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 JUNE 30, 1997 AND 1996

SALES

Sales for the second quarter of 1997 were $32.7 million, an increase of 10% from second quarter of 1996 sales of $29.8 million. The Company's increase in sales between the periods presented has resulted from increased unit sales of the Company's systems. A significant part of the sales increase was attributable to increased demand by domestic semiconductor equipment customers, primarily the Company's largest customer, reflecting the recovery in the semiconductor equipment industry. Sales in Europe were up 22% from the comparable quarter in 1996. Sales in Japan were up 138% from the comparable quarter in 1996 due to higher unit sales, primarily from the flat panel display industry. In anticipation of continued growth of business from the semiconductor equipment market throughout the rest of 1997, the Company has acquired 31,000 square feet of additional space which increases the Company's total square footage by 25%.

GROSS MARGIN

The Company's gross margin for the second quarter of 1997 was 38.4%, down from 42.3% in the comparable period in 1996, and up from 36.3% in the first quarter of 1997. The decline in gross margin from the second quarter of 1996 to the second quarter of 1997 was due primarily to adjustments for excess and obsolete inventory, higher costs associated with customer service, and increased overhead and staffing incurred in anticipation of higher manufacturing levels in 1997. The improvement in gross margin from the first quarter of 1997 to the second quarter of 1997 was primarily the result of more favorable absorption of manufacturing overhead resulting from a 58% increase in sales.

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 second quarter of 1997 were $3.5 million, down from $3.6 million in the second quarter of 1996, representing a decrease of 4%. As a percentage of sales, research and development expenses decreased to 10.7% in the second quarter of 1997 from 12.2% in the second quarter of 1996.

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 second quarter of 1997 were $2.3 million, compared to expenses of $2.2 million in the second quarter of 1996, representing an increase of 4%. The increase was primarily due to higher spending for purchased services. As a percentage of sales, sales and marketing expenses decreased to 7.1% in the second quarter of 1997 from 7.5% in the second quarter of 1996, primarily as a result of the higher 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 second quarter of 1997 were $1.7 million, compared to expenses of $2.3 million in the second quarter of 1996, representing a decrease of 27%. The decrease is primarily a result of lower spending for payroll costs and purchased services. As a percentage of sales, general and administrative expenses decreased to 5.2% in the second quarter of 1997 from 7.8% in the second 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 and 1998, particularly for the foreign locations.

OTHER INCOME (EXPENSE)

Other income and expense consists primarily of foreign exchange gains and losses, interest income and expense and other miscellaneous income and expense items. Other income was $0.3 million for the second quarter of 1997, compared to other expense of $0.1 million in the second quarter of 1996.

The Company has experienced fluctuations in foreign currency exchange rates during the past two quarters, 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 $2.0 million for the second quarter of 1997 represented an estimated effective rate of 37.8% 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.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996

SALES

Sales for the first six months of 1997 were $53.4 million, a decrease of 6% from sales of $57.0 million in the comparable period in 1996. 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 the 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 that affected the first quarter of 1997. Partially offsetting these decreases, sales in Japan were up 156% from the comparable period in 1996 due to increased unit sales.

GROSS MARGIN

The Company's gross margin for the first six months of 1997 was 37.6%, down from 39.9% in the comparable period in 1996. The 2.3% decline in gross margin between the periods presented was due primarily to unfavorable absorption of manufacturing overhead costs resulting from the lower sales base.

RESEARCH AND DEVELOPMENT

Research and development expenses for the first six months of 1997 were $6.3 million, down from $7.1 million in the comparable period in 1996, representing a decrease of 11%. This decrease resulted from a reduction in allocation of infrastructure

costs to research and development. As a percentage of sales, research and development expenses decreased to 11.9% in the first six months of 1997 from 12.5% in the comparable period in 1996.

SALES AND MARKETING

Sales and marketing expenses for the first six months of 1997 were $4.1 million, down from $4.3 million in the comparable period in 1996, representing a decrease of 5%. As a percentage of sales, sales and marketing expenses increased to 7.7% in the first six months of 1997 from 7.6% in the comparable period in 1996.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for the first six months of 1997 were $3.0 million, down from $4.1 million in the comparable period in 1996, representing a decrease of 27%. This decrease was primarily a reduction in payroll and benefits expenses. As a percentage of sales, general and administrative expenses decreased to 5.5% in the first six months of 1997 from 7.1% in the comparable period in 1996.

OTHER INCOME (EXPENSE)

Other expense was $0.1 million for the first six months of 1997, compared to other expense of $0.2 million in the comparable period in 1996.

PROVISION FOR INCOME TAXES

The income tax provision of $2.5 million for the first six months of 1997 represented an estimated effective rate of 38.0%, compared to an effective income tax rate for the year 1996 of 38.1%.

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 provided by operations totaled $1.2 million for the first six months of 1997 compared to $0.2 million for the same period in 1996. Cash provided in the first six months of 1997 was primarily a result of net income and increases in accounts payable offset by increases in accounts receivable and inventories. Cash provided in the comparable period in 1996 was primarily a result of net income offset by increases in accounts receivable and inventories and decreases in accounts payable.

Investing activities, consisting primarily of equipment acquisitions, used cash of $0.8 million in the first six months of 1997, versus $4.4 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 six months of 1997 used cash of $0.5 million and consisted primarily of repayment of notes payable and capital lease obligations. In the comparable period in 1996, financing activities used cash of $0.4 million and consisted primarily of repayment of notes payable and capital lease obligations, partially offset by proceeds from the sale of common stock.

The Company has updated its capital spending outlook and plans to spend approximately $5.0 million through the remainder of 1997 for the acquisition of manufacturing and test equipment and furnishings.

As of June 30, 1997, the Company had working capital of $40.8 million. The Company's principal sources of liquidity consisted of $11.2 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 July 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 June 30, 1997, $1.2 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.