##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q/A
 Amendment No. 1
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission file number: 0-27234
 PHOTON DYNAMICS, INC.
 (Exact name of registrant as specified in its charter)
 California(State or other jurisdiction of
incorporation or organization)
    
    94-3007502(I.R.S. Employer
Identification No.)
 5970 Optical Court
San Jose, California 95138-1400  (Address of principal executive offices including zip code)
 (408) 226-9900  (Registrants telephone number, including area code)
 þ o
 þ o
 o þ




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##### Table of Contents



PHOTON DYNAMICS, INC.
 QUARTERLY REPORT ON FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
EXPLANATORY NOTE TO FORM 10-Q/A AMENDMENT 1
   2




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INDEX
 PagePART I FINANCIAL INFORMATIONItem 1
    
    Financial Statements (unaudited)
    
    
    4Condensed Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004
    
    
    4Condensed
Consolidated Statements of Operations for the Three and Nine Months Ended June 30,
2005 and 2004
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2005 and 2004
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 4
    
    Controls and Procedures
    
    
    49PART II OTHER INFORMATIONItem 5
    
    Other Information
    
    
    51Item 6
    
    Exhibits
    
    
    51Signatures
    
    
    53EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 PHOTON DYNAMICS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2005
    
    
    2004(Restated)
    
    
    (Restated)(Unaudited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,099
    
    
    $
    25,483Short-term investments
    
    
    76,312
    
    
    
    58,672Accounts receivable, net
    
    
    38,654
    
    
    
    58,341Inventories
    
    
    22,956
    
    
    
    31,716Other current assets
    
    
    5,107
    
    
    
    4,536Total current assets
    
    
    156,128
    
    
    
    178,748Land, property and equipment, net
    
    
    20,393
    
    
    
    20,337Other assets
    
    
    3,800
    
    
    
    3,909Intangible assets, net
    
    
    3,578
    
    
    
    4,753Goodwill
    
    
    153
    
    
    
    153Total assets
    
    $
    184,052
    
    
    $
    207,900LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    8,708
    
    
    $
    18,485Warranty
    
    
    6,334
    
    
    
    6,194Other current liabilities
    
    
    9,679
    
    
    
    10,231Deferred gross margin
    
    
    10,222
    
    
    
    11,503Total current liabilities
    
    
    34,943
    
    
    
    46,413Other liabilities
    
    
    1,013
    
    
    
    1,528Commitments and contingenciesShareholders equity:Common stock, no par value
    
    
    287,590
    
    
    
    285,790Accumulated deficit
    
    
    (139,636
    )
    
    
    (126,178
    )Accumulated other comprehensive income
    
    
    142
    
    
    
    347Total shareholders equity
    
    
    148,096
    
    
    
    159,959Total liabilities and shareholders equity
    
    $
    184,052
    
    
    $
    207,900
  4




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PHOTON DYNAMICS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)(Unaudited)(In thousands, except per share data)Revenue
    
    $
    39,096
    
    
    $
    38,522
    
    
    $
    101,061
    
    
    $
    89,079Cost of revenue
    
    
    25,966
    
    
    
    20,711
    
    
    
    67,515
    
    
    
    48,306Gross margin
    
    
    13,130
    
    
    
    17,811
    
    
    
    33,546
    
    
    
    40,773Operating expenses:Research and development
    
    
    8,618
    
    
    
    8,031
    
    
    
    27,906
    
    
    
    19,985Selling, general and administrative
    
    
    7,352
    
    
    
    4,594
    
    
    
    18,143
    
    
    
    13,158Amortization of intangible assets
    
    
    380
    
    
    
    155
    
    
    
    1,175
    
    
    
    416Restructuring charges
    
    
    951
    
    
    
    
    
    
    
    951
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    210Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    665Impairment of purchased intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,089Gain on sale of property and equipment
    
    
    (143
    )
    
    
    (419
    )
    
    
    (143
    )
    
    
    (449
    )Impairment of property and equipment
    
    
    174
    
    
    
    
    
    
    
    556
    
    
    
    234Total operating expenses
    
    
    17,332
    
    
    
    12,571
    
    
    
    48,588
    
    
    
    36,308Income (loss) from operations
    
    
    (4,202
    )
    
    
    5,240
    
    
    
    (15,042
    )
    
    
    4,465Interest income and other, net
    
    
    472
    
    
    
    389
    
    
    
    1,891
    
    
    
    4,494Income (loss) from continuing operations before
income taxes and discontinued operations
    
    
    (3,730
    )
    
    
    5,629
    
    
    
    (13,151
    )
    
    
    8,959Provision for income taxes
    
    
    167
    
    
    
    134
    
    
    
    565
    
    
    
    560Income (loss) from continuing operations before
discontinued operations
    
    
    (3,897
    )
    
    
    5,495
    
    
    
    (13,716
    )
    
    
    8,399Income (loss) from discontinued operations
    
    
    268
    
    
    
    (265
    )
    
    
    258
    
    
    
    (1,494
    )Net income (loss)
    
    $
    (3,629
    )
    
    $
    5,230
    
    
    $
    (13,458
    )
    
    $
    6,905Income (loss) per share from continuing operations:Basic
    
    $
    (0.23
    )
    
    $
    0.33
    
    
    $
    (0.81
    )
    
    $
    0.51Diluted
    
    $
    (0.23
    )
    
    $
    0.32
    
    
    $
    (0.81
    )
    
    $
    0.49Income (loss) per share from discontinued operations:Basic
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.09
    )Diluted
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    0.02
    
    
    $
    (0.09
    )Net income (loss) per share:Basic
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.79
    )
    
    $
    0.42Diluted
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.79
    )
    
    $
    0.40Weighted average number of shares:Basic
    
    
    16,984
    
    
    
    16,663
    
    
    
    16,934
    
    
    
    16,565Diluted
    
    
    16,984
    
    
    
    17,071
    
    
    
    16,934
    
    
    
    17,141
  5




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PHOTON DYNAMICS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedJune 30,2005
    
    
    2004(Restated)
    
    
    (Restated)(Unaudited)(In thousands)Cash flows from operating activities:Net income (loss) from continuing operations
    
    $
    (13,716
    )
    
    $
    8,399Adjustments to reconcile net income (loss) from continuing operations to net
cash provided by (used in) operating activities from continuing operations:Depreciation
    
    
    4,331
    
    
    
    2,721Amortization of intangible assets
    
    
    1,175
    
    
    
    416Impairment of goodwill
    
    
    
    
    
    
    665Impairment of purchased intangibles and fixed assets
    
    
    556
    
    
    
    2,323Acquired in-process research and development
    
    
    
    
    
    
    210Gain on sale of property and equipment
    
    
    (143
    )
    
    
    (449
    )Stock ownership expense
    
    
    44
    
    
    
    164Restructuring charges
    
    
    171
    
    
    
    Accretion of non-interest bearing notes payable
    
    
    53
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    19,687
    
    
    
    (32,099
    )Inventories
    
    
    8,762
    
    
    
    (16,776
    )Other current assets
    
    
    (324
    )
    
    
    758Other assets
    
    
    109
    
    
    
    (1,304
    )Accounts payable
    
    
    (9,786
    )
    
    
    15,342Other current liabilities
    
    
    252
    
    
    
    1,592Deferred gross margin
    
    
    (1,281
    )
    
    
    724Other liabilities
    
    
    (66
    )
    
    
    (65
    )Net cash provided by (used in) operating activities from continuing operations
    
    
    9,824
    
    
    
    (17,379
    )Net cash used in operating activities from discontinued operations
    
    
    (589
    )
    
    
    (1,453
    )Net cash provided by (used in) operating activities
    
    
    9,235
    
    
    
    (18,832
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (5,070
    )
    
    
    (12,508
    )Proceeds from disposal of property and equipment
    
    
    270
    
    
    
    511Acquisition of assets of Quantum Composers, Inc
    
    
    
    
    
    
    (1,000
    )Acquisition of Rapid Thermal Processing Division from Intevac, Inc
    
    
    
    
    
    
    (300
    )Acquisition of certain intangible assets upon termination of a distributor
agreement
    
    
    
    
    
    
    (1,138
    )Purchase of short-term investments
    
    
    (51,481
    )
    
    
    (378,706
    )Redemption of short-term investments
    
    
    33,678
    
    
    
    411,554Net cash provided by (used in) investing activities from continuing operations
    
    
    (22,603
    )
    
    
    18,413Cash flows from financing activities:Issuance of common stock
    
    
    1,756
    
    
    
    4,198Net repayment of short-term borrowings
    
    
    (532
    )
    
    
    Net cash provided by financing activities from continuing operations
    
    
    1,224
    
    
    
    4,198Net cash used in financing activities from discontinued operations
    
    
    (198
    )
    
    
    Net cash provided by financing activities
    
    
    1,026
    
    
    
    4,198Effect of exchange rate changes on cash and cash equivalents
    
    
    (42
    )
    
    
    54Net decrease in cash and cash equivalents from continuing operations
    
    
    (11,597
    )
    
    
    5,286Net decrease in cash and cash equivalents from discontinued operations
    
    
    (787
    )
    
    
    (1,453
    )Net decrease in cash and cash equivalents
    
    
    (12,384
    )
    
    
    3,833Cash and cash equivalents at beginning of period
    
    
    25,483
    
    
    
    18,305Cash and cash equivalents at end of period
    
    $
    13,099
    
    
    $
    22,138
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PHOTON DYNAMICS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1  Basis of Presentation and Summary of Significant Accounting Policies
 Restatement of Third Quarter Fiscal 2005 Financial Statements
    June 30, 2005As Reported
    
    
    Adjustments
    
    
    As Restated(In thousands)Condensed Consolidated Balance Sheet Data:Total current assets
    
    $
    156,128
    
    
    $
    
    
    
    $
    156,128Total assets
    
    
    184,052
    
    
    
    
    
    
    
    184,052Deferred gross margin
    
    
    10,976
    
    
    
    (754
    )
    
    
    10,222Total current liabilities
    
    
    35,697
    
    
    
    (754
    )
    
    
    34,943Accumulated deficit
    
    
    (140,390
    )
    
    
    754
    
    
    
    (139,636
    )Total liabilities and shareholders equity
    
    
    184,052
    
    
    
    
    
    
    
    184,052
 Three Months Ended June 30, 2005As Reported
    
    
    Adjustments
    
    
    As Restated(In thousands, except per share data)Condensed Consolidated Statement of Operations Data:Revenue
    
    $
    39,096
    
    
    $
    
    
    
    $
    39,096Cost of revenue
    
    
    26,720
    
    
    
    (754
    )
    
    
    25,966Gross margin
    
    
    12,376
    
    
    
    754
    
    
    
    13,130Loss from operations
    
    
    (4,956
    )
    
    
    754
    
    
    
    (4,202
    )Interest income and other, net
    
    
    472
    
    
    
    
    
    
    
    472Loss from continuing operations before income taxes
    
    
    (4,484
    )
    
    
    754
    
    
    
    (3,730
    )Provision for income taxes
    
    
    167
    
    
    
    
    
    
    
    167Loss from continuing operations
    
    
    (4,651
    )
    
    
    754
    
    
    
    (3,897
    )
 7




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Three Months Ended June 30, 2005As Reported
    
    
    Adjustments
    
    
    As Restated(In thousands, except per share data)Income from discontinued operations
    
    
    268
    
    
    
    
    
    
    
    268Net loss
    
    $
    (4,383
    )
    
    $
    754
    
    
    $
    (3,629
    )Net loss per share from continuing operations:Basic
    
    $
    (0.27
    )
    
    $
    0.04
    
    
    $
    (0.23
    )Diluted
    
    $
    (0.27
    )
    
    $
    0.04
    
    
    $
    (0.23
    )Net income per share from discontinued operations:Basic
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.02Diluted
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.02Net loss per share:Basic
    
    $
    (0.26
    )
    
    $
    0.04
    
    
    $
    (0.21
    )Diluted
    
    $
    (0.26
    )
    
    $
    0.04
    
    
    $
    (0.21
    )Weighted average number of shares:Basic
    
    
    16,984
    
    
    
    
    
    
    
    16,984Diluted
    
    
    16,984
    
    
    
    
    
    
    
    16,984
 Nine Months Ended June 30, 2005As Reported
    
    
    Adjustments
    
    
    As Restated(In thousands, except per share data)Condensed Consolidated Statement of Operations Data:Revenue
    
    $
    101,061
    
    
    $
    
    
    
    $
    101,061Cost of revenue
    
    
    68,269
    
    
    
    (754
    )
    
    
    67,515Gross margin
    
    
    32,792
    
    
    
    754
    
    
    
    33,546Loss from operations
    
    
    (15,796
    )
    
    
    754
    
    
    
    (15,042
    )Interest income and other, net
    
    
    1,891
    
    
    
    
    
    
    
    1,891Loss from continuing operations before income taxes
    
    
    (13,905
    )
    
    
    754
    
    
    
    (13,151
    )Provision for income taxes
    
    
    565
    
    
    
    
    
    
    
    565Loss from continuing operations
    
    
    (14,470
    )
    
    
    754
    
    
    
    (13,716
    )Income from discontinued operations
    
    
    258
    
    
    
    
    
    
    
    258Net loss
    
    $
    (14,212
    )
    
    $
    754
    
    
    $
    (13,458
    )Net loss per share from continuing operations:Basic
    
    $
    (0.85
    )
    
    $
    0.04
    
    
    $
    (0.81
    )Diluted
    
    $
    (0.85
    )
    
    $
    0.04
    
    
    $
    (0.81
    )Net income per share from discontinued operations:Basic
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.02Diluted
    
    $
    0.02
    
    
    $
    (0.00
    )
    
    $
    0.02Net loss per share:Basic
    
    $
    (0.84
    )
    
    $
    0.04
    
    
    $
    (0.79
    )Diluted
    
    $
    (0.84
    )
    
    $
    0.04
    
    
    $
    (0.79
    )Weighted average number of shares:Basic
    
    
    16,934
    
    
    
    
    
    
    
    16,934Diluted
    
    
    16,934
    
    
    
    
    
    
    
    16,934
 Restatement of Fiscal 2004 and First Quarter Fiscal 2005 Financial Statements.
  8




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Basis of Presentation.
   9




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##### Table of Contents



Description of Operations and Principles of Consolidation.
  Management Estimates.
 Fair Value of Financial Instruments.
 Inventories.
 Concentration of Credit and Other Risk.
   10




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Revenue Recognition.
     Shipping Costs.
 Research and Development Cost.
 Interest Income.
 Stock-Based Compensation Plans.
 11




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Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Stock option plan:Expected stock price volatility
    
    
    0.71
    
    
    
    0.80
    
    
    
    0.74
    
    
    
    0.86Average Risk free interest rate
    
    
    3.89
    %
    
    
    1.55
    %
    
    
    3.1
    %
    
    
    2.15
    %Expected life of options (years)
    
    
    4.0
    
    
    
    5.4
    
    
    
    5.4
    
    
    
    5.2Stock purchase plan:Expected stock price volatility
    
    
    0.58
    
    
    
    0.96
    
    
    
    0.65
    
    
    
    0.96Average Risk free interest rate
    
    
    2.93
    %
    
    
    2.13
    %
    
    
    2.5
    %
    
    
    2.13
    %Expected life of plan (years)
    
    
    1.2
    
    
    
    2.0
    
    
    
    1.3
    
    
    
    2.0
  12




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##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)(In thousands, except per share data)Net income (loss)  as reported
    
    $
    (3,629
    )
    
    $
    5,230
    
    
    $
    (13,458
    )
    
    $
    6,905Less: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax
    
    
    (959
    )
    
    
    (1,605
    )
    
    
    (4,886
    )
    
    
    (5,495
    )Net income (loss)  pro forma
    
    $
    (4,588
    )
    
    $
    3,625
    
    
    $
    (18,344
    )
    
    $
    1,410Basic net income (loss) per share  as reported
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.79
    )
    
    $
    0.42Diluted net income (loss) per share  as reported
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.79
    )
    
    $
    0.40Basic net loss per share  pro forma
    
    $
    (0.27
    )
    
    $
    0.22
    
    
    $
    (1.08
    )
    
    $
    0.09Diluted net loss per share  pro forma
    
    $
    (0.27
    )
    
    $
    0.21
    
    
    $
    (1.08
    )
    
    $
    0.08
 Recent Accounting Pronouncements.
     13




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NOTE 2  Financial Statement Components
 June 30,
    
    
    September 30,2005
    
    
    2004(In thousands)Accounts receivable:Accounts receivable, gross
    
    $
    38,824
    
    
    $
    58,838Allowance for doubtful accounts
    
    
    (170
    )
    
    
    (497
    )Total
    
    $
    38,654
    
    
    $
    58,341Inventories:Raw materials
    
    $
    15,449
    
    
    $
    15,529Work-in-process
    
    
    6,444
    
    
    
    15,046Finished goods
    
    
    1,063
    
    
    
    1,141Total
    
    $
    22,956
    
    
    $
    31,716Other current liabilities:Compensation
    
    $
    4,562
    
    
    $
    3,984Obligation to a manufacturing subcontractor in connection with inventory purchases
    
    
    
    
    
    
    623Accrued closing costs associated with discontinued operations
    
    
    113
    
    
    
    449Vendor Obligations
    
    
    87
    
    
    
    669Notes Payable
    
    
    1,310
    
    
    
    1,534Other accrued expenses
    
    
    3,607
    
    
    
    2,972Total
    
    $
    9,679
    
    
    $
    10,231Accumulated other comprehensive income:Foreign currency translation adjustments
    
    $
    491
    
    
    $
    533Unrealized losses on available for sale securities
    
    
    (349
    )
    
    
    (186
    )Total
    
    $
    142
    
    
    $
    347
 NOTE 3  Discontinued Operations
 Printed Circuit Board Assembly Inspection Business
  14




---



##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    83Cost of revenue
    
    
    5
    
    
    
    
    
    
    
    (127
    )
    
    
    (71
    )Gross margin
    
    
    (5
    )
    
    
    
    
    
    
    127
    
    
    
    154Operating expenses:Selling, general and administrative
    
    
    
    
    
    
    231
    
    
    
    139
    
    
    
    1,615Total operating expenses
    
    
    
    
    
    
    231
    
    
    
    139
    
    
    
    1,615Loss from discontinued operations
    
    $
    (5
    )
    
    $
    (231
    )
    
    $
    (12
    )
    
    $
    (1,461
    )
   June 30,
    
    
    September 30,2005
    
    
    2004(In thousands)ASSETSCurrent assets:Other current assets
    
    $
    1,155
    
    
    $
    908Total assets
    
    $
    1,155
    
    
    $
    908LIABILITIESCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    5Other current liabilities
    
    
    496
    
    
    
    707Total current liabilities
    
    
    496
    
    
    
    712Other liabilities
    
    
    60
    
    
    
    113Total liabilities
    
    $
    556
    
    
    $
    825
   15




---



##### Table of Contents



One-TimeTerminationBenefits
    
    
    Other Costs
    
    
    Total(In thousands)Inception of liability
    
    $
    696
    
    
    $
    1,326
    
    
    $
    2,022Cash expenditures
    
    
    (614
    )
    
    
    (447
    )
    
    
    (1,061
    )Adjustments to the liability
    
    
    (82
    )
    
    
    (342
    )
    
    
    (424
    )Balance at September 30, 2004
    
    
    
    
    
    
    537
    
    
    
    537Cash payments
    
    
    
    
    
    
    (205
    )
    
    
    (205
    )Adjustments to the liability
    
    
    
    
    
    
    (132
    )
    
    
    (132
    )Balance at June 30, 2005
    
    $
    
    
    
    $
    200
    
    
    $
    200
  Cathode Ray Tube Display and High Quality Glass Inspection Business
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(In thousands)Cost of revenue
    
    $
    (150
    )
    
    $
    
    
    
    $
    (150
    )
    
    $
    Gross margin
    
    
    150
    
    
    
    
    
    
    
    150
    
    
    
    Operating expenses:Selling, general and administrative
    
    
    (123
    )
    
    
    3
    
    
    
    (120
    )
    
    
    (32
    )Impairment of purchased intangibles and fixed assets
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    65Total operating expenses
    
    
    (123
    )
    
    
    34
    
    
    
    (120
    )
    
    
    33Income (loss) from discontinued operations
    
    $
    273
    
    
    $
    (34
    )
    
    $
    270
    
    
    $
    (33
    )
   June 31,
    
    
    September 30,2005
    
    
    2004(In thousands)LIABILITIESOther current liabilities:
    
    $
    263
    
    
    $
    797Total current liabilities
    
    $
    263
    
    
    $
    797
  16




---



##### Table of Contents



One-Time
    
    
    ContractTermination
    
    
    TerminationBenefits
    
    
    Costs
    
    
    Other Costs
    
    
    Total(In thousands)Inception of liability
    
    $
    1,116
    
    
    $
    771
    
    
    $
    11
    
    
    $
    1,898Cash expenditures
    
    
    (1,116
    )
    
    
    (322
    )
    
    
    (61
    )
    
    
    (1,499
    )Adjustments to the liability
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    50Balance at September 30, 2004
    
    
    
    
    
    
    449
    
    
    
    
    
    
    
    449Cash payments
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    (66
    )Adjustments to the liability
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    (270
    )Balance at June 30, 2005
    
    $
    
    
    
    $
    113
    
    
    $
    
    
    
    $
    113
  NOTE 4  Non-Recurring Acquisitions and Dispositions
 Nine months ended June 30, 2004 dispositions
  Nine months ended June 30, 2004 acquisitions
  Purchase Price Allocation and Pro Forma Information
   17




---



##### Table of Contents



QuantumAssets(In thousands)Acquired core technology
    
    $
    699Acquired developed technology
    
    
    1,006Acquired in-process research and development
    
    
    210Non-compete agreement
    
    
    769Net fair value of acquired tangible assets and assumed liabilities
    
    
    397Total
    
    $
    3,081
     Nine Months EndedJune 30, 2004(Restated)(In thousands,except pershare data)Total revenue
    
    $
    92,554Net income from continuing operations
    
    
    9,132Net income
    
    
    7,638Pro forma income per share from continuing operations:Basic
    
    $
    0.55Diluted
    
    $
    0.53Pro forma income loss per share:Basic
    
    $
    0.46Diluted
    
    $
    0.45
 NOTE 5  Goodwill and Other Purchased Intangible Assets
 Goodwill
  18




---



##### Table of Contents



Intangible Assets
  NonDeveloped
    
    
    Core
    
    
    License
    
    
    CompeteTechnology
    
    
    Technology
    
    
    Agreement
    
    
    Contract
    
    
    Total(In thousands)Balance as of September 30, 2004
    
    $
    932
    
    
    $
    2,109
    
    
    $
    949
    
    
    $
    763
    
    
    $
    4,753Amortization during the period
    
    
    (189
    )
    
    
    (452
    )
    
    
    (284
    )
    
    
    (250
    )
    
    
    (1,175
    )Balance as of June 30, 2005
    
    $
    743
    
    
    $
    1,657
    
    
    $
    665
    
    
    $
    513
    
    
    $
    3,578
     NOTE 6  Derivative Financial Instruments
  19




---



##### Table of Contents



NOTE 7  Restructuring Costs
    20




---



##### Table of Contents



One-Time
    
    
    ContractTermination
    
    
    TerminationBenefits
    
    
    Costs
    
    
    Total(In thousands)Inception of liability
    
    $
    431
    
    
    $
    234
    
    
    $
    665Cash payments
    
    
    (294
    )
    
    
    (15
    )
    
    
    (309
    )Costs incurred and charged to expense
    
    
    286
    
    
    
    
    
    
    
    286Adjustments to the liability
    
    
    (1
    )
    
    
    (7
    )
    
    
    (8
    )Balance at June 30, 2005
    
    $
    422
    
    
    $
    212
    
    
    $
    634
   NOTE 8  Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)(In thousands)Net income (loss)
    
    $
    (3,629
    )
    
    $
    5,230
    
    
    $
    (13,458
    )
    
    $
    6,905Other comprehensive loss:Net change in unrealized losses on investments
    
    
    94
    
    
    
    (383
    )
    
    
    (163
    )
    
    
    (559
    )Change in foreign currency translation
    
    
    (121
    )
    
    
    153
    
    
    
    (42
    )
    
    
    54Other comprehensive loss
    
    
    (27
    )
    
    
    (230
    )
    
    
    (205
    )
    
    
    (505
    )Total comprehensive income (loss)
    
    $
    (3,656
    )
    
    $
    5,000
    
    
    $
    (13,663
    )
    
    $
    6,400
 NOTE 9  Shareholders Equity
 Stock Option Plans.
 NOTE 10  Net Income Per Share
  21




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)(In thousands, except per share data)Numerator:Net income (loss) from continuing operations before
discontinued operations
    
    $
    (3,897
    )
    
    $
    5,495
    
    
    $
    (13,716
    )
    
    $
    8,399Net income (loss) from discontinued operations
    
    
    268
    
    
    
    (265
    )
    
    
    258
    
    
    
    (1,494
    )Net income (loss)
    
    $
    (3,629
    )
    
    $
    5,230
    
    
    $
    (13,458
    )
    
    $
    6,905Denominator:Weighted average shares for basic net income per share
    
    
    16,984
    
    
    
    16,663
    
    
    
    16,934
    
    
    
    16,565Effect of dilutive securities: Employee stock options
    
    
    
    (1)
    
    
    408
    
    
    
    
    (1)
    
    
    576Weighted average shares for diluted net income per share
    
    
    16,984
    
    
    
    17,071
    
    
    
    16,934
    
    
    
    17,141Earnings per share:Basic net income (loss) per share:Net income (loss) from continuing operations
    
    $
    (0.23
    )
    
    $
    0.33
    
    
    $
    (0.81
    )
    
    $
    0.51Net income (loss) from discontinued operations
    
    
    0.02
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.09
    )Net income (loss) per share
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.79
    )
    
    $
    0.42Diluted net income (loss) per share:Net income (loss) from continuing operations
    
    $
    (0.23
    )
    
    $
    0.32
    
    
    $
    (0.81
    )
    
    $
    0.49Net income (loss) from discontinued operations
    
    
    0.02
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.09
    )Net income (loss) per share
    
    $
    (0.21
    )
    
    $
    0.31
    
    
    $
    (0.79
    )
    
    $
    0.40
 
 (1)
    
    The effect of potentially dilutive securities from employee stock options to purchase 95,096
and 132,667 shares of common stock for the three and nine month periods ended June 30, 2005
were not included in the computation of diluted net income (loss) per share as the effect is
anti-dilutive due to net losses.  NOTE 11  Commitments and Contingencies
 Purchase Agreements
  Warranty Obligations
  22




---



##### Table of Contents



Nine Months EndedJune 30,2005
    
    
    2004(In thousands)Beginning balance
    
    $
    6,194
    
    
    $
    2,363Estimated warranty cost of new shipments during the period
    
    
    3,975
    
    
    
    4,030Warranty costs during the period
    
    
    (3,556
    )
    
    
    (2,840
    )Changes in liability for pre-existing warranties, including expirations
    
    
    (279
    )
    
    
    545Ending balance
    
    $
    6,334
    
    
    $
    4,098
 Legal Proceedings
    NOTE 12  Geographic Information
  23




---



##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)(In thousands)Revenue:Korea
    
    $
    19,550
    
    
    $
    20,984
    
    
    $
    30,585
    
    
    $
    44,885Taiwan
    
    
    18,420
    
    
    
    16,507
    
    
    
    40,994
    
    
    
    36,243Japan
    
    
    1,126
    
    
    
    1,031
    
    
    
    16,200
    
    
    
    7,951China
    
    
    
    
    
    
    
    
    
    
    13,282
    
    
    
    Total
    
    $
    39,096
    
    
    $
    38,522
    
    
    $
    101,061
    
    
    $
    89,079
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)Revenue:ArrayChecker(TM)
    
    
    71
    %
    
    
    84
    %
    
    
    63
    %
    
    
    83
    %ArraySaver(TM)
    
    
    21
    %
    
    
    11
    %
    
    
    27
    %
    
    
    12
    %PanelMaster(TM)
    
    
    
    
    
    
    
    
    
    
    1
    %
    
    
    Spares and other
    
    
    8
    %
    
    
    5
    %
    
    
    9
    %
    
    
    5
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
  Three Months
    
    Nine MonthsEnded
    
    EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Restated)
    
    
    
    
    
    (Restated)Customer A
    
    
    42
    %
    
    
    53
    %
    
    
    26
    %
    
    
    37
    %Customer B
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    10
    %Customer C
    
    
    *
    
    
    
    *
    
    
    
    15
    %
    
    
    *Customer E
    
    
    15
    %
    
    
    *
    
    
    
    *
    
    
    
    13
    %Customer F
    
    
    *
    
    
    
    *
    
    
    
    14
    %
    
    
    *Customer G
    
    
    *
    
    
    
    *
    
    
    
    12
    %
    
    
    *Customer H
    
    
    14
    %
    
    
    19
    %
    
    
    *
    
    
    
    *Customer I
    
    
    12
    %
    
    
    *
    
    
    
    *
    
    
    
    *Customer J
    
    
    *
    
    
    
    14
    %
    
    
    *
    
    
    
    *
 
 *
    
    Customer accounted for less than 10% of total revenue for the period  June 30
    
    September 302005
    
    2004Customer A
    
    
    41
    %
    
    
    29
    %Customer E
    
    
    14
    %
    
    
    16
    %Customer F
    
    
    *
    
    
    
    13
    %Customer H
    
    
    16
    %
    
    
    12
    %
 
 *
    
    Customer accounted for less than 10% of total gross accounts receivable for the period 24




---



##### Table of Contents



June 30
    
    
    September 302005
    
    
    2004(In thousands)United States
    
    $
    22,106
    
    
    $
    22,889Canada
    
    
    894
    
    
    
    1,947Other
    
    
    1,124
    
    
    
    407Total
    
    $
    24,124
    
    
    $
    25,243
 NOTE 13  Related Party Transactions
  NOTE 14  Provision for Income Taxes
  25




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The disclosure in this Item 2 of this Quarterly Report on Form 10-Q/A contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, risks and uncertainties, including
the risk factors set forth in this discussion, especially under the caption Factors Affecting
Operating Results in this Form 10-Q/A . Financial projections for future periods are
forward-looking statements, and generally other statements using the words anticipate, expect,
intend, believe and similar expressions identify forward-looking statements. The
forward-looking statements made in this Form 10-Q/A are made as of the filing date with the
Securities and Exchange Commission and future events or circumstances could cause results that
differ significantly from the forward-looking statements included here. Accordingly, we caution
readers not to place undue reliance on these statements. We expressly disclaim any obligation to
update or alter our forward-looking statements, whether as a result of new information, future
events or otherwise.
 The following discussion and analysis should be read in conjunction with the condensed
consolidated financial statements and notes thereto in Item 1 above and with our financial
statements and notes thereto for the year ended September 30, 2004, contained in Amendment No. 3 to
our Annual Report on Form 10-K/A filed with the SEC on August 9, 2005.
 Restatement of Third Quarter Fiscal 2005 Financial Statements
    Restatement of Fiscal 2004 and First Quarter Fiscal 2005 Financial Statements
   26




---



##### Table of Contents



Results of Investigation
          27




---



##### Table of Contents



Overview
 Our Company
     
    
    The level of capital expenditures of flat panel display manufacturers, which in turn
depends on the current and anticipated market demand for products utilizing flat panel
displays, and
    
    The relative competitiveness of our products and services.
  Focus on Flat Panel Display Industry
     28




---



##### Table of Contents




    
    Product Focus:We continue to improve our product performance in defect detection,
repair success, cost of ownership, ease of use and throughput for each of our product
generations. We seek to couple this improved system performance with our expert applications
engineering services to provide the best possible business solutions to our customers.
    
    Quality Focus:We are continuing to implement processes to drive product quality
improvement and ease of use for our customers.
    
    Technology Leadership:We are continuing to emphasize our research and development to
maintain our technology leadership in our products. We have formed an advance technology
organization to focus on our ArrayChecker(TM) product, our camera development for all of our
products, and our repair and defect classification algorithms for the
ArraySaver(TM) and
PanelMaster(TM) products.
    
    Financial Improvement:We are continuing to improve financial performance. To achieve
these goals, we will continue to look for vertical integration opportunities, source certain
raw materials and certain system integration in Asia, and expand sales and marketing of our
service product offerings.
 Acquisitions and Dispositions
   Industry
     29




---



##### Table of Contents



Backlog
  Critical Accounting Policies and Estimates
     Revenue Recognition.
   30




---



##### Table of Contents



Allowance for Doubtful Accounts.
  Inventories.
  Warranty.
  Goodwill and Intangible Assets.
  31




---



##### Table of Contents



Contingencies and Litigation.
 Results of Operations
 Selected Financial Data
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Restated)
    
    
    (Restated)
    
    
    (Restated)
    
    
    (Restated)Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenue
    
    
    66.4
    
    
    
    53.8
    
    
    
    66.8
    
    
    
    54.2Gross margin
    
    
    33.6
    
    
    
    46.2
    
    
    
    33.2
    
    
    
    45.8Operating expenses:Research and development
    
    
    22.0
    
    
    
    20.9
    
    
    
    27.6
    
    
    
    22.4Selling, general and administrative
    
    
    18.8
    
    
    
    11.9
    
    
    
    18.0
    
    
    
    14.8Amortization of intangible assets
    
    
    1.0
    
    
    
    0.4
    
    
    
    1.1
    
    
    
    0.5Restructuring charges
    
    
    2.5
    
    
    
    
    
    
    
    0.9
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    0.5
    
    
    
    
    
    
    
    0.2Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.8Impairment of purchased intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.3Gain on sale of property and equipment
    
    
    (0.4
    )
    
    
    (1.1
    )
    
    
    (0.1
    )
    
    
    (0.5
    )Impairment of property and equipment
    
    
    0.5
    
    
    
    
    
    
    
    0.6
    
    
    
    0.3Total operating expenses
    
    
    44.4
    
    
    
    32.6
    
    
    
    48.1
    
    
    
    40.8Income (loss) from operations
    
    
    (10.8
    )
    
    
    13.6
    
    
    
    (14.9
    )
    
    
    5.0Interest income and other, net
    
    
    1.2
    
    
    
    1.0
    
    
    
    1.9
    
    
    
    5.0Income (loss) from continuing operations
before income taxes and discontinued
operations
    
    
    (9.6
    )
    
    
    14.6
    
    
    
    (13.0
    )
    
    
    10.0Provision for income taxes
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.6
    
    
    
    0.6Income (loss) from continuing operations
    
    
    (10.0
    )
    
    
    14.3
    
    
    
    (13.6
    )
    
    
    9.4Income (loss) from discontinued operations
    
    
    0.7
    
    
    
    (0.7
    )
    
    
    0.3
    
    
    
    (1.6
    )Net income (loss)
    
    
    (9.3
    )%
    
    
    13.6
    %
    
    
    (13.3
    )%
    
    
    7.8
    %
 32




---



##### Table of Contents



Revenue
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    Change
    
    
    2004
    
    
    2005
    
    
    Change
    
    
    2004(Restated)
    
    
    
    
    
    
    
    
    
    
    (Restated)(Dollars in millions)Revenue
    
    $
    39.1
    
    
    
    1
    %
    
    $
    38.5
    
    
    $
    101.1
    
    
    
    13
    %
    
    $
    89.1
        33




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    Change
    
    
    2004
    
    
    2005
    
    
    Change
    
    
    2004(Restated)
    
    
    
    
    
    
    
    
    
    
    (Restated)(Dollars in millions)Korea
    
    $
    19.6
    
    
    
    (7
    )%
    
    $
    21.0
    
    
    $
    30.6
    
    
    
    (32
    )%
    
    $
    44.9Taiwan
    
    
    18.4
    
    
    
    12
    %
    
    
    16.5
    
    
    
    41.0
    
    
    
    13
    %
    
    
    36.2Japan
    
    
    1.1
    
    
    
    10
    %
    
    
    1.0
    
    
    
    16.2
    
    
    
    103
    %
    
    
    8.0China
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13.3
    
    
    
    
    
    
    
    $
    39.1
    
    
    
    2
    %
    
    $
    38.5
    
    
    $
    101.1
    
    
    
    13
    %
    
    $
    89.1
   Gross Margin
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    Change
    
    
    2004
    
    
    2005
    
    
    Change
    
    
    2004(Restated)
    
    
    
    
    
    
    (Restated)
    
    
    (Restated)
    
    
    
    
    
    
    (Restated)Gross Margin
    
    
    34
    %
    
    
    (26
    )%
    
    
    46
    %
    
    
    33
    %
    
    
    (18
    )%
    
    
    46
    %
 34




---



##### Table of Contents




    
    A high mix of Generation 5 and earlier generation test and repair products sold at lower
margins than current generation products;
    
    The under-utilization of our San Jose facilities.Key factors that may impact our future gross margin include:
    
    Our revenue mix between higher margin ArrayChecker(TM) systems and lower margin
ArraySaver(TM) and PanelMaster(TM) systems;
    
    The costs of increasing customer service staff to support the increased demands of our customers;
    
    The additional costs in connection with inefficiencies of manufacturing newly-introduced products;
    
    Competitive pricing pressures, particularly in the array repair market;
    
    Reduced production levels as a consequence of either industry slowdown, order
cancellations or pushouts by our customers; and
    
    Fluctuations in the level of revenue due to the cyclical nature of customers capital
expenditures.
 Research and Development
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    Change
    
    
    2004
    
    
    2005
    
    
    Change
    
    
    2004(Dollars in millions)Expense
    
    $
    8.6
    
    
    
    7
    %
    
    $
    8.0
    
    
    $
    27.9
    
    
    
    40
    %
    
    $
    20.0Percent of Revenue
    
    
    22
    %
    
    
    
    
    
    
    21
    %
    
    
    28
    %
    
    
    
    
    
    
    22
    %
   
    
    Ramp up our cell and module program to address mass production requirements;
    
    Increase our efforts on Generation 7 and 7.5 products and launch programs for Generation 8 products;
    
    Invest funds in reliability and cost reduction initiatives; and
    
    Expand our repair product offering.
  35




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##### Table of Contents



Selling, General and Administrative
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    

June
30,2005
    
    
    Change
    
    
    2004
    
    
    2005
    
    
    Change
    
    
    2004(Dollars in millions)Expense
    
    $
    7.4
    
    
    
    60
    %
    
    $
    4.6
    
    
    $
    18.1
    
    
    
    38
    %
    
    $
    13.2Percent of Revenue
    
    
    19
    %
    
    
    
    
    
    
    12
    %
    
    
    18
    %
    
    
    
    
    
    
    15
    %
  
    
    Amounts spent on the internal investigation and resulting restatement of our fiscal 2004
Annual Report on Form 10-K/A and our fiscal 2005 Quarterly Report on Form 10-Q/A for the
three month period ended December 31, 2004. Expenses incurred in the quarter were
approximately $1.6 million;
    
    Amounts spent on preparation work for compliance with Section 404 of the Sarbanes-Oxley Act of 2002; and
    
    Additional investments in the marketing area.
 Amortization of Intangibles
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2005
    
    
    Change
    
    
    2004
    
    
    2005
    
    
    Change
    
    
    2004Expense
    
    $
    380,000
    
    
    
    145
    %
    
    $
    155,000
    
    
    $
    1.2 million
    
    
    
    182
    %
    
    $
    416,000Percent of Revenue
    
    
    1
    %
    
    
    
    
    
    
    0.4
    %
    
    
    1
    %

    
    
    
    
    
    
    0.5
    %
   Restructuring Charges
    36




---



##### Table of Contents



Acquired In-Process Research and Development
     Impairment of Goodwill, Purchased Intangibles and Property and Equipment
   37




---



##### Table of Contents



Gain on Sale of Property and Equipment
  Interest Income and Other, Net
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2005
    
    Change
    
    2004
    
    2005
    
    Change
    
    2004Income
    
    $
    472,000
    
    
    
    21
    %
    
    $
    389,000
    
    
    $1.9 million
    
    
    (58
    )%
    
    $4.5
    millionPercent of Revenue
    
    
    1
    %
    
    
    
    
    
    
    1
    %
    
    
    
    2
    %
    
    
    
    
    
    5
    %
  Provision for Income Taxes
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2005
    
    Change
    
    2004
    
    2005
    
    Change
    
    2004(Restated)
    
    
    
    
    
    
    
    
    
    (Restated)Expense
    
    $
    167,000
    
    
    
    25
    %
    
    $
    134,000
    
    
    $
    565,000
    
    
    
    1
    %
    
    $
    560,000Percent of Revenue
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    1
    %
    
    
    
    
    
    
    1
    %
   Discontinued Operations
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Income (loss)
    
    $
    268,000
    
    
    $
    (265,000
    )
    
    $
    258,000
    
    
    $(1.5 million)
  38




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities of Continuing Operations
  Investing Activities of Continuing Operations
  Financing Activities of Continuing Operations
    39




---



##### Table of Contents



Operating, Investing and Financing Activities of Discontinued Operations
  Nine Months EndedJune 31,2005
    
    
    2004(In thousands)Printed circuit board business
    
    $
    (523
    )
    
    $
    (1,225
    )Cathode ray tube display and high quality glass inspection business
    
    
    (264
    )
    
    
    (228
    )Net cash used in discontinued operations
    
    $
    (787
    )
    
    $
    (1,453
    )
 Contractual Obligations
  Payments Due by Fiscal YearContractual Obligations
    
    Total
    
    
    2005(1)
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter(In thousands)Notes payable
    
    $
    2,251
    
    
    $
    333
    
    
    $
    977
    
    
    $
    941
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    15,920
    
    
    
    948
    
    
    
    3,572
    
    
    
    2,748
    
    
    
    2,627
    
    
    
    2,627
    
    
    
    3,398Purchase obligations
    
    
    32,671
    
    
    
    20,062
    
    
    
    8,132
    
    
    
    3,762
    
    
    
    715
    
    
    
    
    
    
    
    Total
    
    $
    50,842
    
    
    $
    21,343
    
    
    $
    12,681
    
    
    $
    7,451
    
    
    $
    3,342
    
    
    $
    2,627
    
    
    $
    3,398
 
 (1)
    
    Remaining 3 months    Working Capital
  Impact of Accounting Pronouncements
  40




---



##### Table of Contents



Factors Affecting Operating Results
 We have sustained losses and we may sustain losses in the future.
  41




---



##### Table of Contents



Our operating results are difficult to predict and may vary from investors expectations,
which could cause our stock price to fall.
   
    
    the timing of the receipt of orders from major customers;
    
    our product mix;
    
    competitive pricing pressures;
    
    our ability to obtain components from our single or limited source suppliers in a timely manner;
    
    global economic uncertainty;
    
    changing international economic conditions;
    
    the outcome of our litigation with a former executive officer;
    
    worldwide political instability;
    
    our ability to design, manufacture and introduce new products on a cost-effective and timely basis;
    
    the delay between expenses to further develop marketing and service capabilities and the
realization of benefits from those improved capabilities; and
    
    the introduction of new products by our competitors.
  If our products experience performance, reliability or quality problems, our customers may
reduce their orders.
  42




---



##### Table of Contents




    
    delays in collecting accounts receivable;
    
    reduced orders;
    
    additional service expenses; and
    
    higher manufacturing costs.
   Capital investment by manufacturers of flat panel display products can be highly cyclical and
may decline in the future.
   We depend on sales to a few large customers in the flat panel display industry, and if we lose any
of our large customers our revenue could decrease significantly.
  We rely upon sales of a limited range of products, and if demand for one product decreases for any
reason it could cause our revenue to decline significantly.
  43




---



##### Table of Contents



We may not be able to develop and introduce new products that respond to evolving industry
requirements in a timely manner, which could reduce our ability to compete effectively.
    If we are not able to obtain critical components from our single or limited source suppliers, we
may experience significant delays in producing our products, which could decrease our revenue for
an extended period of time.
  All of our revenue is derived from sales to companies located outside the United States, which
exposes us to risks that we would not experience with domestic sales.
  
    
    political instability and the possibility of hostilities, terrorist attacks, or war;
    
    imposition of governmental controls;
    
    fluctuations in interest and currency exchange rates;
    
    export license requirements;
    
    restrictions on the export of technology;
    
    limited foreign protection of intellectual property rights;
    
    trade restrictions;
    
    periodic or local international downturns;
    
    changes in tariffs; and
    
    difficulties in staffing and managing international operations.
  44




---



##### Table of Contents



Compliance with new reporting requirements may strain our resources and we may be unable to
implement in a timely manner additional finance and accounting systems, procedures and controls in
the future to satisfy new reporting requirements, which could cause our stock price to fall.
   We may have difficulty integrating the businesses or assets we have acquired and may acquire in
the future, and we may not realize the benefits that we expect from these acquisitions.
  
    
    difficulty in the assimilation of the technologies and products of the acquired company;
    
    entering markets in which we have no or limited direct prior experience;
    
    loss of key customers of the acquired company;
    
    diversion of management resources from the business of the combined company;
    
    incompatibility of business cultures or practices;
    
    loss of key employees of the acquired company;
 45




---



##### Table of Contents




    
    costs and delays in implementing common systems and procedures;
    
    potential inefficiencies in delivering services to the customers of the combined company; and
    
    assumption of unknown or undisclosed liabilities.
   Any failure of, or other problems at or with, our third party manufacturers could delay shipments
of our flat panel display products, harm our relationships with our customers or otherwise
negatively impact our business.
  If we do not compete effectively in our target markets, we will lose market share.
  Our success depends in large part on the strength of the active matrix liquid crystal display
in the flat panel display industry.
  Our business could be harmed if we fail to properly protect our intellectual property.
  46




---



##### Table of Contents



Litigation may be necessary to enforce or defend against claims of intellectual property
infringement, which could be expensive and, if we lose, could prevent us from selling our products.
   We must attract and retain key employees and our management team and employees must work
effectively together to maintain and grow our business.
  Terrorism and international political instability may negatively affect our operations.
   Our manufacturing facilities may be subject to disruption from natural disasters.
  47




---



##### Table of Contents



Our stock price may fluctuate significantly.
  
    
    announcements of technological innovations or new products by us or by our competitors;
    
    government regulations;
    
    developments in patent or other property rights; and
    
    developments in our relationships with our customers.
  Some anti-takeover provisions may affect the price of our common stock.
  We do not anticipate paying cash dividends.
  New regulations related to equity compensation will negatively impact our financial statements and
could adversely affect our ability to attract and retain key personnel.
  48




---



##### Table of Contents



ITEM 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Efforts to Address Existing Material Weaknesses and Other Deficiencies.
 
    
    an appropriate level of review of those significant financial statement accounts
requiring a higher degree of judgment and estimates, in part due to the need for more
personnel as well as more highly skilled and trained personnel in certain positions;
    
    a formal review process of the financial statements and supporting schedules of our
international subsidiaries; and
    
    consistent processes and controls over revenue transactions entered into and recorded by
our Japanese subsidiary with those processes and controls in place in the U.S.
      49




---



##### Table of Contents



Changes in Internal Control Over Financial Reporting Prior to the Third Quarter of Fiscal 2005
   Changes in Internal Control Over Financial Reporting in the Third Quarter of Fiscal 2005
  
    
    We hired a new Chief Financial Officer, as of May 31, 2005.
    
    We hired a new Vice President of Finance and a new Corporate Controller, each of whom
began employment with us in July 2005.
    
    We improved our sales certification program to ensure completeness of all documentation
relating to complex financial transactions, as well as requiring a review of all material
transactions by senior finance personnel.
    
    We enhanced controls around the close process and consolidation to ensure timely
reconciliations and reviews of all subsidiary and consolidated financial statements.
    
    We performed additional training for key personnel in the proper methodology of revenue
allocation for undelivered elements and other technical revenue recognition concepts.
    
    We implemented a revised signature authorization policy to ensure that all contractual
commitments made by the company are properly authorized and accounted for.
    
    We strengthened our Disclosure Committee process to ensure that filings are properly
reviewed and reflect all known material information required.
    
    We hired a new Asia Pacific controller in Korea to oversee Asia accounting personnel and
ensure policies and procedures are followed.
    
    We improved our reviews of all accounting estimates; specifically, excess and obsolete
inventory, warranty and other reserves and accruals.
 Assessment of Disclosure Controls and Procedures at June 30, 2005
  50




---



##### Table of Contents



Limitations on the Effectiveness of Disclosure Controls and Procedures.
 
 PART II. OTHER INFORMATION
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 Exhibits
 Number
    
    Exhibit3.1(1)
    
    Amended and Restated Articles of Incorporation of the Registrant.3.2(1)
    
    Certificate of Amendment to Articles of Incorporation of the Registrant.3.3(2)
    
    Bylaws of the Registrant and amendments thereto.
 51




---



##### Table of Contents



Number
    
    Exhibit4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.10.4(3)
    
    Letter Agreement Extending Consulting Contract with Malcolm Thompson, dated April 8, 2005.10.47(4)
    
    Sublease, dated April 15, 2005, among Photon Dynamics Canada, Inc., Service Results
Technology, and Huntley Contracting Limited.10.48(5)
    
    Offer letter, dated April 29, 2005, between Photon Dynamics, Inc. and Maureen L. Lamb.10.49(4)
    
    Separation Agreement, dated May 5, 2005, between Photon Dynamics, Inc., and Richard Okumoto.10.50(5)
    
    Amendment to Employment Agreement, dated April 5, 2005, between
Photon Dynamics, Inc. and Steve Song.10.51(5)
    
    Amendment to Employment Agreement, dated April 5, 2005, between
Photon Dynamics, Inc. and Mark Merrill.31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1*
    
    Certifications required by
Rule 13a-14(b) or Rule 15d-14(b)and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
 Key to Exhibits:
 
 (1)
    
    Previously filed as the like-numbered exhibit to the Registrants Registration Statement on
Form S-1 (Commission File No. 333-76650) as filed with the Securities and Exchange Commission
on January 14, 2002, as amended, and incorporated herein by reference.(2)
    
    Previously filed as the like-numbered exhibit to the Registrants Annual Report on Form
10-KSB for the fiscal year ended September 30, 1998 as filed with the Securities and Exchange
Commission on December 18, 1998, and incorporated herein by reference.(3)
    
    Previously filed as Exhibit 10.4 to the Registrants Current Report on Form 8-K as filed with
the Securities and Exchange Commission on April 11, 2005, and incorporated herein by
reference.(4)
    
    Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 as filed with the SEC on August 9, 2005, and incorporated here by
reference.(5)
    
    Previously filed as an exhibit to the Registrants Current Report on Form
8-K, filed with the SEC on November 9, 2005, and incorporated herein by
reference.*
    
    The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q/A
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 52




---



##### Table of Contents



SIGNATURES
  PHOTON DYNAMICS, INC.By:
    
    /s/ Maureen L. LambMaureen L. LambChief Financial Officer and Secretary(Duly authorized and principal financial officer)Dated:
November 21, 2005
 53




---



##### Table of Contents



Exhibit Index
 Number
    
    Exhibit3.1(1)
    
    Amended and Restated Articles of Incorporation of the Registrant.3.2(1)
    
    Certificate of Amendment to Articles of Incorporation of the Registrant.3.3(2)
    
    Bylaws of the Registrant and amendments thereto.4.1
    
    Reference is made to Exhibits 3.1, 3.2 and 3.3.10.4(3)
    
    Letter Agreement Extending Consulting Contract with Malcolm Thompson, dated April 8, 2005.10.47(4)
    
    Sublease, dated April 15, 2005, among Photon Dynamics Canada, Inc., Service Results
Technology, and Huntley Contracting Limited.10.48(5)
    
    Offer letter, dated April 29, 2005, between Photon Dynamics, Inc. and Maureen L. Lamb.10.49(4)
    
    Separation Agreement, dated May 5, 2005, between Photon Dynamics, Inc., and Richard Okumoto.10.50(5)
    
    Amendment to Employment Agreement, dated April 5, 2005, between
Photon Dynamics, Inc. and Steve Song.10.51(5)
    
    Amendment to Employment Agreement, dated April 5, 2005, between
Photon Dynamics, Inc. and Mark Merrill.31.1
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).31.2
    
    Certification required by Rule 13a-14(a) or Rule 15d-14(a).32.1*
    
    Certifications required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63
of Title 18 of the United States Code (18 U.S.C. §1350).
 Key to Exhibits:
 
 (1)
    
    Previously filed as the like-numbered exhibit to the Registrants Registration Statement on
Form S-1 (Commission File No. 333-76650) as filed with the Securities and Exchange Commission
on January 14, 2002, as amended, and incorporated herein by reference.(2)
    
    Previously filed as the like-numbered exhibit to the Registrants Annual Report on Form
10-KSB for the fiscal year ended September 30, 1998 as filed with the Securities and Exchange
Commission on December 18, 1998, and incorporated herein by reference.(3)
    
    Previously filed as Exhibit 10.4 to the Registrants Current Report on Form 8-K as filed with
the Securities and Exchange Commission on April 11, 2005, and incorporated herein by
reference.(4)
    
    Previously filed as an exhibit to the Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 as filed with the SEC on August 9, 2005, and incorporated here by
reference.(5)
    
    Previously filed as an exhibit to the Registrants Current Report on Form
8-K, filed with the SEC on November 9, 2005, and incorporated herein by
reference.*
    
    The certification attached as Exhibit 32.1 accompanies the Quarterly Report on Form 10-Q/A
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. 54