in orders could impact our revenue and operating results. If sales forecasted from a specific customer are not realized, we may experience an unplanned shortfall in net sales, and our quarterly and annual revenue and operating results may fluctuate significantly from period to period.





Our quarterly and annual revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it very difficult for us to predict our future operating results. We incurred significant net losses between 2001 and 2003, yet were profitable for each of the years 2004 to 2007. Again, we incurred net losses between 2008 and 2012 to-date, due to declining demand as a result of the weakness in the semiconductor equipment market and the global economy. We may not achieve profitability in future years. We will need to generate significant sales to achieve profitability, and we may not be able to do so. A substantial percentage of our operating expenses are fixed in the short term and we may continue to be unable to adjust spending to compensate for shortfalls in net sales. As a result, we may continue to incur losses, which could cause the price of our common stock to decline further or remain at a low level for an extended period of time.





We are highly dependent on international sales, and face significant international business risks.





International sales accounted for 94 percent of our net sales for the year ended December 31, 2011 and 86 percent of our net sales for the six months ending July 1, 2012, respectively. We anticipate international sales will continue to account for the vast majority of our future net sales. Asia has been a particularly important region for our business, and we anticipate that it will continue to be important going forward. Our sales to customers located in Asia accounted for 84 percent of our net sales for the year ended December 31, 2011, and 76 percent of our net sales for the six months ending July 1, 2012, respectively. Because of our continuing dependence upon international sales, we are subject to a number of risks associated with international business activities, including:





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|• | burdensome governmental controls, laws, regulations, tariffs, duties, taxes, restrictions, embargoes or export license requirements;




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|• | unexpected changes in laws or regulations prompted by economic stress, such as protectionism, and other attempts to rectify real or perceived international trade imbalances;




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|• | exchange rate volatility;




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|• | the need to comply with a wide variety of foreign and U.S. customs and export laws;




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|• | political and economic instability;




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|• | government-sponsored competition;




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|• | differing labor regulations;




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|• | reduced protection for, and increased misappropriation of, intellectual property;




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|• | difficulties in accounts receivable collections;




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|• | increased costs for product shipments and potential difficulties from shipment delays;




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|• | difficulties in managing distributors, representatives, contract manufacturers and suppliers;




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|• | difficulties in staffing and managing foreign subsidiary operations; and




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|- | ----------------------------------------------------------------------------------------------------------------
|• | natural disasters, acts of war, terrorism, widespread illness or other catastrophes affecting foreign countries.




Our sales to date have been denominated primarily in U.S. dollars; however future sales to Asian customers may be denominated in the customer's local currency. Our sales in foreign currencies are subject to risks of currency fluctuation. For U.S. dollar sales in foreign countries, our products may become less price competitive when the local currency is declining in value compared to the dollar. This could cause us to lose sales or force us to lower our prices, which would reduce our gross margins.





We are exposed to various risks relating to compliance with the regulatory environment, including export control laws and material contracts provisions, and non-compliance or non-performance with any of these items could result in adverse consequences and monetary fines or damages.





We are subject to various risks related to (1) disagreements and disputes between national and regional regulatory agencies related to international trade; (2) new, inconsistent and conflicting rules by regulatory agencies in the countries in which we operate; and (3) interpretation and application of different laws and regulations. If we are found by a court or regulatory agency to not be in compliance with the laws and regulations, our business, financial condition and results of operations could be adversely affected.





As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S. these laws include the International Traffic in Arms Regulations (“ITAR”) administered by the State Department's Directorate of Defense Trade Controls, the Export Administration Regulations (“EAR”) administered by the Bureau of Industry and Security (“BIS”), and trade sanctions against embargoed countries and destinations administered by the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”). The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called “dual use” items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. In addition, we must comply with certain requirements related to documentation, record keeping, plant visits and hiring of foreign nationals. Any failures to comply with these laws and regulations could result in fines, adverse publicity and restrictions on our ability to export our products, and repeat failures could carry more significant penalties. As previously reported, in 2008, we self-disclosed to BIS certain inadvertent EAR violations, and have been working with BIS to resolve these. In April 2012, we entered into a settlement agreement with BIS that resolved in full all matters contained in our voluntary self-disclosure. Under the settlement, we agreed to a civil penalty of $850,000 of which we paid $250,000 in May 2012 and $600,000 is suspended for the next year and will be waived provided that no violations occur during that period.





We are a party to several governmental and private-party contracts that provide for liquidated damages in the event that we fail to comply with the covenants or requirements under any of these contracts. These liquidated damage payments could be significant and we could incur significant legal fees if we were to renegotiate these contracts. Any such damage amounts or legal expenses may adversely impact our financial condition or results of operations.





Because of competition for qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products.





Our growth will depend on our ability to attract and retain qualified, experienced employees. Our ability to attract employees may be harmed by our recent financial losses, which has impacted our available cash and our ability to provide performance-based annual cash incentives. Also, part of our total compensation program includes share-based compensation. Share-based compensation is an important tool in attracting and retaining employees in our industry. If the market price of our common shares declines or remains low, it may adversely affect our ability to attract or retain employees.





During periods of growth in the semiconductor industry, there is substantial competition for experienced engineering, technical, financial, sales and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. If we are unable to retain existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited, we could fail to meet our delivery commitments or we could experience deterioration in service levels or decreases in customer satisfaction.





The price of our common stock has fluctuated in the past and may continue to fluctuate significantly in the future, which may lead to losses by investors, delisting, securities litigation or hostile or otherwise unfavorable takeover offers.





The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future.


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For example, for the six months ended July 1, 2012, the closing price range for our common stock was between $1.42 and $3.19 per share.   In addition, the closing price range for our common stock was between $0.88 and $1.75 for the month of July 2012.  Our stock may be subject to eventual delisting from NASDAQ if we do not maintain a minimum $1.00 per share trading price, which would likely lead to less liquidity and more volatility.





The relatively low stock price makes us attractive to hedge funds and other short-term investors. This could result in substantial volatility of the stock price and cause fluctuations in trading volumes for our stock. Fluctuations in the trading price or liquidity of our common stock may harm the value of your investment in our common stock.





In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price fluctuations. These fluctuations have frequently been unrelated to the operating performance of the affected companies. In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources.





Our stock price has been below the five-year peak of $11.76 for several years, and if net sales do not return to the peak 2007 levels or we do not return to profitability in the near term, we could be an attractive target for acquisition or be impacted by mergers or acquisition by another company or consolidation in the industry. An acquisition or merger could be hostile or on terms unfavorable to us, and may result in substantial costs and potential disruption to our business.





Other factors that may have a significant impact on the market price and marketability of our securities include changes in securities analysts' recommendations, short selling, and halting or suspension of trading in, or delisting of, our common stock by NASDAQ.





We are subject to significant risks related to our operations.





We may outsource select manufacturing activities to third-party service providers, which decrease our control over the performance of these functions and quality of our products.





From time to time, we may outsource product manufacturing to third-party service providers. Outsourcing has a number of risks and reduces our control over the performance of the outsourced functions. Significant performance problems by these third-party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems that could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations. If for any reason one or more of these third-party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to deliver our products to our customers could be severely impaired.





We depend upon a limited number of suppliers for some components and subassemblies, and supply shortages or the loss of these suppliers could result in increased cost or delays in the manufacture and sale of our products.


We rely, to a substantial extent, on outside vendors to provide many of the components and subassemblies of our systems. We obtain some of these components and subassemblies from a sole source or a limited group of suppliers. We generally acquire these components on a purchase order basis and not under long-term supply contracts. Because of this reliance on these vendors and suppliers, we may be unable to obtain an adequate supply of required components. When demand for semiconductor equipment is strong, our suppliers may have difficulty providing components on a timely basis.





In addition, during periods of shortages of components, we may have reduced control over pricing and timely delivery of components. We often quote prices to our customers and accept customer orders for our products prior to purchasing components and subassemblies from our suppliers. If our suppliers increase the cost of components or subassemblies, we may not have alternative sources of supply and may no longer be able to increase the cost of the system being evaluated by our customers to cover all or part of the increased cost of components.





The manufacture of some of these components is an extremely complex process and requires long lead times. If we are unable to obtain adequate and timely deliveries of our required components, we may have to seek alternative sources of supply or manufacture such components internally. This could delay our ability to manufacture or ship our systems in a timely manner, causing us to lose sales, incur additional costs, delay new product introductions and harm our reputation. Historically, we have not experienced any significant delays in manufacturing due to an inability to obtain components, and we are not currently aware of any specific problems regarding the availability of components that might significantly delay the manufacturing of our systems in the future. Any inability to obtain adequate deliveries, or any other circumstance that would require us to seek


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alternative sources of supply or to manufacture such components internally, could delay our ability to ship our systems and could have a material adverse effect on us.





Our gross margins may be impacted if we do not effectively manage our inventory.


We need to manage our inventory of component parts, work-in-process and finished goods (principally comprised of products undergoing customer evaluations) effectively to meet customer delivery demands at an acceptable risk and cost. For both the inventories that support manufacture of our products and our spare parts inventories, if the anticipated customer demand does not materialize in a timely manner, we will incur increased carrying costs and some inventory could become excess or obsolete, resulting in write-offs, which would adversely affect our cash position and results of operations. The sale of this inventory during periods of increasing revenue could temporarily impact our gross margins favorably due to the adjusted carrying value of this inventory, and could result in future unpredictability in our gross margin estimates.





Our gross margins for sales of products that we manufacture in Germany and/or South Korea may fluctuate due to changes in the value of the Euro and South Korean won.


We develop and manufacture products in Germany, where our costs for labor and materials are primarily denominated in Euros, and anticipate increased manufacturing activities in South Korea going forward, where our costs for labor are primarily denominated in won. Future increases in the strength of the Euro or won, if any, could increase our development costs, our costs to manufacture systems, and our costs to purchase spare parts for products from our suppliers, which would make it more difficult for us to compete and could adversely affect our results of operations.





We manufacture many of our products at two primary manufacturing facilities and are thus subject to risk of disruption.


Although, from time to time, we outsource select core product manufacturing to third parties, we continue to produce our latest generation products at our two principal manufacturing plants in Fremont, California and Dornstadt, Germany. We have limited ability to interchangeably produce our products at either facility, and in the event of a disruption of operations at one facility, our other facility would not be able to make up the capacity loss. Our operations could be subject to disruption for a variety of reasons, including, but not limited to, natural disasters, including earthquakes in California, work stoppages, operational facility constraints and terrorism. Such disruption could cause delays in shipments of products to our customers, result in cancellation of orders or loss of customers and seriously harm our business.





We self-insure certain risks including earthquake risk. If one or more of the uninsured events occurs, we could suffer major financial losses.


We purchase insurance to help mitigate the economic impact of certain insurable risks; however, certain other risks are uninsurable or are insurable only at significant cost or cannot be mitigated with insurance. An earthquake could significantly disrupt our principal manufacturing operations in Fremont, California, an area highly susceptible to earthquakes. It could also significantly delay our research and development efforts on new products, a significant portion of which is conducted in California. We self-insure earthquake risks because we believe this is a prudent financial decision based on the high cost and limited coverage available in the earthquake insurance market. If a major earthquake occurs, we could suffer a major financial loss and face significant disruption in our business.





If we are unable to protect our intellectual property, we may lose valuable assets and experience reduced market share. Efforts to protect our intellectual property may be costly to resolve, require costly litigation and could divert management attention. We also agree to indemnify customers for certain claims, and such obligations are more likely to increase during downturns.





We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements, and other intellectual property protection methods to protect our proprietary technology. Despite our efforts to protect our intellectual property, we may from time to time be subject to claims of infringement of other parties' patents or other proprietary rights. If this occurs, we may not be able to prevent the use of such technology. Our means of protecting our proprietary rights may not be adequate and our patents may not be sufficiently broad to protect our technology. Any patents owned by us could be challenged, invalidated or circumvented and any rights granted under any patent may not provide adequate protection to us.





Furthermore, we may not have sufficient resources to protect our rights. When we outsource portions of our manufacturing, we are less able to protect our intellectual property ourselves, and rely more on our service providers to do so. Our service providers may not always be able to assure that their employees or former employees do not use our intellectual


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property for their own account to compete with us. Our competitors may independently develop similar technology, or design around patents that may be issued to us. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our products in such foreign countries. As a result of these threats to our proprietary technology, we may have to resort to costly litigation to enforce our intellectual property rights.





Customers may request that we indemnify them or otherwise compensate them because of claims of intellectual property infringement made against them by third parties. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets, even if the claims are without merit, could be very expensive to defend and could divert the attention of our management. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek costly licenses from third parties and prevent us from manufacturing and selling our products. Royalty or license agreements, if required, may not be available on terms acceptable to us, or at all. Any of these situations could have a material adverse effect on our business and operating results in one or more countries.





In the normal course of business, we indemnify customers with respect to certain matters, for example if our tool infringes the intellectual property rights of any third party or if we breach any promise in our contract with the customer. During downturns in general or industry specific economic conditions, our customers may feel they have greater leverage in negotiating with us and require that the extent and scope of our obligation to indemnify them be expanded. . In the future, our financial performance could be materially adversely affected if we expend significant amounts in defending or settling any claims raised under customer indemnification provisions.





Our failure to comply with environmental or safety regulations could result in substantial liability.





We are subject to a variety of federal, state, local and foreign laws, rules, and regulations relating to environmental protection and workplace safety. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations, as well as governmental standards for workplace safety. If we fail to comply with present or future regulations, especially in our manufacturing facilities in the United States, Germany and South Korea, we could be subject to substantial liability for cleanup efforts, personal injury, fines or suspension or cessation of our operations. We may be subject to liability if our acquired companies have past violations. Restrictions on our ability to expand or continue to operate our present locations could be imposed upon us as a result of such laws, rules and regulations, and we could be required to acquire costly remediation equipment or incur other significant expenses.





Any future business divestitures or acquisitions may disrupt our business, diminish stockholder value or distract management attention.





We may seek to divest of certain assets or businesses from time to time, especially if we need additional liquidity or capital resources. When we make a decision to sell assets or a business, we may encounter difficulty completing the transaction as a result of a range of possible factors such as new or changed demands from the buyer. These circumstances may cause us to incur additional time or expense or to accept less favorable terms, which may adversely affect the overall benefits of the transaction.





As part of our ongoing business strategy, we may consider acquisitions of, or significant investments in, businesses that offer products, services and technologies complementary to our own. Such acquisitions could materially adversely affect our operating results and/or the price of our common stock. Acquisitions also entail numerous risks, including:





|  |                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------
|• | difficulty of assimilating the operations, products and personnel of the acquired businesses and possible impairments caused by this;




|  |                                              
|- | ---------------------------------------------
|• | potential disruption of our ongoing business;




|  |                                                     
|- | ----------------------------------------------------
|• | unanticipated costs associated with the acquisition;




|  |                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------
|• | inability of management to manage the financial and strategic position of acquired or developed products, services and technologies;




|  |                                                                                
|- | -------------------------------------------------------------------------------
|• | inability to maintain uniform standards, controls, policies and procedures; and




|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|• | impairment of relationships with employees and customers that may occur as a result of integration of the acquired

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business.





To the extent that shares of our stock or other rights to purchase stock are issued in connection with any future acquisitions, dilution to our existing stockholders will result, and our earnings per share may suffer. We may be required to incur debt to pay for any future acquisitions, which could subject us to restrictive covenants and other leverage concerns. Any future acquisitions may not generate additional revenue or provide any benefit to our business, and we may not achieve a satisfactory return on our investment in any acquired businesses.





Divestitures, acquisitions and other transactions are inherently risky, and we cannot provide any assurance that our previous or future transactions will be successful. The inability to effectively manage the risks associated with these transactions could materially and adversely affect our business, financial condition or results of operations.





Our current transfer of operations and periodic restructuring plans may not produce anticipated benefits and may lead to charges that will adversely affect our results of operations.





We are currently undertaking a transfer of our operations from Canada to our Germany facility. This transfer plan may not be achieved in a timely and efficient manner, and may not fully realize the anticipated cost savings and synergies for a variety of reasons. Some of the risk related to this transfer include failure to obtain expected cost savings due to cost overruns in connection with the move or after operations commence; failure to merge our Canadian operations into our existing German operations; and employment and other law, rules, regulations or other limitations in foreign jurisdictions that could have an impact on timing, amounts or costs of achieving expected synergies.





In addition, we have from time to time enacted, and are currently implementing, restructuring and other cost reduction plans designed to reduce our manufacturing overhead and our operating expenses. These restructuring efforts resulted or may result in significant restructuring charges that have adversely affected, and may continue to adversely affect, our results of operations for the periods in which such charges occur. Additionally, actual costs related to such restructuring plans have in the past, and may in the future, exceed the amounts that we previously estimated, leading to additional charges as actual costs are incurred. We expect to incur significant restructuring charges through the remainder of 2012, both in connection with our transfer of the Canadian operations and current restructuring.





Changes in tax rates or tax liabilities could affect results.





We are subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly tax rates could be affected by numerous factors, including changes in the applicable tax laws, composition of earnings in countries with differing tax rates or our valuation and utilization of deferred tax assets and liabilities. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our results of operations.





We may be required to record additional impairment charges that will adversely impact our results of operations.





We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable. The resulting assessment may lead to a material decline in our market valuation and projected net sales, causing a decrease in the anticipated future cash flows attributable to these assets relative to the cash flow expectations when the assets were acquired. In the event that we determine in a future period that impairment of our intangible assets exists for any reason, we would record additional impairment charges in the period such determination is made, which would adversely impact our financial position and results of operations.





Our restated certificate of incorporation and restated bylaws, our stockholder rights plan and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.





Our restated certificate of incorporation, our restated bylaws, our stockholder rights plan and Delaware law contain provisions that might enable our management to discourage, delay or prevent a change in control. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Pursuant to such provisions:


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|  |                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock;




|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
|• | our board of directors is staggered into three classes, only one of which is elected at each annual meeting;




|  |                                                     
|- | ----------------------------------------------------
|• | stockholder action by written consent is prohibited;




|  |                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | nominations for election to our board of directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements;




|  |                                                                                                                                                                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|• | certain provisions in our bylaws and certificate of incorporation such as notice to stockholders, the ability to call a stockholder meeting, advance notice requirements and action of stockholders by written consent may only be amended with the approval of stockholders holding 66 2/3 percent of our outstanding voting stock;




|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
|• | the ability of our stockholders to call special meetings of stockholders is prohibited; and




|  |                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
|• | subject to certain exceptions requiring stockholder approval, our board of directors is expressly authorized to make, alter or repeal our bylaws.




In addition, the provisions in our stockholder rights plan could make it more difficult for a potential acquiror to consummate an acquisition of our company. We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15 percent or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15 percent or more of our outstanding voting stock.





|        |                                                            
|------- | -----------------------------------------------------------
|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.





|        |                                
|------- | -------------------------------
|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES

None.





|        |                        
|------- | -----------------------
|ITEM 4. | MINE SAFETY DISCLOSURES

Not applicable.





|        |                  
|------- | -----------------
|ITEM 5. | OTHER INFORMATION

None.


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|        |         
|------- | --------
|ITEM 6. | Exhibits

ExhibitNumberDescription3.1(2)Amended and Restated Certificate of Incorporation of the Company.3.2(3)Amended and Restated Bylaws of the Company.10.1(4) (c)2012 Equity Incentive Plan31.1(1)Certification of Chief Executive Officer Pursuant to Sarbanes-Oxley Act Section 302(a).PDF31.2(1)Certification of Chief Financial Officer Pursuant to Sarbanes-Oxley Act Section 302(a).PDF32.1(1)Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.PDF32.2(1)Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.PDF101.INS(5)XBRL Instance Document101.SCH(5)XBRL Taxonomy Extension Schema Document101.CAL(5)XBRL Taxonomy Extension Calculation Linkbase Document101.DEF(5)XBRL Taxonomy Extension Definition Linkbase Document101.LAB(5)XBRL Taxonomy Extension Label Linkbase Document101.PRE(5)XBRL Taxonomy Extension Presentation Linkbase Document


_________________


(c)  Management contract or compensatory plan or arrangement.


|    |                
|--- | ---------------
|(1) | Filed herewith.

|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference from the Company's Current Report on Form 8-K/A filed on January 30, 2001.

|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(3) | Incorporated by reference from the Company's Current Report on Form 8-K filed on December 22, 2010.

|    |                                                                                               
|--- | ----------------------------------------------------------------------------------------------
|(4) | Incorporated by reference from the Company's current report on Form 8-K filed on May 11, 2012.

|    |                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.




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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 hereunto duly authorized.


MATTSONTECHNOLOGY, INC.(Registrant)


Date: August 9, 2012


By:/s/ DAVIDDUTTONDavid DuttonPresident and Chief Executive Officer(Principal Executive Officer)


Date: August 9, 2012


By:/s/ J. MICHAELDODSONJ. Michael DodsonChief Financial Officer, Executive Vice President and Secretary(Principal Financial Officer)


Date: August 9, 2012


By:/s/ TYLERPURVISTyler PurvisChief Accounting Officer and Corporate Controller(Principal Accounting Officer)


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