NOTE 4.   Marketable Securities

            The Company has evaluated its investment policies consistent with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and determined that all of its investment securities are to be classified as available-for-sale.  Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in Stockholders' Equity under the caption "Accumulated other comprehensive loss".  Realized gains and losses, interest and dividends on available-for-sale securities are included in "Interest income and other, net".  Net realized losses on available-for-sale securities were $0 and $3 for the three months ended March 31, 2008 and 2007, respectively.  Gross unrealized gains on available-for-sale securities were $90 and $29 as of March 31, 2008 and December 31, 2007, respectively.  Gross unrealized losses on available-for-sale securities were $68 and $152 as of March 31, 2008 and December 31, 2007, respectively.

NOTE 5.    Derivative Instruments and Hedging Activities

            The Company, when it considers it to be appropriate, enters into forward contracts to hedge the economic exposures arising from foreign currency denominated transactions. At March 31, 2008 and December 31, 2007, these contracts included the sale of Japanese Yen to purchase U.S. dollars. The foreign currency forward contracts were entered into by our Japanese subsidiary to economically hedge a portion of certain intercompany obligations. The forward contracts are not designated as hedges for accounting purposes and therefore, the change in fair value is recorded in selling, general and administrative expenses in the Consolidated Statements of Operations.       

            The dollar equivalent of the US dollar forward contracts and related fair values were as follows:

NOTE 6.    Identifiable Intangible Assets

            Identifiable intangible assets as of  March 31, 2008 are as follows:

Gross Carrying
Amount

Accumulated
Amortization

Net

Developed technology $  49,891    $   12,601   $   37,290 Customer and distributor relationships 7,300   1,167   6,133 Trade names 4,100   767   3,333     Total identifiable intangible assets $   61,291   $   14,535   $   46,756

            Identifiable intangible assets as of December 31, 2007 are as follows:

          Intangible asset amortization expense for the three months ended March 31, 2008 and 2007 was $1,668 and $1,119, respectively.  Estimated amortization expense  for the remainder of 2008 amounts to $5,002 and in each of the next five years amounts to $6,341 for 2009, $6,124 for 2010, $5,891 for 2011, $5,891 for 2012, and $5,891 for 2013.

NOTE 7.   Accounts Receivable

          Accounts receivable are net of the allowance for doubtful accounts of $462 and $214 as of March 31, 2008 and December 31, 2007, respectively.

NOTE 8.    Inventories

         The Company has established reserves of $5,532 and $3,394 as of March 31, 2008 and December 31, 2007, respectively.

 

 

NOTE 9.   Property, Plant and Equipment

March 31,

December 31,

2008

2007

Land and building $      6,201 $      5,185 Machinery and equipment 12,691 11,829 Furniture and fixtures 2,679 2,668 Computer equipment 6,827 6,407 Leasehold improvements 5,857 5,791 34,255 31,880 Accumulated depreciation (16,737) (15,818)      Net property, plant and equipment

$    17,518 $    16,062

NOTE 10.   Commitments and Contingencies

 Warranty Reserves

        Changes in the Company's warranty reserves are as follows:

NOTE 11.   Share-Based Compensation

Restricted Stock Unit Activity

        A summary of the Company's nonvested restricted stock unit activity with respect to the three month period ended March 31, 2008 follows:

        As of March 31, 2008 and December 31, 2007, there was $7,520 and $7,852 of total unrecognized compensation cost related to restricted stock units granted under the plans, respectively.  That cost is expected to be recognized over a weighted average period of 3.5 years and 3.7 years for the respective periods.

       
NOTE 12.   Interest Income and Other, Net

 

Three Months Ended
March 31, 2008 2007 Interest  income $   381 $     1,036 Realized losses on sales of
    marketable securities, net -      (3)     Total interest income and other, net $   381 $     1,033

NOTE 13.  Income Taxes

            The Company adopted the provisions of FIN 48, as amended by FSP 48-1, effective January 1, 2007. As a result of the implementation of FIN 48, as amended, the Company recognized increases in the liability for unrecognized tax benefits of $2,173, non-current deferred tax assets of $1,948 and goodwill of $245. The adoption of FIN 48, as amended, resulted in a cumulative effect adjustment to retained earnings of $20 as of January 1, 2007.  

            The total amount of unrecognized tax benefits as of the date of adoption was $4,552.  As of March 31, 2008, the total amount of unrecognized tax benefits is $5,991, of which $3,714 would impact the effective tax rate if recognized. There are no known tax positions which are reasonably possible to change over the next twelve months necessitating a significant change in the Company's unrecognized tax benefits.

            The Company is continuing its practice of recognizing interest and penalties related to income tax matters in income tax expense.  As of March 31, 2008, the Company had accrued interest and penalties expense related to unrecognized tax benefits of $129.

            The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. Presently, the Company is not under examination by the Internal Revenue Service for examination of income tax returns for open periods, December 31, 2004 through December 31, 2007. The Company is not currently under examination by any U.S. state, local or foreign tax authority for all open tax periods beginning after December 31, 2002.

NOTE 14.   Comprehensive Income (Loss)

        The difference between net income (loss) and comprehensive income (loss) for the Company is due to currency translation adjustments and unrealized gains (losses) on investments.

        The components of comprehensive income (loss) are as follows:

  

Three Months Ended
March 31, 2008 2007 Net income (loss) $   (1,646) $   5,564 Change in net unrealized gains on investments, net of tax 39 64 Change in currency translation
   adjustments 346 104      Total comprehensive income (loss) $    (1,261) $   5,732

NOTE 15.   Earnings (Loss) Per Share
 

        Basic earnings (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period.  Diluted earnings (loss) per share is computed in the same manner and also gives effect to all dilutive common equivalent shares outstanding during the period.  Potentially dilutive common equivalent shares consist of stock options and restricted stock units for 2007.  For the three month period ended March 31, 2008, all outstanding stock options and restricted stock units totaling 52, were excluded from the computation of diluted loss per share because the effect in the period would be anti-dilutive.  During the three months ended March 31, 2007, there were stock options with exercise prices above the average fair market value of the Company's common stock which were excluded from the computation of diluted earnings per share due to the anti-dilutive nature of these options.  During the three months ended March 31, 2007, there were restricted stock units which were excluded from the computation of diluted earnings per share as their effect would be anti-dilutive.  For the three months ended March 31, 2007,  the weighted average number of stock options and restricted stock units excluded from the computation of diluted earnings per share was 1,950.     

        The Company's basic and diluted earnings (loss) per share amounts are as follows:

 

Three Months Ended March 31, 2008 2007 Numerator:      Net income (loss) $     (1,646) $      5,564 Denominator:        Basic earnings (loss) per share -
        weighted average shares
        outstanding 30,533 29,031      Effect of potential dilutive securities:        Employee stock options and
        restricted stock units - dilutive
        shares -      193      Diluted earnings (loss) per share -
        weighted average shares
       outstanding 30,533 29,224 Earnings (loss) per share:        Basic $        (0.05) $       0.19      Diluted $        (0.05) $       0.19

NOTE 16.   Segment Reporting and Geographic Information

         Operating segments are business units that have separate financial information and are separately reviewed by the Company's chief decision maker.  The Company's chief decision maker is the Chief Executive Officer.  The Company and its subsidiaries currently operate in a single reportable segment: the design, development, manufacture, sale and service of process control metrology systems used in semiconductor device manufacturing.  The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. 

The following table lists the different sources of revenue:

         For geographical reporting, revenues are attributed to the geographic location in which the customer is located.  Revenue by geographic region is as follows: 

        Customers comprising 10% or more of revenue in either period presented:

Three Months Ended

March 31,

2008

2007

Customer A 12.2% 10.9% Customer B   6.9% 12.3% Customer C 0.3% 10.3%

NOTE 17.   Recent Accounting Pronouncements        

           In March 2008, the Financial Accounting Standards Board ("FASB') issued SFAS No. 161, "Disclosure about Derivatives Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS 161), which requires enhanced disclosures about an entity's derivative and hedging activities and thereby improves the transparency of financial reporting.  SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 with early application encouraged.  The Company is currently evaluating the potential impact of adopting SFAS 161.

      
NOTE 18.   Reclassifications

        Certain prior period amounts have been reclassified to conform to current financial statement presentation.

        See Note 17 to the condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q regarding the impact of recent accounting pronouncements on the Company's financial position and results of operations.

     
Results of Operations for the Three Month Periods Ended March 31, 2008 and 2007

            On December 18, 2007, Rudolph, along with our wholly-owned subsidiary, Mariner Acquisition Company LLC, entered into, and consummated the transactions contemplated by, an agreement with Applied Precision Holdings, LLC and Applied Precision, LLC (collectively, “Applied”), pursuant to which we purchased substantially all of the assets and assumed certain liabilities of the semiconductor division of Applied to be known as the Probe Card Test and Analysis division (“PCTA”). The PCTA is engaged in the business of designing, developing, manufacturing, marketing, selling and supporting advanced probe card metrology and wafer probe process monitoring equipment and is complementary to our existing business.

            The closing occurred on December 18, 2007 and we paid $59.1 million in cash and issued 1.3 million shares of common stock for a total purchase price of $73.2 million. Under the terms of the purchase agreement, we agreed to assume the following liabilities of Applied relating to the PCTA: accounts payable, assigned contracts, licenses and leases, warranty claims and employee liabilities. In addition, we agreed to assume the defense of and all obligations relating to certain litigation. The cash portion of the purchase price is subject to further post-closing adjustment based on the final closing net asset balance. The purchase price has been preliminarily allocated based on estimates of the fair values of assets acquired and liabilities assumed. The final valuation of net assets is expected to be completed during 2008.

            On January 22, 2008, we announced that we had acquired all intellectual property and selected assets from privately-held RVSI Inspection, LLC, headquartered in Hauppauge, New York. The acquired business is currently known as the Rudolph Technologies Wafers Scanner Product Group.  We account for this acquisition as a business combination.  The impact of the acquisition was not material to our consolidated financial position or results of operations.

            Rudolph’s business is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to capital equipment spending depends on a number of factors, including general worldwide economic conditions as well as other economic drivers such as personal computer, cell phone and personal electronic device sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project a year-over-year decrease in capital spending of 15-20% for 2008. We monitor capital equipment spending through announced capital spending plans by our customers and monthly-published industry data such as the book-to-bill ratio. The book-to-bill ratio is a 3-month running statistic that compares bookings or orders placed with capital equipment suppliers to billings or shipments. A book-to-bill above one shows that semiconductor device equipment manufacturers are ordering equipment at a pace that exceeds the equipment suppliers’ shipments for the period. The three month rolling average North American semiconductor equipment book-to-bill ratio was 0.9 for the month of March 2008, remaining the same from the December 2007 book-to-bill ratio of 0.9.

            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. For the three month period ended March 31, 2008 and for the years ended December 31, 2007, 2006 and 2005, sales to customers that individually represented at least five percent of our revenues accounted for 64.8%, 37.1%, 40.9%, and 62.6% of our revenues, respectively.

            We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products, and they could cease purchasing products from us at any time. A delay in purchase or cancellation by any of our large customers could cause quarterly revenues to vary significantly. In addition, during a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems. Our transparent film measurement systems range in average selling price from approximately $250,000 to $1.0 million per system, our opaque film measurement systems range in average selling price from approximately $900,000 to $2.0 million per system and our macro-defect inspection and probe card and test analysis systems range in average selling price from approximately $250,000 to $1.4 million per system. Accordingly, a small change in the number of systems we sell may also cause significant changes in our operating results. Because fluctuations in the timing of orders from our major customers or in the number of our individual systems we sell could cause our revenues to fluctuate significantly in any given quarter or year, we do not believe that period-to-period comparisons of our financial results are necessarily meaningful, and they should not be relied upon exclusively as an indication of our future performance.

            A significant portion of our revenues has been derived from customers outside of the United States.  In the three month period ended March 31, 2008, approximately 85.4% of our revenues were derived from customers outside of the United States, of which 67.3% were derived from customers in Asia and 18.1% were derived from customers in Europe.  In 2007, approximately 77.1% of our revenues were derived from customers outside of the United States, of which 58.5% were derived from customers in Asia and 18.6% were derived from customers in Europe.  In 2006, approximately 70.6% of our revenues were derived from customers outside of the United States, of which 59.9% were derived from customers in Asia and 10.7% were derived from customers in Europe.  In 2005, approximately 77.5% of our revenues were derived from customers outside of the United States, of which 56.3% were derived from customers in Asia and 21.2% were derived from customers in Europe.  We expect that revenues generated from customers outside of the United States will continue to account for a significant percentage of our revenues. 

            The sales cycle for our systems typically ranges from six to 15 months, and can be longer when our customers are evaluating new technology. Due to the length of these cycles, we invest significantly in research and development and sales and marketing in advance of generating revenues related to these investments. Additionally, the rate and timing of customer orders may vary significantly from month to month. Accordingly, if sales of our products do not occur when we expect, our expenses and inventory levels may increase relative to revenues and total assets.

            Revenues. Our revenues are primarily derived from the sale of our systems, services, spare parts and software licensing.  Our revenues were $37.2 million for the three month periods ended March 31, 2008, compared to $48.4 million for the three month periods ended March 31, 2007, representing an decrease of 23.0%. 

            The following table lists the different sources of our revenue (in thousands):

         Exhibit No.     Description

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 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 report;
   
   
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
   
   
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
      
      

   2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
      
      
   3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      
      
   4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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

   1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
      
      
   2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

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 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 report;
   
   
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
   
   
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

   1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
      
      

   2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
      
      
   3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      
      
   4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

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

   1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
      
      
   2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.