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

The following discussion contains, in addition to historical information, forward-looking statements. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the Company's 1996 annual report on Form 10-K.

In particular, the Company believes that the following factors could impact forward-looking statements made herein or in future written or oral releases and by hindsight, prove such statements to be overly optimistic and unachievable: volatility of the semiconductor and semiconductor equipment industries, customer concentration, dependence on design wins, rapid technological change and dependence on new system introduction, competition, and management of growth.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996

SALES

Sales for the first quarter of 1997 were $20.7 million, a decrease of 24% from first quarter of 1996 sales of $27.2 million. The Company's decrease in sales between the periods presented has resulted from decreased unit sales of the Company's systems. A significant part of this unit sales decrease is attributable to decreased demand by domestic semiconductor equipment customers, primarily the Company's two largest customers reflecting the downturn in the entire semiconductor equipment industry. Sales in Europe were down marginally from the comparable quarter in 1996. Sales in Japan were up 188% from the comparable quarter in 1996 due to increased revenue from the flat panel display industry.

The Company continues to be cautious about the outlook for future sales to the semiconductor equipment industry.

GROSS MARGIN

The Company's gross margin for the first quarter of 1997 was 36.3% of revenue, down from 37.3% of revenue in the comparable period in 1996, and down from 36.9% in the fourth quarter of 1996. The decline in gross margin from the first quarter of 1996 to the first quarter of 1997 is due primarily to higher customer service costs, which increased in total dollars spent and as a percentage of sales, higher allocations of infrastructure costs to cost of good sold, and a less favorable absorption of manufacturing overhead costs. These increases were partially offset by lower material costs. The Company expects that

increased customer service costs and underutilization of manufacturing capacity will continue to negatively impact gross margin until sales levels improve.

RESEARCH AND DEVELOPMENT

The Company's research and development costs are incurred researching new technologies, developing new products and improving existing product designs. Research and development expenses for the first quarter of 1997 were $2.8 million, down from $3.5 million in the first quarter of 1996, representing a decrease of 20%. This decrease resulted from lower spending for materials and supplies, as well as a reduction in allocations of infrastructure costs to research and development. These decreases reflect a continuation of the Company's cost containment efforts implemented in the third quarter of 1996. As a percentage of sales, research and development expenses increased to 13.6% in the first quarter of 1997 from 12.9% in the first quarter of 1996, primarily as a result of the lower sales base.

The Company believes that continued research and development investment is essential to ongoing development of new products. Since inception, all research and development costs have been internally funded and expensed.

SALES AND MARKETING

Sales and marketing expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, and other marketing activities. Sales and marketing expenses for the first quarter of 1997 were $1.8 million, compared to expenses of $2.1 million in the first quarter of 1996, representing a decrease of 14%. This decrease is primarily a result of lower allocations of general and administrative costs to the sales and marketing function. As a percentage of sales, sales and marketing expenses increased to 8.7% in the first quarter of 1997 from 7.7% in the first quarter of 1996, primarily as a result of the lower sales base.

The Company continues to reorganize its sales and marketing team to better address the specific needs of its customers. As a result, sales and marketing expenses are expected to increase as a percentage of sales in future periods.

GENERAL AND ADMINISTRATIVE

General and administrative expenses support the worldwide financial, administrative, information systems and human resources functions of the Company. General and administrative expenses for the first quarter of 1997 were $1.2 million, compared to expenses of $1.7 million in the first quarter of 1996, representing a decrease of 29%. The decrease is primarily a result of continued lower spending driven by cost containment efforts implemented during the third quarter of 1996, particularly for payroll costs and purchased services. As a percentage of sales, expenses decreased to 6.0% in the first quarter of 1997 from 6.3% in the first quarter of 1996.

The Company is in the process of implementing new information management system software throughout the Company including the replacement of existing systems in its foreign locations. The Company expects that significant charges related to training and implementation of the new software will occur during 1997 particularly for the foreign locations.

OTHER INCOME (EXPENSE)

Other income and expense consists primarily of foreign exchange gains and losses, interest expense and other miscellaneous income and expense items. Other expense was $0.4 million for the first quarter of 1997, compared to other expense of $0.2 million in the first quarter of 1996.

The Company has experienced fluctuations in foreign currency exchange rates during the past few months particularly against the Japanese yen. As a hedge against currency fluctuations in the Japanese yen, the Company entered into various forward foreign exchange contracts during the first quarter to lessen future exposures to foreign exchange losses.

PROVISION FOR INCOME TAXES

The income tax provision of $0.5 million for the first quarter of 1997 represented an estimated effective rate of 39.0% compared to an effective income tax rate for the year 1996 of 38.1%. The Company adjusts its income taxes periodically based upon the anticipated tax status of all foreign and domestic entities.

LIQUIDITY AND CAPITAL RESOURCES

Until the initial public offering of the Company's common stock in November 1995, the Company financed its operations, acquired equipment and met its working capital requirements through borrowings under its revolving line of credit, long-term loans secured by property and equipment and cash flow from operations.

Cash used in operations totaled $0.9 million for the first quarter of 1997 compared to cash provided by operations of $0.1 million for the same period in 1996. Cash used in the first quarter of 1997 was primarily a result of increases in accounts receivable and inventories offset by net income and increases in accounts payable. Cash provided in the comparable period in 1996 was primarily a result of net income and increases in accounts payable, income taxes payable and other liabilities, offset by increases in accounts receivable and inventories.

Investing activities, consisting primarily of equipment acquisitions, used cash of $0.3 million in the first quarter of 1997, versus $3.1 million in the comparable period in 1996. In the first quarter of 1996 the Company equipped and moved into a new 56,000 square

foot building. Financing activities in the first quarter of 1997 consisted primarily of notes payable and capital lease obligations and used cash of $0.3 million. In the comparable period in 1996, financing activities consisted primarily of repayment of notes payable and capital lease obligations, partially offset by proceeds from the sale of common stock, and used cash of $0.1 million.

The Company plans to spend approximately $3.5 million through the remainder of 1997 for the acquisition of manufacturing and test equipment and furnishings.

As of March 31, 1997, the Company had working capital of $36.8 million. The Company's principal sources of liquidity consisted of $9.8 million of cash and cash equivalents and $10.0 million available under a $10.0 million revolving line of credit that bears interest at the prime rate (8.5% at April 15, 1997). The Company has the option to convert up to $3.0 million of its revolving line of credit to a 36-month term loan that would bear interest at prime rate plus 0.50%.

The Company also has a term loan for equipment financing for its US operations. At March 31, 1997, $1.3 million was outstanding under the term loan, which bears interest at prime plus 0.25% and is due November 5, 1999.

The Company believes that its cash and cash equivalents, cash flow from operations and available borrowings, will be sufficient to meet the Company's working capital needs through at least the end of 1997. After that time, the Company may require additional equity or debt financing to address its working capital, capital equipment, or expansion needs. There can be no assurance that additional funding will be available when required or that it will be available on terms acceptable to the Company.