The excess of the purchase price over the fair value of the net assets acquired and liabilities assumed was allocated to goodwill.  The total goodwill of $12,796 is not being amortized in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS No. 141) and No. 142, "Goodwill and Intangible Assets" (SFAS No. 142).  All remaining and future acquired goodwill will be subject to an impairment test each year using a fair-value-based approach pursuant to SFAS No. 142. Identifiable intangible assets include patents and in-process research and development (IPRD).  The Company is amortizing the patents of approximately $9,900 on a straight-line basis over their estimated remaining useful life of 16 years.  The amount allocated to IPRD of $3,500 is related to automated defect inspection technology to be used in stand alone and integrated metrology equipment.  Such amount was charged to expense at the acquisition date as the IPRD had not reached technological feasibility and had no alternative future use.

        The following unaudited pro forma consolidated financial information presents the combined results of operations of the Company and YMG as if the acquisition occurred at the beginning of the periods presented, after giving effect to certain adjustments, including amortization expense.  Due to the non-recurring nature of the $3,500 IPRD charge, this amount has not been included in the unaudited pro forma consolidated financial information.  The unaudited pro forma consolidated financial information does not necessarily reflect the results of operations that would have occurred had the acquisition been completed as of the dates indicated or of the results that may be obtained in the future (in thousands except per share information).

Identifiable intangible assets:

Identifiable intangible assets as of September 30, 2002 are as follows:

The changes in the carrying amount of goodwill are as follows:

        Certain statements in this quarterly report on Form 10-Q are 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.  In addition, we may, from time to time, make oral forward looking statements.  Forward looking statements may be identified by the words "anticipate", "believe", "expect", "intend", "will" and similar expressions, as they relate to us or our management.  These statements include, without limitation, the statements that (i) we expect demand for our products to improve once customers adjust to the period of oversupply and historical levels of capital expenditures resume, (ii) we anticipate that our effective tax rate for our current year, excluding the IPRD charge, to be approximately 30% and (iii) we believe that our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future.

        The forward looking statements contained herein reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Actual results may differ materially from those projected in such forward looking statements due to a number of factors, risks and uncertainties, including the risk factors set forth in this current report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2001.  We disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date of this quarterly report.

Critical Accounting Policies

        Management's discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  We review the accounting policies we use in reporting our financial results on a regular basis.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories, intangible assets, income taxes and warranty obligations.  We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances.  Our estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions.  These estimates and judgments are reviewed by management on an ongoing basis, and by our Audit Committee at the end of each quarter prior to the public release of our financial results.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

        Revenue Recognition.    Revenue is recognized upon the shipment of our products provided that there is persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed or determinable, and collection of the related receivable is reasonably assured.  Certain sales of our products are accounted for as multiple element arrangements, consisting of the sale of the product and installation.  We generally recognize revenue upon delivery of the product, which is prior to installation, as the actions required to perform the installation are deemed to be perfunctory.  Installation is deemed to be perfunctory based on our sales and installation history for similar products and customers and the fact that other vendors can and have performed the installation.  If in the future we do not meet the criteria that we currently use to determine the perfunctory nature of installation or such criteria changes, we may have to recognize revenue at a later date.  When customer acceptance is subjective and not obtained prior to shipment, we defer a portion of the product revenue until such time as positive affirmation of acceptance has been obtained from the customer.  Customer acceptance is generally based on our products meeting published or contractual performance specifications.  The amount of revenue allocated to the shipment of products is done on a residual method basis.  Under this method, the total arrangement value is allocated first to undelivered contract elements, based on their fair values, with the remainder being allocated to product revenue.  The fair value of installation services is based upon billable hourly rates and the estimated time to complete the service.  Revenue related to undelivered installation services is deferred until such time as installation is completed at the customer's site.

        Allowance for Doubtful Accounts.    We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  We specifically analyze accounts receivable and analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments or our assumptions are otherwise incorrect, additional allowances may be required.

        Excess and Obsolete Inventory.    We write down our excess and obsolete inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product life-cycles, product demand and market conditions.  If actual product life-cycles, product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

        Warranties.    We provide for the estimated cost of product warranties at the time revenue is recognized.  While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure.  Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Results of Operations for the Three and Nine Month Periods Ended September 30, 2002 and 2001

        On September 25, 2002, the Company acquired all of the outstanding stock of ISOA, Inc., a Texas corporation (ISOA), through a merger of Oasis Acquisition, Inc., a wholly owned subsidiary of the Company, with and into ISOA, with ISOA as the surviving corporation, renamed Yield Metrology Group (YMG).  YMG had licensed its technology for use in the semiconductor industry and recently began transitioning to a semiconductor capital equipment supplier.  YMG's core technologies are Knowledge Based Algorithms used in wafer macro defect detection and classification.  The purchase consideration for YMG, including direct acquisition costs, was $25.2 million in cash.  The transaction was accounted for using the purchase method of accounting for business combinations.  Excluding the in-process research and development charge of $3.5 million, discussed below, the impact of the acquisition was immaterial to the Company's operations for the three and nine months ended September 30, 2002.

        During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems.  Our transparent film measurement systems range in price from approximately $200,000 to $1.0 million per system and our opaque film measurement systems range in price from approximately $900,000 to $1.8 million per system.  Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results.

        Revenues.    Our revenues are derived from the sale of our metrology systems, services and spare parts.  Our revenues were $15.2 million and $40.4 million for the three and nine month periods ended September 30, 2002, compared to $15.1 million and $68.7 million for the same periods in the prior year.  There was a nominal increase in revenues for the three months ended September 30, 2002 compared to revenues from the same period in the prior year.  Revenues decreased 41.3% in the nine month period ended September 30, 2002 compared to revenues from the same period in the prior year.  This revenue decline was primarily due to lower unit shipments resulting from the economic slowdown in the semiconductor industry.

        Our business continues to be impacted by the slowdown in economies worldwide.  We have been further affected by the cyclical nature of the semiconductor industry with recurring periods of oversupply.  These factors have resulted in a downturn in demand for our products.  We currently do not have visibility as to the length or severity of the downturn.  We do expect demand for our products to improve once customers adjust to the period of oversupply and historical levels of capital expenditures resume.  There has been no current evidence, however, that customer buying patterns will significantly increase in the near term.  There is a risk that the slowdown may be prolonged.

        Cost of Revenues and Gross Profit.    Cost of revenues consists of the labor, material and overhead costs of manufacturing our systems, spare parts cost and the cost associated with our worldwide service support infrastructure.  Our gross profit was $6.2 million and $16.8 million for the three and nine month periods ended September 30, 2002, compared to $6.7 million and $35.5 million for the same periods in the prior year.  Our gross profit represented 41% and 42% of our revenues for the three and nine month periods ended September 30, 2002 and 45% and 52% of our revenues for the same periods in the prior year.  The decrease in gross profit as a percentage of revenue for the three and nine month periods ended September 30, 2002 compared to the three and nine month periods ended September 30, 2001 is primarily due to a slight change in product mix and fixed manufacturing costs being a higher component of cost of revenues.

        Research and Development.    Research and development expenditures consist primarily of salaries and related expenses of employees engaged in research, design and development activities.  They also include consulting fees, prototype equipment expenses and the cost of related supplies.  Our research and development expenses were $3.0 million and $8.0 million for the three and nine month periods ended September 30, 2002, compared to $3.2 million and $9.6 million for the same periods in the prior year.  Research and development expense represented 20% of our revenues for both the three and nine month periods ended September 30, 2002, compared to 21% and 14% of our revenues for the same periods in the prior year.  The dollar decrease in research and development expenses resulted from lower cost associated with new product development.

        Selling, General and Administrative.    Selling, general and administrative expense is primarily comprised of salaries and related costs for sales, marketing, and general and administrative personnel, as well as commissions and other non-personnel related expenses.  Our selling, general and administrative expense was $3.5 million and $8.1 million for the three and nine month periods ended September 30, 2002, compared to $2.9 million and $10.4 million for the same periods in the prior year.  Selling, general and administrative expense represented 23% and 20% of our revenues for the three and nine month periods ended September 30, 2002, compared to 19% and 15% of our revenues for the same periods in the prior year.  The dollar increase in selling, general and administrative expense for the year over year increase for the three month period ended September 30, 2002 is due primarily to costs in connection with acquisitions that are no longer being pursued.  The year over year decrease for the nine month period ended September 30, 2002 is due primarily to cost cutting initiatives, such as travel limitations, employee reductions, as well as the completion of certain infrastructure initiatives in prior periods.

        Amortization.    Amortization expense is related to the core technology we acquired from our predecessor company in 1996.  Amortization expense was $0.1 million and $0.2 million for the three and nine month periods ended September 30, 2002 and 2001.  Amortization of goodwill was immaterial for the three and nine months ended September 30, 2001.

        Interest income and other, net.    Interest income and other, net was $0.7 million and $1.6 million for the three and nine month periods ended September 30, 2002, compared to $0.7 million and $2.3 million for the same periods in the prior year.  The decrease in interest income earned by us in the nine month periods ended September 30, 2002 was the result of lower interest rates.

        Income Taxes.    We use the liability method of accounting for income taxes prescribed by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes".  Income tax expense was $20 thousand and $630 thousand in the three and nine month periods ended September 30, 2002.  We anticipate that our effective tax rate for our current year, excluding the IPRD charge, to be approximately 30% as compared to 36% in the prior year.  Our anticipated effective tax rate decreased in 2002 primarily as a result of a decrease in our anticipated income before income taxes combined with the positive impact of our research and experimentation tax credits on our effective tax rate.

Liquidity and Capital Resources

        At September 30, 2002, we had $73.4 million of cash, cash equivalents and short-term investments and $105.4 million in working capital.  At December 31, 2001 we had $94.6 million of cash and cash equivalents and $128.6 million in working capital.

        Operating activities provided $1.4 million and $24.7 million in cash for the nine month periods ended September 30, 2002 and 2001, respectively.  The net cash provided by operating activities during the nine month period ended September 30, 2002 was primarily a result of a decrease in accounts payable and accrued liabilities of $2.9 million, profit before depreciation, amortization and the write-off of IPRD of $2.6 million, an increase in deferred revenue of $1.8 million and an increase in income taxes payable and other liabilities of $1.8 million, partially offset by an increase in accounts receivable of $4.3 million and an increase in inventories of $3.7 million.  The net cash provided by operating activities for the nine month period ended September 30, 2001 was primarily a result of a decrease in accounts receivable of $12.7 million, net income of $11.1 million, and a decrease in deferred revenue of $1.8 million.

        Net cash used in investing activities during the nine month period ended September 30, 2002 of $55.4 million includes acquisitions, net of cash acquired, of $25.1 million, purchases of short-term investments of $29.9 million and capital expenditures of $0.5 million.  Net cash used in investing activities during the nine month period ended September 30, 2001 of $2.3 million was primarily to fund building renovations and to purchase computer equipment necessary for our operations.

        Net cash provided by financing activities for the nine month period ended September 30, 2002 of $2.1 million was a result of proceeds received from sales of shares through employee stock plans and other.  Net cash provided by financing activities for the nine month period ended September 30, 2001 of $43.9 million was primarily due to the completion of our follow-on public offering of 1,000,000 shares of common stock at $45.00 per share.  Net proceeds to us after the underwriter's discount and other fees amounted to $42.0 million.

        Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment commitments, which will affect our ability to generate additional cash. On September 25, 2002, the Company completed its acquisition of YMG.  The purchase consideration for YMG, including direct acquisition costs, was $25.2 million in cash.  We believe that our cash, cash equivalents and short-term investments existing after the completion of the acquisition will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the foreseeable future.  Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means.  There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.

        Our operating results are subject to significant variation due to the cyclical nature of the semiconductor device industry which is currently experiencing a downturn.  While we are not able to predict the duration or severity of this downturn or the effect it may have on our operating results, past downturns have often resulted in substantial decreases in the semiconductor device industry's demand for capital equipment, including its thin film metrology equipment, and have seriously harmed our operating results.  Our business depends upon the capital expenditures of semiconductor device manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors.  There is typically a nine to twelve month lag between a change in the economic condition of the semiconductor device industry and the resulting change in the level of capital expenditures by semiconductor device manufacturers.  In most cases, the resulting decrease in capital expenditures has been more pronounced than the precipitating downturn in semiconductor device industry revenues.  The current semiconductor device industry downturn may continue for the next several quarters.  The current downturn and any future downturn in the semiconductor device industry, or any reduction by that industry in capital expenditures, may seriously harm our business, financial condition and results of operations.

        We obtain some of the components and subassemblies included in our systems from a limited group of suppliers and do not have long-term contracts with many of our suppliers.  Our dependence on limited source suppliers of components and our lack of long-term contracts with many of our suppliers exposes us to several risks, including a potential inability to obtain an adequate supply of components, price increases, late deliveries and poor component quality.  Disruption or termination of the supply of these components could delay shipments of our systems, damage our customer relationships and reduce our sales.  From time to time in the past, we have experienced temporary difficulties in receiving shipments from our suppliers.  The lead time required for shipments of some of our components can be as long as four months.  In addition, the lead time required to qualify new suppliers for lasers could be as long as a year, and the lead time required to qualify new suppliers of other components could be as long as nine months.  If we are unable to accurately predict our component needs, or if our component supply is disrupted, we may miss market opportunities by not being able to meet the demand for our systems.  Further, a significant increase in the price of one or more of these components or subassemblies included in our systems could seriously harm our results of operations.

        Our quarterly operating results have varied significantly in the past and may continue to do so in the future, which could cause our stock price to decline.  Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include:

- changes in customer demand for our systems, which is influenced by economic conditions in the semiconductor device industry, demand for products that use semiconductors, market acceptance of our systems and those of our customers and changes in our product offerings;

- seasonal variations in customer demand, including the tendency of European sales to slow significantly in the third quarter of each year;

- the timing, cancellation or delay of customer orders and shipments;

- product development costs, including increased research, development, engineering and marketing expenses associated with our introduction of new products and product enhancements; and

- the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels.

        In light of these factors and the cyclical nature of the semiconductor industry, we expect to continue to experience significant fluctuations in quarterly and annual operating results.  Moreover, many of our expenses are fixed in the short-term which, together with the need for continued investment in research and development, marketing and customer support, limits our ability to reduce expenses quickly.  As a result, declines in net sales could harm our business and the price of our common stock could substantially decline.

        During any quarter, a significant portion of our revenue may be derived from the sale of a relatively small number of systems.  Our transparent film measurement systems range in price from approximately $200,000 to $1.0 million per system and our opaque film measurement systems range in price from approximately $900,000 to $1.8 million per system.  Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results.  This, in turn, could cause fluctuations in the market price of our common stock.

        Variations in the length of our sales cycles could cause our revenues, and thus our business, financial condition and operating results, to fluctuate widely from period to period.  This variation could cause our stock price to decline.  Our customers generally take a long time to evaluate our film metrology systems and many people are involved in the evaluation process.  We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems in the semiconductor fabrication process.  The length of time it takes for us to make a sale depends upon many factors, including:

- the efforts of our sales force and our independent distributor;

- the complexity of the customer's fabrication processes;

- the internal technical capabilities and sophistication of the customer;

- the customer's budgetary constraints; and

- the quality and sophistication of the customer's current metrology equipment.

        Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer, if ever, varies widely in length.  Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from nine to 15 months.  Sometimes our sales cycles can be much longer, particularly with customers in Japan.  During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts.

        If we do make a sale, our customers often purchase only one of our systems, and then evaluate its performance for a lengthy period before purchasing any more of our systems.  The number of additional products a customer purchases, if any, depends on many factors, including a customer's capacity requirements.  The period between a customer's initial purchase and any subsequent purchases can vary from six months to a year or longer, and variations in the length of this period could cause further fluctuations in our operating results and possibly in our stock price.

        In 1999, 2000, 2001 and the first nine months of 2002, sales to end user customers that individually represented at least five percent of our revenues accounted for 49.3%, 27.8%, 42.5% and 41.7% of our revenues.  In 1999, 2000, 2001 and the first nine months of 2002, sales to Intel accounted for 31.2%, 19.4%, 33.4% and 36.2% of our revenues.  We operate in the highly concentrated, capital intensive semiconductor device manufacturing industry.  Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue.  If any of our key customers were to purchase significantly fewer of our systems in the future, or if a large order were delayed or cancelled, our revenues would significantly decline.  Accordingly, we expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for at least the next several years.  In addition, as large semiconductor device manufacturers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated.

        We operate in an industry that is subject to evolving industry standards, rapid technological changes, rapid changes in consumer demands and the rapid introduction of new, higher performance systems with shorter product life cycles.  To be competitive in our demanding market, we must continually design, develop and introduce in a timely manner new film metrology systems that meet the performance and price demands of semiconductor device manufacturers.  We must also continue to refine our current systems so that they remain competitive.  We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in developing them.  Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share.

        Metrology product development is inherently risky because it is difficult to foresee developments in semiconductor device manufacturing technology, coordinate technical personnel and identify and eliminate metrology system design flaws.  We recently developed our S and S-ultra systems, which are thin film metrology systems specifically designed for use in the CMP, etch, diffusion and other portions of the semiconductor device manufacturing process where we do not currently have significant market share.  Any new systems introduced by us may not achieve a significant degree of market acceptance or, once accepted, may fail to sell well for any significant period.

        We expect to spend a significant amount of time and resources to develop new systems and refine existing systems.  In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of new systems.  Our ability to commercially introduce and successfully market new systems is subject to a wide variety of challenges during this development cycle, including start-up bugs, design defects and other matters that could delay introduction of these systems.  In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that do materialize may be cancelled.  As a result, if we do not achieve market acceptance of new products, we may not be able to realize sufficient sales of our systems in order to recoup research and development expenditures.

        Competition from our new S and S-ultra systems could have a negative effect on sales of our other transparent thin film metrology systems, including our SpectraLASER and FOCUS systems, and the prices we could charge for these systems.  We may also divert sales and marketing resources from our current systems in order to successfully launch and promote our S and S-ultra systems.  This diversion of resources could have a further negative effect on sales of our current systems.

        The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers.  In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our largest customers.  Our relationships with these and other customers provide us with access to valuable information regarding trends in the semiconductor device industry, which enables us to better plan our product development activities.  If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our long-term ability to produce commercially successful systems will be impaired.

        Our industry is characterized by the need for continual investment in research and development as well as customer service and support.  As a result of our need to maintain our spending levels in these areas, our operating results could be materially harmed if our revenues fall below expectations.  In addition, because of our emphasis on research and development and technological innovation, our operating costs may increase further in the future.

        Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology.  If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products.  We own or have licensed a number of patents relating to our transparent and opaque thin film metrology systems, and have filed applications for additional patents.  Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable.  In addition, the patents we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties.  Third parties may also design around these patents.

        In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology.  We routinely enter into confidentiality agreements with our employees.  However, in the event that these agreements may be breached, we may not have adequate remedies.  Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties.

        Our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties.  From time to time we may receive communications from third parties asserting that our products or systems infringe, or may infringe, the proprietary rights of these third parties.  These claims of infringement may lead to protracted and costly litigation which could require us to pay substantial damages or have the sale of our products or systems stopped by an injunction.  Infringement claims could also cause product or system delays or require us to redesign our products or systems, and these delays could result in the loss of substantial revenues.  We may also be required to obtain a license from the third party or cease activities utilizing the third party's proprietary rights.  We may not be able to enter into such a license or such license may not be available on commercially reasonable terms.  The loss of important intellectual property rights could therefore prevent our ability to sell our systems, or make the sale of such systems more expensive for us.

        We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party's patent or other proprietary rights.  In addition, we may be subject to lawsuits by third parties seeking to enforce their own intellectual property rights.  Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties.

        In 2001, 53.7% of our revenue was derived from sales in foreign countries, including certain countries in Asia such as Taiwan, Korea, Singapore and Japan.  The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U. S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and continue to sell systems.  For example, Taiwan is not a signatory of the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally.  The publication of a patent in Taiwan prior to the filing of a patent in Taiwan would invalidate the ability of a company to obtain a patent in Taiwan.  Similarly, in contrast to the United States where the contents of patents remain confidential during the patent prosecution process, the contents of a patent are published upon filing which provides competitors an advance view of the contents of a patent application prior to the establishment of patent rights.  There is a risk that our means of protecting our proprietary rights may not be adequate in these countries.  For example, our competitors in these countries may independently develop similar technology or duplicate our systems.  If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries.

        The market for semiconductor capital equipment is highly competitive.  We face substantial competition from established companies in each of the markets we serve.  We principally compete with KLA-Tencor and Therma-Wave.  We compete to a lesser extent with companies such as Dai Nippon Screen, Nanometrics and Sopra.  Each of our product lines also competes with products that use different metrology techniques.  Some of our competitors have greater financial, engineering, manufacturing and marketing resources, broader product offerings and service capabilities and larger installed customer bases than we do.  As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products which could impair sales of our products.  Moreover, there may be significant merger and acquisition activity among our competitors and potential competitors.  These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs.  Many of our customers and potential customers in the semiconductor device manufacturing industry are large companies that require global support and service for their semiconductor capital equipment.  While we believe that our global support and service infrastructure is sufficient to meet the needs of our customers and potential customers, our larger competitors have more extensive infrastructures than we do, which could place us at a disadvantage when competing for the business of global semiconductor device manufacturers.

        Many of our competitors are investing heavily in the development of new systems that will compete directly with ours.  We have from time to time selectively reduced prices on our systems in order to protect our market share, and competitive pressures may necessitate further price reductions.  We expect our competitors in each product area to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics.  Such product introductions by our competitors would likely cause us to decrease the prices of our systems and increase the level of discounts we grant our customers.

        We believe that once a semiconductor device manufacturer has selected one vendor's capital equipment for a production-line application, the manufacturer generally relies upon that capital equipment and, to the extent possible, subsequent generations of the same vendor's equipment, for the life of the application.  Once a vendor's equipment has been installed in a production line application, a semiconductor device manufacturer must often make substantial technical modifications and may experience production-line downtime in order to switch to another vendor's equipment.  Accordingly, unless our systems offer performance or cost advantages that outweigh a customer's expense of switching to our systems, it will be difficult for us to achieve significant sales to that customer once it has selected another vendor's capital equipment for an application.

        Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, customer support, finance and manufacturing personnel.  The loss of any of these key personnel, who would be extremely difficult to replace, could harm our business and operating results.  During downturns in our industry, we have often experienced significant employee attrition, and we may experience further attrition in the event of a future downturn.  Although we have employment and noncompetition agreements with key members of our senior management team, including Messrs. McLaughlin, Loiterman and Roth, these individuals or other key employees may nevertheless leave our company.  We do not have key person life insurance on any of our executives.  In addition, to support our future growth, we will need to attract and retain additional qualified employees.  Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees.

        We produce all of our systems in our manufacturing facility located in Ledgewood, New Jersey.  Our manufacturing processes are highly complex and require sophisticated and costly equipment and a specially designed facility.  As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage as a result of a fire or any other reason, could seriously harm our ability to satisfy our customer order deadlines.  If we cannot timely deliver our systems, our revenues could be adversely affected.

        Historically, a portion of our sales have been made through an independent distributor.  We expect that sales through this independent distributor will represent a portion of our sales for the next several years.  Our independent distributor also provides field service to our customers.  The activities of this distributor are not within our control.  A reduction in the sales or service efforts or financial viability of our independent distributor, or a termination of our relationship with them, could harm our sales, our financial results and our ability to support our customers.  Although we believe that we maintain good relations with our independent distributor, such a relationship may nevertheless deteriorate in the future.

        Our sales to customers in Asian markets represented approximately 36.6% of our revenues in 2001 and 33.4% of our revenues for the first nine months of 2002.  Countries in the Asia Pacific region, including Japan, Korea, China and Taiwan, each of which accounted for a significant portion of our business in that region, have experienced currency, banking and equity market weaknesses in the past.  We expect that turbulence in the Asian markets could adversely affect our sales in future periods.

        International sales accounted for approximately 53.7% of our revenues in 2001.  We anticipate that international sales will account for a significant portion of our revenue for at least the next five years.  Due to the significant level of our international sales, we are subject to material risks which include:

        Unexpected changes in regulatory requirements including tariffs and other market barriers.    The semiconductor device industry is a high-visibility industry in many of the European and Asian countries in which we sell our products. Because the governments of these countries have provided extensive financial support to our semiconductor device manufacturing customers in these countries, we believe that our customers could be disproportionately affected by any trade embargoes, excise taxes or other restrictions imposed by their governments on trade with United States companies such as ourselves.  Any such restrictions could lead to a reduction in our sales to customers in these countries.

        Political and economic instability.    There is considerable political instability in Taiwan related to its disputes with China and in South Korea related to its disputes with North Korea.  In addition, several Asian countries, particularly Japan, have experienced significant economic instability.  An outbreak of hostilities or other political upheaval in Taiwan or South Korea, or an economic downturn in Japan, would likely harm the operations of our customers in these countries, causing our sales to suffer.  The effect of such events on our revenues could be material because we derive substantial revenues from sales to semiconductor device foundries in Taiwan such as TSMC and UMC, from memory chip manufacturers in South Korea such as Hyundai and Samsung, and from semiconductor device manufacturers in Japan such as NEC and Toshiba.

        Difficulties in staffing and managing foreign branch operations.    During periods of tension between the governments of the United States and other countries, it is often difficult for United States companies such as ourselves to staff and manage operations in such countries.

        A substantial portion of our international sales are denominated in U.S. dollars.  As a result, if the dollar rises in value in relation to foreign currencies, our systems will become more expensive to customers outside the United States and less competitive with systems produced by competitors outside the United States.  Such conditions could negatively impact our international sales.  Foreign sales also expose us to collection risk in the event it becomes more expensive for our foreign customers to convert their local currencies into U.S. dollars.

        Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures.  To this end, we may choose to acquire new and complementary businesses, products, or technologies instead of developing them ourselves.  We may, however, face competition for acquisition targets from larger and more established companies with greater financial resources, making it more difficult for us to complete acquisitions.  We do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees.  Integrating any business, product or technology we acquire could be expensive and time-consuming, could disrupt our ongoing business and could distract our management.  In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings.  In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our stockholders.  If we are unable to integrate any acquired entities, products or technologies effectively, our business, financial condition and operating results will suffer.  In addition, any amortization of goodwill or other assets or charges resulting from the costs of acquisitions could harm our business and operating results.

        In September 2002, we completed our acquisition of YMG, a semiconductor capital equipment supplier, and we are in the process of integrating YMG into our company.  We may not successfully address the integration challenges in a timely manner, or at all, and we may not realize the anticipated benefits or synergies of the YMG transaction or of any other transaction to the extent, or in the timeframe, anticipated.  Moreover, the timeframe for achieving benefits may be dependent partially upon the actions of employees, suppliers or other third parties.  Even if the YMG acquisition is successfully integrated, we may not receive the expected benefits of the transaction.  Managing acquisitions requires varying levels of management resources, which may divert our attention from other business operations.  These transactions also have resulted and may in the future result in significant costs and expenses and charges to earnings.  In the case of the YMG acquisition, these costs and expenses include those related to in-process research and development charges and legal, accounting and financial advisory fees.

If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease

        Our systems are complex and sometimes have contained errors, defects and bugs when introduced.  If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems could be harmed.  Further, if our systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems.  Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers.  We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems.  Our product liability policy currently provides only $2.0 million of coverage per claim with an overall umbrella limit of $4.0 million.  In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits.

        Provisions of our certificate of incorporation and bylaws may inhibit changes in control of our company not approved by our board of directors.  These provisions also limit the circumstances in which a premium can be paid for the common stock, and in which a proxy contest for control of our board may be initiated.

        These provisions provide for:

- a prohibition on stockholder actions through written consent;

- a requirement that special meetings of stockholders be called only by our chief executive officer or board of directors;

- advance notice requirements for stockholder proposals and director nominations by stockholders;

- limitations on the ability of stockholders to amend, alter or repeal our by-laws; and

- the authority of our board to issue, without stockholder approval, preferred stock with such terms as the board may determine.

        We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to changes in interest rates primarily from our investments in certain available-for-sale securities.  Our available-for-sale securities consist primarily of fixed income investments (U.S. Treasury and Agency securities, commercial paper and corporate bonds).  We continually monitor our exposure to changes in interest rates and credit ratings of issuers from our available-for-sale securities.  Accordingly, we believe that the effects of changes in interest rates and credit ratings of issuers are limited and would not have a material impact on our financial condition or results of operations.  However, it is possible that we are at risk if interest rates or credit ratings of issuers change in an unfavorable direction.  The magnitude of any gain or loss will be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected.

Foreign Currency Risk

        We do not use foreign currency forward exchange contracts or purchased currency options to hedge local currency cash flows or for trading purposes.  All sales arrangements with international customers are denominated in U.S. dollars.  We have branch operations in Taiwan, Singapore, China and Korea and a wholly-owned subsidiary in Europe, which are subject to currency fluctuations.  These foreign branches are limited in their operations and level of investment so that the risk of currency fluctuations is not expected to be material.

(a)    Evaluation of Disclosure Controls and Procedures.

        Our chief executive officer and our chief financial officer, after evaluating our "disclosure controls and procedures" (as defined in Securities Exchange Act of 1934 (the "Exchange Act") Rules 13a-14(c) and 15d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this Quarterly Report on Form 10-Q, have concluded that as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

        The Company's management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud.  Because of inherent limitations in any system of disclosure controls and procedures, no evaluation of controls can provide absolute assurance that all instances of error or fraud, if any, within the Company may be detected.

(b)     Changes in Internal Controls.

        Subsequent to the Evaluation Date, there were no significant changes in our internal controls or in other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Paul F. McLaughlin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Rudolph Technologies, Inc.;
   
   
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
   
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
   
   
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   
   
2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
   
   
3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

   1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
      
      
   2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

I, Steven R. Roth, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Rudolph Technologies, Inc.;
   
   
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
   
   
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
   
   
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
   
   
2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
   
   
3. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

   1. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
      
      
   2. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002