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 1995 annual report on Form 10-K.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995

SALES

Sales for the second quarter of 1996 were $29.8 million, an increase of 20% from second quarter of 1995 sales of $24.9 million. The Company's sales growth during the periods presented has resulted from the increased unit sales of the Company's systems. Average selling prices remained constant. A significant part of this unit sales growth is attributable to increased sales to domestic customers, primarily the Company's two largest customers, which in the quarter reported on accounted for approximately 57% of the Company's revenue, as compared to 40% for the same quarter of the previous year.

The Company is cautious about the outlook for future sales to the semiconductor equipment industry. During the most recent quarter, 71% of the Company's revenue came from this industry. Industry analysts are generally forecasting reduced demand in the semiconductor equipment industry in the near-term.

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.

GROSS MARGIN

The Company's gross margin for the second quarter of 1996 was 42.3% of revenue, down from 51.7% of revenue in the comparable period in 1995 and up from 37.3% in the first quarter of 1996. The gross margin in the second quarter of 1996 compared to the comparable period in 1995 was primarily affected by higher costs associated with outsourcing the manufacture of assemblies, product mix, and costs associated with expanded manufacturing facilities. The Company realized improvements from the first quarter to the second quarter of 1996 resulting from the review of all outsourcing

contracts, re-negotiating prices with outsourcing vendors and re-evaluating prior decisions to outsource certain assemblies. Additionally, the Company's revenues increased $2.7 million from the first quarter to the second quarter of 1996 resulting in more favorable absorption of manufacturing overhead.

RESEARCH AND DEVELOPMENT

The Company's research and development costs are associated with researching new technologies, developing new products and improving existing product designs. Research and development expenses for the second quarter of 1996 were $3.6 million, compared to expenses of $2.3 million in the second quarter of 1995, representing an increase of 56%. As a percentage of sales, research and development expenses increased to 12.2% in the second quarter of 1996 from 9.3% in the second quarter of 1995. The increase is primarily associated with costs incurred to support new product development.

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 which include personnel, trade shows, advertising, and other marketing activities. Sales and marketing expenses for the second quarter of 1996 were $2.2 million, compared to expenses of $1.4 million in the second quarter of 1995, representing an increase of 59%. As a percentage of sales, sales and marketing expenses increased to 7.5% in the second quarter of 1996 from 5.7% in the second quarter of 1995. The increase is attributable to costs associated with expansion of the sales and marketing infrastructure to support the increase in sales volume.

The Company is reorganizing its sales and marketing team to better address the specific needs of its customers. To accomplish this, the Company hired a vice president of sales, marketing and customer support, opened a new support office in Korea and plans to open a service office in Taiwan. 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 1996 were $2.3 million, compared to expenses of $2.0 million in the second quarter of 1995, representing an increase of 19%. As a percentage of sales, these expenses decreased to 7.8% in the second quarter of 1996 from 7.9% in the second quarter of 1995.

The Company is currently implementing information management system software which will replace existing systems to support its growth. The Company expects that significant charges related to training and implementation of the new software will occur during 1996. Some of these expenses were recognized and have been allocated to other functional areas.

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 expenses were $0.1 million for the second quarter of 1996, compared to other income of $0.2 million in the second quarter of 1995.

PROVISION FOR INCOME TAXES

The income tax provision of $1.7 million for the second quarter of 1996 represented an estimated effective rate of 38.6%. The income tax provision in the comparable period in 1995 was $2.9 million, representing an estimated rate of 38.9%.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995

SALES

Sales for the first six months of 1996 were $57.0 million, an increase of 33% from sales of $43.0 million in the comparable period in 1995. The Company's sales growth during the periods presented has resulted from the increased unit sales of the Company's systems. A significant part of this growth is attributable to increased sales to domestic customers, primarily the Company's two largest customers, which in the six months reported on accounted for approximately 57% of the company's revenue, as compared to 41% for the same period in the previous year.

The Company is cautious about the outlook for future sales to the semiconductor equipment industry. During the first six months of 1996, 72% of the Company's revenue came from this industry. Industry analysts are generally forecasting reduced demand in the semiconductor equipment industry in the near- term.

GROSS MARGIN

The Company's gross margin for the first six months of 1996 was 39.9% of revenue, down from 49.4% of revenue in the comparable period in 1995. The gross margin in the first six months of 1996 was primarily affected by higher costs associated with outsourcing assemblies, changes in product mix, and costs associated with expanding into additional manufacturing facilities. Average selling prices remained relatively constant.

RESEARCH AND DEVELOPMENT

Research and development expenses for the first six months of 1996 were $7.1 million, compared to expenses of $4.4 million in the comparable period in 1995, representing an increase of 63%. As a percentage of sales, research and development expenses increased to 12.5% in the first six months of 1996 from 10.2% in the first six months of 1995. The increase is primarily associated with costs incurred to support new product development.

SALES AND MARKETING

Sales and marketing expenses for the first six months of 1996 were $4.3 million, compared to expenses of $2.7 million in the comparable period in 1995, representing an increase of 59%. As a percentage of sales, these expenses increased to 7.6% in the first six months of 1996 from 6.3% in the first six months of 1995. The increase is attributable to costs associated with expansion to support the increase in sales volume.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for the first six months of 1996 were $4.1 million, compared to expenses of $3.6 million in the comparable period in 1995, representing an increase of 12%. As a percentage of sales, these expenses decreased to 7.1% in the first six months of 1996 from 8.4% in the first six months of 1995.

OTHER INCOME (EXPENSE)

Other expenses were $0.2 million for the first six months of 1996, compared to other income of $0.1 million in the first six months of 1995.

PROVISION FOR INCOME TAXES

The income tax provision of $2.7 million for the first six months of 1996 represented an estimated effective rate of 38.0%. The income tax provision in the comparable period in 1995 was $4.1 million, representing an estimated rate of 38.7%. The Company periodically adjusts its income tax provision 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 provided by operations totaled $0.2 million for the first six months in 1996 compared to $0.9 million for the same period in 1995. Cash provided in the first six

months of 1996 was primarily a result of net income offset by increases in accounts receivable and inventories and decreases in accounts payable. Cash provided in the comparable period in 1995 was primarily a result of net income and increases in accounts payable offset by increases in accounts receivable and inventories.

Investing activities, consisting primarily of equipment acquisitions and leasehold improvements, used cash of $4.4 million in the first six months of 1996, versus $1.8 million in the comparable period in 1995. Financing activities in the first six months of 1996 consisted primarily of note and loan repayments and used cash of $0.4 million. In the comparable period in 1995, financing activities consisted primarily of proceeds from and repayments to the Company's revolving line of credit, proceeds from notes payable, and repayment of notes payable and capital lease obligations and generated cash of $0.6 million.

The Company plans to spend approximately $2.0 million through the remainder of 1996 for the acquisition of equipment and integrated information management system software, leasehold improvements and furnishings.

As of June 30, 1996, the Company had working capital of $34.3 million. The Company's principal sources of liquidity consisted of $8.8 million of cash and cash equivalents and $8.0 million available under an $8.0 million revolving line of credit that bears interest at the prime rate (8.25% at July 15, 1996). 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. At June 30, 1996, $1.3 million was outstanding under the term loan, which bears interest at prime plus 0.75% and is due July 31, 1999. The Company also entered into an agreement in November 1995, that provides the Company with a $1.5 million line of credit to purchase equipment. At June 30, 1996, there were no amounts outstanding under this line of credit.

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 1996. 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.