UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Quarterly Period Ended February 28, 2009

Commission File Number 0-21626

ELECTROGLAS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware 77-0336101

(State of Incorporation) I.R.S. Employer Identification Number)

5729 Fontanoso Way

San Jose, CA 95138

Telephone: (408) 528-3000

(Address of Principal Executive

Offices and Telephone Number)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _ No X

As of March 27, 2009, 26,818,000 shares of the Registrant's common stock, $0.01 par value, were outstanding (excluding 155,000 shares held by the Company as treasury stock).

FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our accompanying Condensed Consolidated Financial Statements and the related notes thereto. This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical are forward-looking statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions also identify forward-looking statements. The forward-looking statements include, without limitation, statements regarding:

•

Our intention to continue to emphasize reduction of our utilization of cash, improving gross margins on sales, and maintaining spending controls;

•

Our expectation that the holders of the 6.25% Notes will convert the Notes into Common Stock at some time prior to March 2011 or if not converted prior to that date the note holders will require us to purchase the Notes at that time;

•

Our cash contractual obligations as of February 28, 2009;

•

Our expectation that the semiconductor test markets will remain highly cyclical and difficult to forecast;

•

Our belief that to stay competitive, grow our business over the long term, improve our gross margins, and generate operating cash flows, we must continue to invest in new technologies and product enhancements and at the same time, as necessary, rapidly adjust our expense structure during the hard to predict cyclical semiconductor equipment demand cycles;

•

Our expectation that we will continue to invest in research and development of our systems products and software to anticipate and address technological advances;

•

Our belief that continued, rapid development of new products and enhancements to existing products is necessary to maintain our competitive position;

•

Our belief that alternative sources of components and subassemblies included in our products that are obtained from a single source exist or can be developed, if required;

•

Our belief that our products compete favorably with respect to product performance, reliability, price, service and technical support, product improvements, established relationships with customers, and product familiarity;

•

Our intention to retain any future earnings to fund the development and growth of our business;

•

Our statements relating to our efforts to market our existing technologies to other industries;

•

Our expectation that international sales will continue to represent a significant percentage of net sales and fluctuate as a percentage of total sales;

•

Our intention not to repatriate earnings from foreign subsidiaries and the effect of any repatriation of foreign earnings on income taxes;

•

Our belief that future sales will be impacted by our ability to succeed in new product evaluations;

•

Our belief that we have and can maintain certain technological and other advantages over our competitors;

•

Our belief that our success depends in significant part on our intellectual property, innovation, technological expertise, distribution strength, and our ability to manage our suppliers;

•

Our belief that our future success partly depends on our ability to hire and retain key personnel and the ability to attract additional skilled personnel in all areas to grow our business;

•

Our belief that our current foreign exchange exposure in all international operations is not material to our consolidated financial statements because we primarily transact business in United States dollars;

•

Our belief that the impact of a 10% change in exchange rates would not be material to our financial condition and results of operations;

•

Our belief that it is improbable that we will be required to pay any amounts for indemnification under our software license agreements;

•

Our statements relating to outstanding restructuring accruals and the timing of payment of such accruals;

•

Our assertion that sales often reflect orders shipped in the same quarter as they are received;

•

Our intention to emphasize outsourcing in functional areas where it is cost effective and increases the Company’s competitive position;

•

Our belief that in order to become profitable, our market share for our products must improve;

•

Our intention to record a full valuation allowance on domestic tax benefits until we can sustain an appropriate level of profitability; and

•

Our belief that we have adequately accrued for any foreseeable outcome related to any foreign and domestic tax issues on a more likely than not basis.

The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those stated or implied by the forward-looking statements.

These risks and uncertainties include but are not limited to:

• The ability to secure additional funding, as and when needed;

• An unanticipated lack of resources to continue to make investments in technological advances and product cost reductions necessary to maintain competitive advantages and to sell our

products into new markets;

• Continued cyclicality in the semiconductor industry;

• Unanticipated product performance failures and the lack of market acceptance of our EG6000 products;

• Unanticipated problems encountered in our manufacturing outsourcing and other outsourcing efforts;

• Unanticipated problems with foreign and domestic tax authorities;

• The ability to achieve broad market acceptance of existing and future products; and

• The loss of one or more of our customers.

For a detailed description of these and other risks associated with our business that could cause actual results to differ from those stated or implied in such forward-looking statements, see the disclosure contained under the heading “Factors that May Affect Results and Financial Condition” in this Quarterly Report on Form 10-Q. All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement or statements. The reader should also consult the cautionary statements and risk factors listed in our reports filed from time to time with the Securities and Exchange Commission.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ELECTROGLAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)

	Three months ended						Nine months ended
	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Net Sales	$	2,219		$	11,553		$	16,973		$	33,425
Cost of sales		2,893			8,635			15,297			23,813
Gross margin		(674	)		2,918			1,676			9,612
Operating expenses:
Engineering, research and development		1,675			2,355			5,445			6,814
Sales, general and administrative		2,385			3,372			8,119			10,711
Restructuring and impairment charges		70			149			590			608
Total operating expenses		4,130			5,876			14,154			18,133
Operating loss		(4,804	)		(2,958	)		(12,478	)		(8,521	)
Interest income		20			143			122			589
Gain on sale of investments		-			-			-			362
Interest expense		(596	)		(604	)		(1,780	)		(1,844	)
Gain on mark to market financial instrument
related to convertible debt		-			-			-			85
Other expense, net		(187	)		(205	)		(586	)		(502	)
Loss before provision (benefit) for income taxes		(5,567	)		(3,624	)		(14,722	)		(9,831	)
Provision (benefit) for income taxes		(1,020	)		124			(995	)		548
Net loss	$	(4,547	)	$	(3,748	)	$	(13,727	)	$	(10,379	)

Basic and diluted net loss per share	$	(0.17	)	$	(0.14	)	$	(0.52	)	$	(0.39	)
Shares used in basic and diluted calculations		26,627			26,385			26,589			26,353

See the accompanying notes to condensed consolidated financial statements.

ELECTROGLAS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data, unaudited)

	February 28, 2009			May 31, 2008 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	4,956		$	16,541
Accounts receivable, net of allowances of $548 and $329		2,809			9,419
Inventories		7,032			5,533
Receivable from Flextronics Industrial Ltd.		-			1,644
Prepaid expenses and other current assets		2,051			2,752
Total current assets		16,848			35,889
Equipment and leasehold improvements, net		1,829			2,724
Goodwill		1,942			1,942
Other assets		2,412			2,806
Total assets	$	23,031		$	43,361

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable	$	1,570		$	6,848
Accrued liabilities		3,649			5,717
Deferred revenue		511			826
Line of credit		500			-
Total current liabilities		6,230			13,391
Convertible subordinated 6.25% notes		24,180			23,610
Other non-current liabilities		1,629			2,442
Total liabilities		32,039			39,443
Commitments and contingencies
Stockholders’ (deficit) equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none outstanding		-			-
Common stock, $0.01 par value; 60,000,000 shares authorized; 26,882,000 and 26,681,000
shares issued; 26,727,000 and 26,526,000 outstanding		269			267
Additional paid-in capital		200,731			199,932
Accumulated deficit		(207,712	)		(193,985	)
Cost of common stock in treasury; 155,000 shares		(2,296	)		(2,296	)
Total stockholders’ (deficit) equity		(9,008	)		3,918
Total liabilities and stockholders’ (deficit) equity	$	23,031		$	43,361

See the accompanying notes to condensed consolidated financial statements.

(1) Derived from the Company’s audited consolidated financial statements as of May 31, 2008.

ELECTROGLAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Nine months ended
	February 28, 2009			March 1, 2008
Cash used in operating activities
Net loss	$	(13,727	)	$	(10,379	)
Charges to net loss not affecting cash		3,724			5,918
Changes in operating assets and liabilities		(1,756	)		979
		(11,759	)		(3,482	)
Cash used in investing activities
Capital expenditures		(81	)		(219	)
Cash paid for long-term investment		(275	)		-
		(356	)		(219	)
Cash provided by (used in) financing activities
Net borrowings on line of credit		500			-
Pay off of 5.25% convertible notes		-			(8,500	)
Debt issuance costs related to issuance of convertible notes		-			(52	)
Stock option exercises and employee stock purchase plan		104			106
		604			(8,446	)

Effect of exchange rate changes on cash and cash equivalents		(74	)		35
Net decrease in cash and cash equivalents		(11,585	)		(12,112	)
Cash and cash equivalents at beginning of period		16,541			30,788
Cash and cash equivalents at end of period	$	4,956		$	18,676

See the accompanying notes to condensed consolidated financial statements.

ELECTROGLAS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Business

Electroglas Inc. (the “Company”) is a supplier of semiconductor manufacturing equipment and software to the global semiconductor industry. The Company was incorporated in Delaware in April 1993, to succeed the wafer prober business conducted by the Electroglas division of General Signal Corporation, our former parent. Immediately prior to the closing of the initial public offering of our common stock, in July 1993, the Company assumed the assets and liabilities of the Electroglas division in an asset transfer. The Company has been in the semiconductor equipment business for more than 40 years. The Company’s primary product line is automated wafer probing equipment and related network software to manage information from that equipment. In conjunction with automated test systems from other suppliers, the Company’s semiconductor manufacturing customers use its wafer probers and network software to quality test semiconductor wafers. Beginning in 2007, we began to market our existing EG6000 technologies to other equipment manufacturers in other application areas such as micro assembly and inspection. These companies, in addition to semiconductor, sell into the medical, cell phone and solar fields.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete consolidated financial statements and therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008 and the Company’s interim reports filed on Form 10-Q for the periods ended August 30, 2008 and November 29, 2008. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The Company’s fiscal quarters are every thirteen weeks and end on a Saturday, except for the fourth quarter which ends on May 31st.

Significant Accounting Policies

The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended May 31, 2008. The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,” (“FIN 48”) as of the first day of the first quarter of fiscal 2008. The Company has not otherwise materially changed its significant accounting policies.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions for such items as revenue recognition, inventory valuation, warranty reserves, asset impairments, allowances for doubtful accounts, tax valuation allowances, stock-based compensation assumptions, and accruals such as restructuring reserves. These estimates and assumptions affect the amounts reported in the financial statements, and actual results could differ from those estimates.

Comprehensive Loss

Comprehensive loss includes net loss as well as additional other comprehensive income (loss) items. At February 28, 2009 and May 31, 2008, there were no accumulated other comprehensive gains or losses included in the Company’s consolidated balance sheet. Comprehensive loss and net loss are the same for all periods presented.

Inventories

Inventories are stated at the lower of cost or market (estimated net realizable value) using the first-in, first-out or FIFO method. The Company periodically reviews the carrying value of its inventories and non-cancellable purchase commitments. The Company may record charges to inventory due to excess, obsolete and slow moving inventories. The Company’s analysis is based on the estimated impact of changes in technology on the Company’s products (including engineering design changes) and the timing of these changes. The Company also considers future sales forecasts, product order history, and backlog to assess its inventory requirements. Inventory on loan to customers is included in finished goods inventory. Loaner inventory is amortized beginning in the ninth month after shipment through the twentieth month to a 10% residual value and is charged to the organization responsible for the inventory, either Engineering or Sales. If there is weak demand in the semiconductor equipment markets and orders fall below forecasts, additional adjustments to inventories may be required which will negatively impact gross margins. Inventory adjustments are considered to permanently establish a new basis for inventory and are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable, except when the associated inventory balances decline due to disposition or sale. As a result of these analyses, the Company recorded inventory charges and amortization of $0.2 million and $0.2 million in the three months ended and $0.8 million and $1.4 million in the nine months ended February 28, 2009 and March 1, 2008, respectively. The following is a summary of inventories by major category:

In thousands (unaudited)	February 28, 2009		May 31, 2008
Raw materials	$	3,470	$	2,578
Work in process		444		143
Finished goods		3,118		2,812
	$	7,032	$	5,533

Warranty Reserves and Guarantees

The Company generally warrants its products for a period of thirteen months from the date of shipment and accrues for the estimated cost of warranty. For established products, this accrual is based on historical experience, and for newer products, this accrual is based on estimates from similar products. In addition, from time to time, specific warranty accruals are made for specific technical problems. Revenues associated with extended warranties are measured based on fair value and recognized ratably over the duration of the extended warranty.

The Company’s warranty liability is included in accrued liabilities and changes during the reporting periods are as follows:

In thousands (unaudited)	Balance at Beginning of Period		New Warranties Charged to Costs of Sales		Warranty Reserve Utilized			Balance at End of Period
Three months ended February 28, 2009	$	847	$	215	$	(328	)	$	734
Three months ended March 1, 2008	$	1,037	$	560	$	(542	)	$	1,055

Nine months ended February 28, 2009	$	1,110	$	694	$	(1,070	)	$	734
Nine months ended March 1, 2008	$	1,242	$	1,674	$	(1,861	)	$	1,055

The Company’s software license agreements generally include certain provisions for indemnifying customers against liabilities if the software products infringe a third party’s intellectual property rights. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under these arrangements.

Restructuring Charges

In the third quarter and first nine months of fiscal 2009, the Company recorded a restructuring charge of $0.1 million and $0.6 million, respectively, related to a reduction of workforce across all functions. The liability for restructuring charges is included in accrued liabilities. Details of the restructuring charges for the 2009 restructuring plans are as follows:

	Three months ended February 28, 2009									Nine months ended February 28, 2009
In thousands (unaudited)	Severance			Other Costs			Total			Severance			Other Costs			Total
Beginning balance	$	104		$	8		$	112		$	-		$	-		$	-
Restructuring charges		1			69			70			494			96			590
Cash payments		(97	)		(45	)		(142	)		(486	)		(64	)		(550	)
Ending balance	$	8		$	32		$	40		$	8		$	32		$	40

Details of the restructuring charges for the 2008 restructuring plan are as follows. These costs have been fully paid.

	Three months ended February 28, 2009						Nine months ended February 28, 2009
In thousands (unaudited)	Severance		Other Costs		Total		Severance		Other Costs			Total
Beginning balance	$	-	$	-	$	-	$	-	$	147		$	147
Restructuring charges		-		-		-		-		-			-
Asset write-offs		-		-		-		-		-			-
Cash payments		-		-		-		-		(147	)		(147	)
Ending balance	$	-	$	-	$	-	$	-	$	-		$	-

	Three months ended March 1, 2008								Nine months ended March 1, 2008
In thousands (unaudited)	Severance		Other Costs			Total			Severance			Other Costs			Total
Beginning balance	$	-	$	249		$	249		$	227		$	94		$	321
Restructuring charges		-		149			149			197			411			608
Asset write-offs		-		-			-			-			(81	)		(81	)
Cash payments		-		(94	)		(94	)		(424	)		(120	)		(544	)
Ending balance	$	-	$	304		$	304		$	-		$	304		$	304

Income Taxes

The Company had approximately ($1.0) million and $0.1 million income tax (benefit) expense in the three months and ($1.0) million and $0.5 million in the nine months ended February 28, 2009 and March 1, 2008, respectively, comprised of foreign income and withholding taxes, and a benefit related to a tax refund in France for prior business tax losses.

When establishing the manufacturing facility in Singapore, the Company received a five-year exemption from Singapore income taxes beginning March 1, 2003 under the condition that certain capital investment and expenditure milestones would be reached by March 1, 2008. As a result of the Company’s strategic initiatives, which include moving the Company’s manufacturing function from Singapore to China, the Company was exposed to a liability for the taxes that otherwise would have been due during the tax exemption period. During 2007, the Company initiated negotiations with the Singapore government, which were concluded in September 2007 to end the tax exemption period retroactively, and eliminate the remaining investment milestones, in exchange for a three-year tax exemption ending February 28, 2006. The Singapore government agreed to shorten the exemption period and waive the remaining investment milestones. During the first quarter of fiscal 2008, the Company accrued $0.3 million to reflect the tax amounts owed as part of this negotiated settlement.

The Company uses estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of tax assets and liabilities. It is the Company’s policy to accrue for income tax exposures or to release such tax reserves in the period in which facts and circumstances arise that suggest that the valuation allowances or reserves should be adjusted. The Company will continue to record a full valuation allowance on domestic tax benefits until it can sustain an appropriate level of profitability.

The Company adopted the provisions of FIN 48 effective June 1, 2007. FIN 48 clarifies the accounting for uncertainty in tax positions. The interpretation prescribes a recognition threshold and measurement criteria for financial statement recognition of a tax position taken or expected to be taken in a tax return. FIN 48 requires the Company to recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting interim periods, disclosure and transition.

As of May 31, 2008, the Company had gross unrecognized tax benefits of approximately $7.4 million, none of which would impact our effective tax rate if recognized. Unrecognized tax benefits were effectively unchanged as of February 28, 2009. If such amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would generate tax benefits to be recorded in the period the reserves are no longer deemed necessary. If such amounts ultimately prove to be less than the final assessment, a future charge to expense would be recorded in the period in which the assessment is determined. Although timing of the resolution and/or closure on audits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months. The Company recognizes interest and penalties related to unrecognized tax benefits within its income tax provision.

The Company conducts business globally and, as a result, the Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The Company is subject to examination for carry forwards of research and development tax credits and net operating losses for years beginning in 1995 to the present time. The Company is not currently under federal or state income tax examination.

Convertible Subordinated Notes (“5.25% Notes”)

In June 2002, the Company completed a $35.5 million private placement of 5.25% fixed rate convertible subordinated notes (the “5.25% Notes”) due in June 2007. Interest on the 5.25% Notes is payable each year on the fifteenth of June and December and is charged to interest expense. In the five month transition period ended May 31, 2005, the Company repurchased a total of $2.0 million of the 5.25% Notes. During May 2006, the Company exchanged $25.0 million of 5.25% Notes for 4,268,000 shares of common stock and $7.5 million in cash in privately negotiated transactions with the note holders. The Company repaid the $8.5 million balance of the 5.25% Notes plus accrued interest on the June 15, 2007 maturity date.

Subordinated Secured Notes (“6.25% Notes”)

In March 2007, the Company completed a $25.75 million private placement of 6.25% (payable semi-annually in June and December) fixed rate subordinated secured notes (the “6.25% Notes”). The Company incurred debt issuance costs totaling $2.4 million and these costs are being amortized to other expense using a method that approximates the effective interest method over the estimated four year life of the 6.25% Notes, which coincides with the earliest date upon which the note holders can require the Company to repurchase the Notes. For the three and nine months ended February 28, 2009 and March 1, 2008, the Company recognized other expense related to the amortization of the debt issuance costs of $150,000 and $450,000, respectively. The 6.25% Notes are due in March 2027; however, the holders may require the Company to repurchase for cash on March 26, 2011 and various future dates at a price equal to 100% of the principal amount plus accrued interest, if any, to the applicable repurchase date. The 6.25% Note terms restrict the Company from transferring capital to certain of its subsidiaries, restrict the payment of dividends, and contain certain other restrictions as well as certain standard financial covenants which are generally required of public companies. As of February 28, 2009, the Company was in compliance with its covenants. One of the covenants in our debenture agreement requires that our common stock remain listed on at least one of the various designated exchanges that does not include the Over-The-Counter Bulletin Board (“OTC”). On March 23, 2009, our shares of common stock were delisted from the NASDAQ Capital Markets and began trading on the OTC. Prior to the delisting, we secured a waiver from the holders of the 6.25% Notes. One of the covenants of our debenture agreement can be interpreted such that if we are late with any of our required filings under the Securities Act of 1934, as amended, and if we fail to effect a cure within 60 days, the holders of the 6.25% Notes can put the 6.25% Notes back to the Company, whereby the 6.25% Notes become immediately due and payable.

The 6.25% Notes are convertible at any time prior to maturity at the election of the bond holders into shares of Common Stock at a conversion price of $2.295, which represented a 12.5% premium over the Company’s stock price on the date of the private placement’s closing. If fully converted, the 6.25% Notes would convert into approximately 11.22 million shares of Common Stock. At any time prior to maturity, subject to certain limitations, the Company may elect to automatically convert (“Auto Convert”) the 6.25% Notes into Common Stock if the closing price of the Common Stock has exceeded 150% (above $3.44 per share) of the conversion price for at least 20 trading days during any 30-day period prior to the Company giving notice to the bond holders. If the Company elects to Auto Convert within the first three years, the Company will be required to pay the bond holders interest for the three year period (make-whole), less any interest paid to that date. The Company considers this interest make-whole provision to be an embedded derivative and determined the value of it to be negligible. The Company can also after three years redeem the 6.25% Notes for cash at 100% of the principal amount plus accrued interest. The 6.25% Notes are ranked junior to the Company’s Comerica bank line borrowings and are collateralized by a second priority lien on substantially all of the Company’s assets.

Prior to October 17, 2007, the 6.25% Notes were deemed to contain an additional embedded derivative (described below) requiring bifurcation and valuation in accordance with the guidance in Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Furthermore, in analyzing the terms of the 6.25% Notes, the Company determined that the Notes represent non-conventional convertible debt as defined in Emerging Issues Task Force (“EITF”) Issue 05-2, “The Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No. 00-19” due to the fact that the 6.25% Notes contain provisions that provide for adjustment to the number of shares into which the Notes are convertible and, therefore, the number of shares issuable upon conversion is not fixed. Under the provisions of EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” this conversion feature would be classified as a liability if it were a freestanding financial instrument, due to the fact that at issuance and through the remainder of the year ended May 31, 2007, the Company did not have enough authorized and unissued shares available to fully settle the maximum potential number of shares that could be required to be delivered under the terms of all of the Company’s existing financial instruments. As a result, to the extent that a shortfall existed between the maximum potential shares issuable under the conversion feature of approximately 13,365,000 shares and the minimum number of shares the Company had available for issuance of approximately 10,091,000 (resulting in a shortfall of approximately 3,274,000 shares), the Company had calculated the relative portion of the fair value of the conversion feature that pertains to this shortfall to be $3.0 million (see discussion of valuation methodology and assumptions below) and had recognized this amount as a separate derivative liability with an offsetting discount to the carrying value of the 6.25% Notes. The resultant discount is being amortized to interest expense over the estimated four year life of the 6.25% Notes. The Company recorded discount amortization interest expense of $0.2 million and $0.2 million for the three months and $0.6 million and $0.6 million for the nine months ended February 28, 2009 and March 1, 2008, respectively.

On October 17, 2007, at the annual meeting of stockholders, the stockholders approved an amendment to the Company’s certificate of incorporation to increase the number of authorized shares of the Company’s Common Stock from 40,000,000 to 60,000,000. This increase in authorized common shares eliminated the shortfall that existed between the maximum potential shares issuable under the conversion feature and the number of authorized shares, and thereby eliminated the embedded derivative liability established in accordance with SFAS 133 when the 6.25% Notes were issued. On October 17, 2007 the conversion feature derivative liability was remeasured at its estimated fair value and the increase in value of $0.1 million was recognized as a gain on mark to market financial instrument related to convertible debt in the statement of operations and the financial instrument liability of $3.1 million was reclassified to additional paid-in capital.

The following table outlines the assumptions the Company used in the Black-Scholes model to value the conversion feature at the date it was reclassified into additional paid-in capital:

	Conversion Feature
	October 17, 2007
Contractual term in years		3.4
Volitility		59.9	%
Risk-free interest rate		4.7	%
Dividend yield		0	%

The following is a summary of the 6.25% Notes value, as of:

In thousands (unaudited)	February 28, 2009			May 31, 2008
Face value of Notes	$	25,750		$	25,750
Notes discount		(1,570	)		(2,140	)
	$	24,180		$	23,610

Long Term Liability – Deferred Rent

The Company leases facilities for its corporate headquarters under a five year agreement that includes tenant concessions such as tenant improvement allowances of $1.0 million and eighteen months of "free rent”. The Company records rent expense at the effective average net rent over the lease term after taking into consideration the value of these tenant rent concessions. This accounting resulted in long term deferred rent liabilities of $0.1 million and $0.6 million as of February 28, 2009 and May 31, 2008, respectively, and were included in other non-current liabilities.

Line of Credit

In December 2008, the Company renewed and amended its revolving line of credit with Comerica Bank. Under these agreements, the Company may borrow up to $7.5 million based partially on eligible accounts receivable balances. This bank line, which has a maturity date of August 31, 2010, is collateralized by substantially all of the Company’s assets and requires that the Company maintain certain financial covenants. The Company currently maintains cash deposits of $3.5 million that will be considered restricted as compensating balances to the extent the Company borrows against this bank line. As of February 28, 2009, the Company had approximately $1.3 million of available borrowing capacity, net of the $3.5 million restricted compensating balance and had net borrowings of $0.5 million outstanding on the line. There were no borrowings outstanding at May 31, 2008.

On March 5, 2009, the Company amended its line of credit with its bank. This amendment reduced the previous $3.5 million cash collateralization requirement to amounts necessary to cover certain outstanding letters of credit and the Company’s corporate credit card account which aggregated is approximately $0.4 million. Pursuant to this amendment, the Company repaid the $0.5 million outstanding on its line on March 17, 2009.

Commitments and Contingencies

The Company’s lease agreement with 5729 Fontanoso Way, LLC for its corporate headquarters commenced on May 1, 2005 for sixty months. The Company has an option to extend this lease agreement for an additional five year period. In addition, the Company leases facilities for its sales and service offices in various locations worldwide. The Company’s rent expense was $0.3 million and $0.4 million for the three months and $0.8 million and $1.2 million for the nine months ended February 28, 2009 and March 1, 2008, respectively.

As of February 28, 2009, contractual obligations and commercial commitments were as follows:

	Payments due by fiscal period
In thousands (unaudited)	Total		Remaining fiscal 2009		2010		2011
Operating leases	$	1,956	$	406	$	1,472	$	78
Purchase commitments		12,700		12,690		10		-
Interest payments on 6.25% notes		3,670		-		1,609		2,061
Principal payment on 6.25% notes		25,750		-		-		25,750
Total cash obligations	$	44,076	$	13,096	$	3,091	$	27,889

On September 18, 2007, the Company signed a five year Manufacturing Services Agreement (“Agreement”) with Flextronics Industrial Ltd. (“Flextronics”) to outsource its Singapore manufacturing to Flextronics in China. As part of this Agreement, Flextronics accepts purchase orders and forecasts from the Company which constitute authorization for Flextronics to procure inventory based on lead times and to procure certain special inventory such as long lead-time items. The Company does not take ownership of these Flextronics orders until the finished products are ready to be shipped to our customers. Under the agreement with Flextronics, the Company may be liable for inventory held by Flextronics to the extent it has placed an accepted purchase order or forecast. Flextronics open commitments and inventory on hand at February 28, 2009, based on the Company’s forecasts, were valued at $12.7 million and are included in the above table as inventory purchase commitments. If the Flextronics inventory goes unused, the Company may be assessed carrying charges or obsolete charges. During the fiscal year ended May 31, 2008, the Company billed Flextronics $8.3 million for inventory purchases of which $6.7 million was paid leaving a $1.6 million “Receivable from Flextronics Industrial Ltd”. For the nine months ended February 28, 2009, the Company billed Flextronics $0.1 million for inventory purchases and received cash payments of $1.7 million

In November 2008, the Company entered into a Development agreement with Prefixa, Inc. (“Prefixa”) related to certain optical technology designed to work with Electroglas’ products. Under the agreement, the Company receives ownership in Prefixa to the extent it has paid its obligations under the agreement and additionally the Company retains certain proprietary rights to the technology and certain other rights under the agreement. To retain its proprietary rights upon completion of an acceptable finished product, the Company must meet certain minimum marketability requirements which it believes to be fairly insignificant. Should Prefixa not meet its obligations under the contract or Electroglas elects to discontinue its relationship with Prefixa, the Company shall retain its investment in Prefixa to the extent it has invested under the contract. As of February 28, 2009, the investment of $275,000 was classified on its balance sheet under long-term investments included as part of other assets, and the Company does not believe there has been any impairment in the value of this investment.

The Company is not currently involved in any legal actions that management believes are material. From time-to-time, however, the Company may be subject to various claims and lawsuits by customers, suppliers, competitors, and employees arising in the normal course of business, including suits charging infringement or violations of antitrust laws. Such suits may seek substantial damages and in certain instances, any damages awarded could be trebled.

Stockholders’ (Deficit) Equity

Preferred stock: The Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of 1,000,000 shares of preferred stock from time to time in one or more series with such designation, rights preferences and limitations as the Board of Directors may determine, including the consideration received therefrom, the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, redemption fund provisions, conversion rights, and voting rights, all without the approval of the holders of common stock.

Stock Option Plans: The Company has a stock-based compensation program that provides its Board of Directors with broad discretion in creating employee equity incentives. In October 2006, the Company’s stockholders approved a new stock incentive plan (the “2006 Plan”) to replace the Company’s 1997 Stock Incentive Plan (the “1997 Plan”) and the Company’s 2001 Non-Officer Employee Stock Incentive Plan (the “2001 Plan”). The stockholders approved a total of 4.0 million shares of common stock (2.0 million of which may be restricted shares) reserved for issuance under the 2006 Plan, plus the number of shares of common stock that remained available for grants of awards under the 1997 and 2001 Plans (1.4 million shares), plus any shares of common stock that would otherwise return to these plans as a result of forfeiture, termination or expiration of awards previously granted under these plans. Stock options are generally time-based, vesting on each annual anniversary of the grant date over three to four years and expire six to seven years from the grant date.

The Company estimates the fair value of stock options using a Black-Scholes valuation model. Consistent with the provisions of SFAS No. 123 (revised 2004) “Share Based Payments” (“FAS 123R”) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 – Share Based Payment (“SAB 107”), the fair value of each option grant and Employee Stock Purchase Plan (“ESPP”) subscription is estimated on the date of grant.

FAS 123R requires the Company to calculate the pool of excess tax benefits that are available as of June 1, 2006 to absorb tax deficiencies recognized in subsequent periods, assuming the Company had applied the provisions of the standard in prior periods. The Company has elected to use the regular or long method of determining the tax effects of share-based compensation. The choice of approach will have no impact on the tax benefit pool or the tax expense to be recognized for the current period, due to the Company’s net operating loss position.

The total stock-based compensation expense for stock options, restricted stock units, and ESPP was as follows, before income taxes:

	Three months ended					Nine months ended
In thousands (unaudited)	February 28, 2009		March 1, 2008			February 28, 2009		March 1, 2008
Cost of sales	$	4	$	(2	)	$	45	$	36
Engineering, research and development		21		91			94		227
Sales, general and administrative		221		268			558		615
	$	246	$	357		$	697	$	878

As of February 28, 2009, the unamortized stock-based compensation balance related to stock options, restricted stock units, and the ESPP was $2.2 million and will be recognized over an estimated weighted average amortization period of 2.4 years.

Employee Stock Option Plans: The following table summarizes stock option activity and related information for the period indicated:

	Nine months ended February 28, 2009
Shares in thousands (unaudited)	Options outstanding			Weighted average exercise prices
Options beginning of period		3,579		$	4.21
Granted		1,931		$	0.34
Exercised		(37	)	$	1.77
Canceled		(733	)	$	6.15
Options end of period		4,740		$	2.35

Restricted Stock Units: Restricted stock units are converted into shares of common stock upon vesting on a one-for-one basis. Vesting of restricted stock units is subject to the employee’s continuing service to the Company. The compensation expense related to these awards was determined using the fair value of common stock on the date of the grant, and compensation is recognized over the service period. Restricted stock units generally vest over three years.

	Outstanding restricted stock units
Shares in thousands (unaudited)	Units outstanding			Weighted average grant date fair value
Unvested awards beginning of period		257		$	2.43
Awards		65		$	0.93
Releases		(125	)	$	2.24
Cancellations and Forfeitures		(35	)	$	2.43
Unvested awards end of period		162		$	1.97

Employee Stock Purchase Plan: In May 2002, the Company’s stockholders approved the 2002 Employee Stock Purchase Plan (the “2002 Plan”) and reserved 2,000,000 shares for issuance under the Plan. The Company’s 2002 Plan provides that eligible employees may purchase stock through payroll deductions at 85% of its fair value on specified dates. At February 28, 2009, the Company had 1.5 million shares reserved for future issuance.

	Nine months ended
In thousands, except per share data (unaudited)	February 28, 2009		March 1, 2008
Shares issued		39		46
Average purchase price	$	0.84	$	1.81
Net cash proceeds	$	33	$	84
Income tax benefits	$	-	$	-
Intrinsic value of purchased shares	$	5.8	$	15.0

Employee Benefit Plans

Incentive plans: The Company has adopted an Employee Incentive Plan and a Savings Plan covering substantially all of its U.S. employees. The Board of Directors determines annually a formula to set aside amounts into a profit sharing pool based upon performance targets to pay bonuses to employees. There were no charges to operations for these plans during the nine months ended February 28, 2009 and March 1, 2008.

Post-retirement medical plan: Effective July 23, 1996 the Board of Directors approved a plan for medical and dental coverage for certain executive retirees meeting certain age and service eligibility requirements. At February 28, 2009, three retirees and their spouses were in the plan. The retirees and their spouses pay their share of the coverage costs at the same percentage rate as an active Company employee. The Company’s future obligation under this plan, which is accrued and included in accrued liabilities, is estimated at $0.5 million.

Pension Plans: The majority of employees in the United States are covered by 401K type defined contribution plans. In Germany, employees are covered by a defined benefit pension plan (“The Plan”) in accordance with local legal requirements. The Company has purchased insurance policies to cover the payment risk of The Plan. These insurance policies have not been segregated and restricted to provide for pension benefits and are therefore not considered plan assets The cash surrender value of these insurance policies as of February 28, 2009 and May 31, 2008 was $1.0 million and $1.2 million, respectively, and have been included in non-current assets under other assets on the Company’s condensed consolidated balance sheets.

Revenue and Geographic Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company has one reportable segment.

The following is a summary of the Company’s net sales to external customers, by geographic regions:

	Three months ended								Nine months ended
In thousands (unaudited)	February 28, 2009				March 1, 2008				February 28, 2009				March 1, 2008
Asia	$	273	12	%	$	3,647	32	%	$	4,393	26	%	$	12,335	37	%
Europe		1,002	45	%		2,228	19	%		6,252	37	%		6,367	19	%
International		1,275	57	%		5,875	51	%		10,645	63	%		18,702	56	%
North America		944	43	%		5,678	49	%		6,328	37	%		14,723	44	%
	$	2,219	100	%	$	11,553	100	%	$	16,973	100	%	$	33,425	100	%

In the three months ended February 28, 2009, sales to customers in the United States, France and Germany represented 42%, 21% and 16% of sales, respectively. In the same period in fiscal year 2008, sales to customers in the United States represented 49% of sales. In the nine months ended February 28, 2009, sales to customers in the United States, United Kingdom, France and Germany represented 37%, 11%, 10% and 11% of sales, respectively. In the same period in fiscal year 2008, sales to customers in the United States and Taiwan represented 44% and 10% of sales, respectively. No sales to customers in another country equaled or exceeded 10% in any of these periods.

The following table presents summary information of the Company's net sales by product, although the Company manages its business as a single operating unit:

	Three months ended				Nine months ended
In thousands (unaudited)	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Systems and software	$510	23%	$6,980	60%	$9,300	55%	$20,295	61%
Aftermarket products & services	1,709	77%	4,573	40%	7,673	45%	13,130	39%
	$2,219	100%	$11,553	100%	$16,973	100%	$33,425	100%

The following table presents summary information of the Company’s significant customers as a percentage of sales:

	Three months ended						Nine months ended
(Unaudited)	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Customer A		21	%		13	%		15	%		14	%
Customer B		--			--			11	%		--
Customer C		12	%		28	%		--			29	%
Customer D		13	%		--			--			--
Customer E		14	%		--			--			--

The following is a summary of the Company’s identifiable long-lived assets by geographic regions as of:

In thousands (unaudited)	February 28, 2009		May 31, 2008
Asia	$	272	$	405
Europe		8		13
International		280		418
North America		1,549		2,306
	$	1,829	$	2,724

Fair Value Measurement

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” (“SFAS No. 157”) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The fair value hierarchy for disclosure of fair value measurements under SFAS No. 157 is as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Quoted prices, other than quoted prices included in Level 1, that are observable for the assets or liabilities, either directly of indirectly.

Level 3: Inputs that are unobservable of the assets or liabilities.

The Company estimated the fair value of financial assets and liabilities and concluded the amounts reported for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their short maturities and minimal risk in the underlying investments. Convertible subordinated notes are stated at cost due to the practicability of estimating fair value due to the lack of the availability of quoted market prices.

Recently Issued Accounting Pronouncements

On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008. Management is currently assessing the impact of the adoption of this portion of SFAS 157.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB statement No. 115” (“SFAS 159”). SFAS 159 permits companies to choose to measure certain financial instruments and other items at fair value. The standard requires that unrealized gains and losses are reported in earnings for items measured using the fair value option. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The fair value option under SFAS 159 became available to the Company in the first quarter of fiscal year 2009. Management has determined that the adoption of SFAS 159 had no impact on the Company.

In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS 161”). SFAS No. 161 requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance, and cash flows. SFAS 161 also requires the disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. SFAS 161 is required to be adopted by the Company in the first quarter of our fiscal year 2010. SFAS 161 will have no impact on the Company unless management enters into derivative instruments or hedging activities after May 31, 2009.

In May 2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No. 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”), which requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s nonconvertible debt borrowing rate. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. This statement will have no impact on the Company.

In April 2008, the FASB issued FSP SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and the period of expected cash flows used to measure the fair value of the asset under SFAS 141 (revised 2007),

“Business Combination” (“SFAS 141R”) when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for SFAS 142’s entity-specific factors. FSP 142-3 shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of the adoption of FSP 142-3 on its consolidated financial position, results of operations and cash flows.

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

Overview

We are a supplier of semiconductor manufacturing equipment and software to the global semiconductor industry. Our primary product line is automated wafer probing equipment. In conjunction with automated test systems from other suppliers, our semiconductor manufacturing customers use our wafer probers to quality test semiconductor wafers. Electroglas has sold over 16,500 wafer probers and its installed base is one of the largest in the industry. Beginning in 2007, we began to market our existing EG6000 technologies to other equipment manufacturers in other application areas such as micro assembly and inspection. These companies, in addition to semiconductor, sell into the medical, cell phone and solar fields. We intend to continue to reduce our operations to better align our operating expenses with our cash flow, and increase our emphasis on our MCAT business, which sells products into non-semiconductor industries, as well as the semiconductor industry.

Our customers consist primarily of chip manufacturers and contract test companies. The demand for our products follows the semiconductor test markets, which remain highly cyclical and difficult to forecast. We are currently experiencing a dramatic slow down in the semiconductor sector which continues to negatively impact our sales.The EG6000, which represents a major advancement in prober design and automation and is focused on providing better performance than currently available from competitors’ products, was developed to serve this much larger production test market.

To stay competitive, grow our business over the long term, improve our gross margins, and generate operating cash flows, we must continue to invest in new technologies and product enhancements and at the same time, as necessary, rapidly adjust our expense structure during the hard to predict cyclical semiconductor equipment demand cycles. Due to the cyclicality of the semiconductor equipment industry and the resulting market pressures, we are focusing our efforts in the following areas:

•

Controlling and aligning our costs, through outsourcing and streamlining to move to break-even and then profitable levels of operation, including positive operating cash flows;

•

Developing successful products and services to meet market windows in our target markets, and marketing our existing technologies to other industries;

•

Working with our manufacturing outsourcing vendor, Flextronics, to achieve a more variable cost model and to cost reduce our products;

•

Completing new customer evaluations of our 300mm products; and

•

Preparing ourselves for increases in customer demand while at the same time maintaining expense control and limiting increases in our cost structure.

There can be no assurances that these efforts will be successful. In order to continue our operations, our market share for our products must improve.

Our principal source of liquidity as of February 28, 2009 consisted of $5.0 million of cash and cash equivalents, including $0.5 net borrowings on the Company’s line of credit. As of February 28, 2009, we had net working capital of $10.6 million. The demand for our products follows the semiconductor test market which is experiencing a significant economic downturn. As a result, we continue to experience declining revenues. Our total revenues were $8.4 million, $6.4 million, and $2.2 million for the fiscal quarters ended August 30, 2008, November 29, 2008 and February 28, 2009, respectively, and operating losses were $3.8 million, $3.9 million, and $4.8 million, for the same periods, respectively. Our cash used in operating activities was $5.2, million, $2.3 million and $4.3 million, respectively, during the fiscal quarters ended August 30, 2008, November 29, 2008 and February 28, 2009. As of March 28, 2009 we had approximately $3.4 million cash available to continue funding our operating loss. Our ability to continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing expenses. There can be no assurance that our cash utilization will remain at or be reduced below its current level. If our revenues do not improve significantly, and we are unable to secure additional funds, we will not have sufficient capital to continue our operations for the next 3 months. We cannot assure you that additional financing will be available on terms favorable to us, or at all.

Additional information about Electroglas is available on our website (www.electroglas.com). Electroglas makes available free of charge on our website our Reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file them with the Securities Exchange Commission (“SEC”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room (1-800-SEC-0330) at 100 F Street, NE, Washington, D.C. 20549. Our filings are also available at the SEC’s website at http://www.sec.gov.

Estimates and Critical Accounting Policies

General: Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

Use of Estimates: The preparation of our 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 on-going basis, we evaluate our estimates, including those related to revenue recognition, asset impairments, inventory valuation, warranties, allowance for doubtful accounts, tax allowances and reserves, stock based compensation, valuation of long-lived assets, and accruals for such items as restructuring reserves. We also estimate our future revenues, expenses and cash usage. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities. Actual results may differ materially from these estimates under different assumptions or conditions.

We believe the following critical accounting policies involve more significant judgments or estimates used in the preparation of our condensed consolidated financial statements. Senior management has discussed the development and selection of these critical accounting policies and estimates with the Company’s audit committee.

Revenue recognition: Revenue is recognized on the sale of our equipment when a customer purchase order or contract has been received, when the products or services have been delivered, when the total purchase price can be assured without making significant concessions, and when our ability to collect from our customer has been assured. In recognizing revenue we make certain assumptions and estimates, namely: (i) we consider a new system routinely accepted in the marketplace when three to five successful installations, based on our acceptance criteria, have been put into customer production; (ii) we consider systems, delivered separately from options, to have value to our customers on a stand alone basis if we have fair value of the options and the options are not significant to the total amount of the order and the options are not essential to the functionality of the system; (iii) we consider systems, delivered separately from installation, to have value to our customers on a stand-alone basis because the equipment can readily be sold by the customer, customers are capable of installing the systems without the support of our installers, installation is routine and inconsequential to the total value of the transaction, and we have fair value and have routinely sold systems on a stand-alone basis; and (iv) for most customers we assume that, based on past history, we will continue to collect our receivables from them without payment or product concessions, despite the fact that they have larger financial size relative to us and despite the Company’s dependence on them in a heavily concentrated industry. In an arrangement with multiple deliverables, such as installation and services, the delivered items are considered a separate unit of accounting if all of the following criteria are met: (i) the delivered items have value to the customer on a stand-alone basis, (ii) vendor objective evidence (VOE) of fair value exists, which is based on the average price charged when each element is sold separately, for the undelivered elements, and (iii) if the arrangement does not include a general right of return relative to a delivered item, or if performance of the undelivered item is considered probable and substantially in the control of the Company. If we cannot objectively determine the fair value of any undelivered element included in a multiple element arrangement, we defer revenue until all elements are delivered and/or the service has been performed, or until fair value can be objectively determined for any remaining undelivered elements. Where we sell to distributors, revenue is deferred until resale to the end-customers. Sales to distributors do not represent a material amount of our sales. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

Inventory valuation: Inventories are stated at lower of cost or market (estimated net realizable value) using the FIFO method. We periodically review the carrying value of inventories and non-cancelable purchase commitments, including inventories at Flextronics, by reviewing sales forecasts, material usage requirements, and by reviewing the impact of changes in technology on our products (including engineering design changes). These forecasts of changes in technology, future sales and pricing are estimates. We may record charges to write down inventories based on these reviews and forecasts. If there is weak demand in the semiconductor equipment markets and orders fall below our forecasts, additional write downs of inventories may be required which will negatively impact gross margins. Inventory impairment charges are considered to permanently establish a new cost basis for inventory and are not subsequently reversed to income even if circumstances later suggest that increased carrying amounts are recoverable, except when the associated inventory is disposed of or sold. Inventory purchase commitments considered excess or losses on purchase commitments above market prices are accrued in the period in which such determinations are made.

Warranty: We generally warrant our products for a period of thirteen months from the date of shipment and we accrue a liability for the estimated cost of warranty. For our established products, this accrual is based on historical experience; and for our newer products, this accrual is based on estimates from similar products. In addition, from time to time, specific warranty accruals are made for specific technical problems. If we experience unforeseen technical problems with our products in future periods to meet our product warranty requirements, revisions to our estimated cost of warranty may be required, and our gross margins will be negatively impacted. Estimates have historically approximated actual results.

Allowance for doubtful accounts: We closely monitor the collection of our accounts receivable and record a general allowance based on the age of the receivables and a specific reserve for identified amounts that we believe are not recoverable. We sell primarily to large, well-established semiconductor manufacturers and semiconductor test companies and we have not experienced significant accounts receivable losses in the past. We have, however, from time to time experienced slowdowns in receivable collections, especially during semiconductor equipment down cycles, as customers extend their payment schedules to conserve their cash balances. If our customers continue to experience down cycles or if their financial conditions deteriorate, we may be required to increase our allowance for doubtful accounts. If a customer demonstrates a pattern of renegotiating terms or requesting concessions prior to payment, we would defer revenue until the price was considered fixed and determinable. Estimates have historically approximated actual results.

Accounting for Income Taxes: We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”) effective June 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes.”

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax liability together with assessing temporary differences that may result in deferred tax assets. Management judgment is required in determining any valuation allowance recorded against our net deferred tax assets. We establish estimates for these allowances and reserves based on historical experience and other assumptions. It is our policy to accrue for tax exposures or to release tax reserves in the period in which the facts and circumstances arise that suggest that the valuation allowances or reserves should be modified. We will continue to record a full valuation allowance on domestic tax benefits until we can sustain an appropriate level of profitability. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities which might result in proposed assessments. Our estimate for the potential outcome for any uncertain tax issue is judgmental in nature. However, we believe we have adequately provided for any reasonable foreseeable outcome related to those matters. Our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire.

Long-lived assets: We evaluate the carrying value of long-lived assets, consisting primarily of equipment and leasehold improvements, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Charges related to asset impairments are recorded in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”).

Restructuring charges: We recognize a liability for restructuring costs at fair value only when the liability is incurred. The three main components of our restructuring charges are workforce reductions, consolidating facilities and asset impairments. Workforce-related charges are accrued when it is determined that a liability has been incurred, which is generally when individuals have been notified of their termination dates and expected severance payments. Plans to eliminate excess facilities result in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for elimination of excess facilities when we have vacated the premises. Asset impairments primarily consist of equipment and leasehold improvements associated with excess facilities being eliminated, and are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal. These estimates were derived using the guidance of Statement of Financial Accounting Standards No. 146 "Accounting for Exit or Disposal Activities" ("SFAS No. 146") and SFAS 144. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.

Stock based compensation expense: We estimate the value of employee stock based awards on the date of grant using the Black-Sholes model and amortize these costs on a straight-line basis over the requisite service periods of the awards. Under SFAS No. 123 (Revised 2004) “Share-Based Payment”, the determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables, such as:

Expected volatility – historical volatility of the Company’s stock price;

Expected term – historical data on employee exercises and post-vesting employment termination behavior;

Risk free interest rate – an implied yield currently based on United States Treasury rates;

Estimated forfeitures – historical option forfeitures over a given period; and

Dividend yield – historical rate of dividend payments.

RESULTS OF OPERATIONS

The components of our statements of operations, expressed as a percentage of net sales, are as follows:

	Three months ended						Nine months ended
(Unaudited)	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Net Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		130.4			74.7			90.1			71.2
Gross margin		(30.4	)		25.3			9.9			28.8
Operating expenses:
Engineering, research and development		75.5			20.4			32.1			20.4
Sales, general and administrative		107.5			29.2			47.8			32.1
Restructuring and impairment expense		3.2			1.3			3.5			1.8
Total operating expenses		186.1			50.9			83.4			54.3
Operating loss		(216.5	)		(25.6	)		(73.5	)		(25.5	)
Interest income		0.9			1.2			0.7			1.8
Gain on sale of investments		-			-			-			1.1
Interest expense		(26.9	)		(5.2	)		(10.5	)		(5.5	)
Gain on mark to market financial instruments related to to convertible debt		-			-			-			0.2
Other expense, net		(8.4	)		(1.8	)		(3.5	)		(1.5	)
Loss before income taxes		(250.9	)		(31.4	)		(86.7	)		(29.4	)
Provision (benefit) for income taxes		(46.0	)		1.1			(5.9	)		1.6
Net loss		(204.9	) %		(32.5	) %		(80.9	) %		(31.0	) %

Net Sales

Net sales consist of systems and software and aftermarket products and services, which consist primarily of services, spare parts, and upgrades. Service revenue, included in aftermarket prober products and services revenue, was 27% and 16% of net sales for the three and nine month periods ended February 28, 2009, and 10% and 10% of net sales for the three and nine months ended March 1, 2008. Net sales of our products are as follows:

	Three months ended								Nine months ended
In thousands (unaudited)	February 28, 2009				March 1, 2008				February 28, 2009				March 1, 2008
Systems and software	$	510	23	%	$	6,980	60	%	$	9,300	55	%	$	20,295	61	%
Aftermarket products & services		1,709	77	%		4,573	40	%		7,673	45	%		13,130	39	%
	$	2,219	100	%	$	11,553	100	%	$	16,973	100	%	$	33,425	100	%

For the three and nine month periods ended February 28, 2009 as compared to the same periods in the prior year, net sales decreased 81% and 49%, respectively, due to reduced overall sales levels due primarily to the current weak semiconductor equipment environment.

The demand for our products follows the semiconductor test markets, which remain highly cyclical and difficult to forecast. As a result of uncertainties in this market environment, any rescheduling or cancellation of planned capital purchases by our customers will cause our sales to fluctuate. Additionally, the customer evaluation process for our 300mm products can be lengthy and can consume significant Company resources. Our future sales will be impacted by our ability to successfully complete these product evaluations.

Gross Margin

	Three months ended						Nine months ended
In thousands (unaudited)	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
Gross margin	$	(674	)	$	2,918		$	1,676		$	9,612
Gross margin as a % of net sales		-30.4	%		25.3	%		9.9	%		28.8	%

The decrease in gross margins for the third quarter in fiscal 2009 compared to the prior year was primarily due to reduced sales levels coupled with unabsorbed fixed costs. Gross margins decreased due to significantly decreased sales volumes in systems ($3.2 million) and aftermarket revenues ($1.4 million), offset somewhat by reduced period costs and indirect overhead costs ($1.0 million). The decrease in gross margins for the first nine months in fiscal 2009 compared to the prior year was primarily due to a lower volume of sales across all product lines ($8.5 million), offset by reduced net variances and period costs ($0.6 million). As a percentage of sales, gross margins decreased in all comparison periods primarily due a larger percentage decrease in net sales as compared to decreases in fixed overhead manufacturing and other period costs.

We believe that our gross margins will continue to be affected by a number of factors, including competitive pressures, changes in demand for semiconductors, product mix, our ability to adequately execute product cost reduction programs, our share of the available market, excess manufacturing capacity costs, and fluctuations in warranty costs. Continued weak demand and changes in market conditions may cause orders to be below forecasts, which may result in additional excess inventory, which would cause write-downs of inventories and would negatively impact gross margin in future periods.

Engineering, Research and Development (ER&D)

	Three months ended						Nine months ended
In thousands (unaudited)	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
ER&D	$	1,675		$	2,355		$	5,445		$	6,814
ER&D as a % of net sales		75.5	%		20.4	%		32.1	%		20.4	%

The reduction of engineering, research and development expenses for the third quarter in fiscal 2009 compared to the prior year was primarily due to reduced payroll and related benefits due to a reduction in headcount. The reduction for the first nine months in fiscal 2009 compared to the prior year was primarily due to reduced payroll and related benefits due to a reduction in headcount. As a percentage of net sales for both periods, ER&D expenses increased as a result of a larger percentage decrease in net sales as compared to the decreases in spending. We expect this trend will continue in the near term.

During these hard to predict cyclical semiconductor equipment demand cycles, we intend to control discretionary expenses and continue investing in selective new product development programs. ER&D expenses consist primarily of salaries, project materials, consultant fees, and other costs associated with our ongoing efforts in hardware and software product development and enhancement.

Sales, General and Administrative (SG&A)

	Three months ended						Nine months ended
In thousands (unaudited)	February 28, 2009			March 1, 2008			February 28, 2009			March 1, 2008
SG&A	$	2,385		$	3,372		$	8,119		$	10,711
SG&A as a % of net sales		107.5	%		29.2	%		47.8	%		32.1	%

The decrease in sales, general and administrative expenses for the three month period ended February 28, 2009 over the previous year quarter was primarily due to decreased personnel costs, sales incentives and related expenses due to lower headcount ($0.5 million), reduced product evaluation costs ($0.2 million), and reduced discretionary spending such as legal, travel, postage and facility costs ($0.4 million). The decrease for the nine month period ended February 28, 2009 over the previous year nine month period was primarily due to decreased personnel costs and related expenses due to lower headcount ($0.6 million), reduced product evaluation costs ($0.7 million), and reduced discretionary spending such as legal, travel, tradeshow, postage, and facility costs ($1.3 million). SG&A expenses consist principally of employee salaries, benefits, travel and sales incentives, promotional expenses, facilities expenses, legal expenses, and other infrastructure costs. SG&A expenses increased as a percentage of net sales for the three and nine months periods primarily due to larger decreases in net sales versus declines in spending. We expect this trend will continue in the near term.

Interest Income

	Three months ended				Six months ended
In thousands (unaudited)	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Interest income	$	20	$	143	$	122	$	589

The decrease in interest income for the three and nine month periods ended February 28, 2009 over the previous year periods was primarily due to lower average invested cash balances.

Gain on Sale of Investments

	Three months ended				Nine months ended
In thousands (unaudited)	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Gain on sale of investments	$	-	$	-	$	-	$	362

This gain in the period ended December 1, 2007 resulted from the sale of marketable securities received as part of the demutualization of the Company’s life and disability insurance carrier in prior years. The Company had previously not recorded these securities and liquidated them during the quarter. The effect on prior years was determined by management to not be material.

Interest Expense

	Three months ended				Nine months ended
In thousands (unaudited)	February 28, 2009		March 1, 2008		February 28, 2009		March 1, 2008
Interest expense	$	596	$	604	$	1,780	$	1,844

Each quarter’s interest expense of $0.6 million is comprised of, 6.25% of the face amount of the bonds ($0.4 million) and amortization of the prepaid bond issuance costs ($0.2 million). In the first quarter of fiscal 2008, interest expense also included 15 days of interest on the 5.25% notes which were paid off on the maturity date of June 15, 2007.

Provision for Income Taxes

	Three months ended					Nine months ended
In thousands (unaudited)	February 28, 2009			March 1, 2008		February 28, 2009			March 1, 2008
Provision (benefit) for income tax	$	(1,020	)	$	124	$	(995	)	$	548

The income tax provision for the three months and nine months ended February 28, 2009 is primarily related to a refund of $1.0 million related to 2003 and prior French business taxes paid by the Company which had been previously written down, offset primarily by accrued taxes for our Asian subsidiaries. The income tax provision for the three months and nine months ended March 1, 2008 is primarily related to accrued Singapore taxes related to moving from a five year tax exempt period to a three year tax exempt period. During the first quarter fiscal 2008, the Company accrued $0.3 million to reflect the tax amounts owed as part of this negotiated settlement related to this change in exemption period. We will continue to accrue for income tax exposures or to release such reserves in the period in which facts and circumstances arise that suggest that the valuation allowances or reserves should be adjusted. We will continue to record a full valuation allowance on domestic tax benefits until we can sustain an appropriate level of profitability.

Liquidity and Capital Resources

Operating activities: Cash used in operating activities was $11.8 million and $3.5 million during the nine months ended February 28, 2009 and March 1, 2008, respectively. The primary use of cash was to fund operating losses. These operating losses were adjusted primarily by certain non-cash operating expenses including depreciation, amortization, provision for inventory write-downs, and stock compensation expense pursuant to SFAS No. 123R. Additionally, changes in the Company’s net assets and liabilities used approximately $1.0 million. The Company’s net assets and liabilities used approximately ($1.8) million and $1.0 million during the nine months ended February 28, 2009, and March 1, 2008, respectively.

Financing and investing activities: During the nine months ended February 28, 2009, cash of $0.6 million was provided by financing activities consisting of $0.5 million of net borrowings on the Company’s bank line of credit and $0.1 million provided from stock option exercises and ESPP purchases. During the nine months ended February 28, 2009, Cash of $275,000 was used for a long term investment in Prefixa, Inc. (“Prefixa”) and $0.1 was used for capital expenditures. During the nine months ended March 1, 2008, cash of $8.5 million was used to pay off the Company’s 5.25% convertible notes when they matured, and $0.2 million was used for capital expenditures.

Liquidity: Our principal source of liquidity as of February 28, 2009 consisted of $5.0 million of cash and cash equivalents. As of February 28, 2009, we had net working capital of $10.6 million. The demand for our products follows the semiconductor test market which is experiencing a significant economic downturn. As a result, we continue to experience declining revenues. Our total revenues were $8.4 million, $6.4 million and $2.2 million for the fiscal quarters ended August 30, 2008, November 29, 2008 and February 28, 2009, respectively, and operating losses were $3.8 million, $3.9 million and $4.8 million for the same periods, respectively. Our cash used in operating activities was $5.2, million, $2.3 million and $4.3 million, respectively, during the fiscal quarters ended August 30, 2008, November 29, 2008 and February 28, 2009. As of March 28, 2009 we had approximately $3.4 million cash available to continue funding our operating losses. Our ability to continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing expenses. There can be no assurance that our cash utilization will remain at or be reduced below its current level. If our revenues do not improve significantly, and we are unable to secure additional funds, we will not have sufficient capital to continue our operations for the next 3 months. We cannot assure you that additional financing will be available on terms favorable to us, or at all.

In December 2008, the Company renewed and amended its revolving line of credit with Comerica Bank. Under these agreements, the Company may borrow up to $7.5 million based partially on eligible accounts receivable balances. This bank line, which has a maturity date of August 31, 2010, is collateralized by substantially all of the Company’s assets and requires that the Company maintain certain financial covenants. Pursuant to this amendment, the Company maintains cash deposits of $3.5 million that will be considered restricted as compensating balances to the extent the Company borrows against this bank line.

As of February 28, 2009, the Company had approximately $1.3 million of available borrowing capacity, net of the $3.5 million restricted compensating balance, and had net borrowings of $0.5 million outstanding on the line. There were no borrowings outstanding as of May 31, 2008.

On March 5, 2009, the Company amended its line of credit with its bank. This amendment reduced the previous $3.5 million cash collateralization to $0.4 million which is required to cover certain outstanding letters of credit and the Company’s corporate credit card account. Pursuant to this amendment, the Company repaid the $0.5 million outstanding on its line on March 17, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

At February 28, 2009, our cash equivalents consisted primarily of fixed income securities. We maintain an investment policy, which ensures the safety and the preservation of our invested funds by limiting default risk, market risk and reinvestment risk. The portfolio includes only marketable securities with active secondary or resale markets. These securities are subject to interest rate risk and may decline in value when interest rates change. If a 100 basis point change occurred in the value of our portfolio, the impact on our consolidated financial statements would be approximately $0.1 million. For financial market risks related to changes in foreign currency exchange rates, refer to Part II: Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended May 31, 2008.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures: As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) or “disclosure controls.” This controls evaluation was performed under the supervision and with the participation of management, including our President and Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO. Based upon the controls evaluation, our CEO and CFO have concluded that, as a result of the matters discussed below with respect to our internal control over financial reporting our disclosure controls as of February 28, 2009 were not effective.

In light of this determination and as part of the work undertaken in connection with this report, we have applied compensating procedures and processes as necessary to ensure the reliability of our financial reporting. Accordingly, management believes, based on its knowledge, that (i) 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 they were made, not misleading with respect to the period covered by this report and (ii) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.

Material Weaknesses Reported for the Year ended May 31, 2008: As previously reported in our Annual Report on Form 10-K for the year ended May 31, 2008 filed with the SEC on August 13, 2008, material weaknesses related to controls surrounding revenue recognition and inventory reserves. More specifically, appropriate evidence documenting persuasive evidence of an arrangement was lacking resulting in year-end audit adjustments to reverse revenue. Also, inventory reserves were incorrectly adjusted in a manner which was not consistent with the Company’s policies or in accordance with generally accepted accounting principles. Based on the results of this controls evaluation, our management has concluded as a result of the material weaknesses in our controls surrounding revenue recognition and inventory reserves that the Company’s disclosure controls and procedures were not effective as of May 31, 2008, the end of the period covered by the Form 10−K. We are in the process of remediating these material weaknesses by: improving training of our sales force and accounting personnel on our revenue and inventory reserve policies and procedures, ensuring that appropriate evidence of an arrangement exists for revenue transactions, reviewing shipping terms to ensure proper revenue recognition under current arrangements, and adding controls around changes in shipping terms from other than EXWorks which is the standard commercial shipping terms used by the Company. We believe that the corrective steps taken above will sufficiently mitigate the material weaknesses.

Changes Internal Control over Financial Reporting: There were no changes in our internal controls over financial reporting during the quarter ended February 28, 2009 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently involved in any legal actions that we believe are material. From time to time, however, we may be subject to various claims and lawsuits by customers, suppliers, competitors, and employees arising in the normal course of business, including suits charging infringement or violations of antitrust laws. Such suits may seek substantial damages and, in certain instances, any damages awarded could be trebled.

ITEM 1A. RISK FACTORS

If our revenues continue to decline and additional capital is unavailable, we may not have sufficient capital to continue our operations for the next 12 months. The demand for our products follows the semiconductor test market which is experiencing a continued significant economic downturn. As a result, we are experiencing declining revenues. Our total revenues were $8.4 million, $6.4 million and $2.2 million for the fiscal quarters ended August 30, 2008, November 29, 2008 and February 28, 2009, respectively, and operating losses were $3.8 million, $3.9 million and $4.8 million for the same periods, respectively. Our cash used in operating activities was $5.2, million, $2.3 million and $4.3 million, respectively, during the fiscal quarters ended August 30, 2008, November 29, 2008 and February 28, 2009. Our ability to continue as a going concern is dependent upon our generating cash flow sufficient to fund operations and reducing expenses. As of March 29, 2009, we had approximately $3.4 million cash available to continue funding our operating losses. There can be no assurance that our cash utilization will remain at or be reduced below its current level. If our revenues do not improve significantly, and we are unable to secure additional funds, we may not have sufficient capital to continue our operations for the next 3 months. We cannot assure you that additional financing will be available on terms favorable to us, or at all.

We have incurred substantial indebtedness as a result of the sale of convertible Notes. As of May 31, 2007 the Company had $8.5 million of 5.25% Notes which became due on June 15, 2007. In March 2007, the Company completed a $25.75 million private placement of 6.25% Notes. The Company used part of the 6.25% Notes proceeds to repay in June 2007 the $8.5 million of 5.25% Notes which matured. These 6.25% Notes are due in 2027; however, the holders have the right in March 2011 and on various other dates prior to maturity to demand repayment in full. Additionally, one of the covenants of our debenture agreement with respect to the 6.25% Notes can be interpreted such that if we are late with any of our required filings under the Securities Act of 1934, as amended (“1934 Act”), and if we fail to effect a cure within 60 days, the holders of the 6.25% Notes can put the 6.25% Notes back to the Company, whereby the 6.25% Notes become immediately due and payable. As a result of our restructuring efforts, the Company has fewer employees to perform the day-to-day controls, processes and activities which increases the risk that we will be unable to make timely filings in accordance with the 1934 Act. These 6.25% Notes could materially and adversely affect our ability to obtain additional debt financing for working capital, acquisitions or other purposes, limit our flexibility in planning for or reacting to changes in our business, reduce funds available for use in our operations and could make us more vulnerable to industry downturns and competitive pressures. We expect holders of the 6.25% Notes to convert their notes or require us to purchase our outstanding 6.25% Notes in March 2011, the earliest date allowed by the terms of the 6.25% Notes. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, some of which are beyond our control.

Semiconductor industry downturns adversely affect our revenues and operating results. Our business largely depends on capital expenditures by semiconductor manufacturers and semiconductor test companies, which in turn depend on the current and anticipated market demand for integrated circuits and products that use integrated circuits. The semiconductor industry is highly cyclical and has historically experienced periods of oversupply resulting in significantly reduced demand for capital equipment. During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions. Our ability to reduce expenses may be limited by our need to invest in the engineering, research and development and marketing required to penetrate targeted markets and maintain customer service and support. During periods of rapid growth, we must be able to rapidly increase our outsourcing manufacturing capacity and other personnel to meet customer demand. We cannot assure our investors that these objectives can be met, which would likely have a material and adverse effect on our business and operating results.

Our operating results are subject to variability and uncertainty, which could negatively impact our stock price. We have experienced and expect to continue to experience significant fluctuations in our results. Our backlog at the beginning of each period does not necessarily determine actual sales for any succeeding period. Our sales have often reflected orders shipped in the same period that they were received. Customers may cancel or reschedule shipments, and production difficulties could delay shipments. For the nine months ended February 28, 2009, and the years ended May 31, 2008, 2007 and 2006 five of our customers accounted for 63%, 51%, 42%, and 51%, respectively, of our net sales. If one or more of our major customers delayed, ceased or significantly curtailed its purchases, it could cause our quarterly results to fluctuate and would likely have a material adverse effect on our results of operations. Other factors that may influence our operating results in a particular quarter include the timing of the receipt of orders from major customers, product mix, competitive pricing pressures, the relative proportions of domestic and international sales, our ability to design, manufacture and introduce new products on a cost-effective and timely basis, the delay between expenses to further develop marketing and service capabilities and the realization of benefits from those improved capabilities, and the introduction of new products by our competitors. Accordingly, our results of operations are subject to significant variability and uncertainty from quarter to quarter, which could adversely affect our stock price.

If we do not continue to develop and successfully market our existing products and new products, our business will be negatively affected. We believe that our future success will depend in part upon our ability to continue to enhance existing products and to develop and manufacture new products. As a result, we expect to continue investing in selective new development programs. There can be no assurance that we will be successful in the introduction, marketing and cost effective manufacture of any of our new products; that we will be able to develop and introduce new products in a timely manner; enhance our existing products and processes to satisfy customer needs or achieve market acceptance; or that the new markets for which we are developing new products or expect to sell current products will develop sufficiently. To develop new products successfully, we depend on close relationships with our customers and the willingness of those customers to share information with us. The failure to develop products and introduce them successfully and in a timely manner could adversely affect our competitive position and results of operations. Additionally, the customer evaluation process for our new 300mm products can be lengthy and can consume significant Company resources. Our future sales will be impacted by our ability to successfully complete these new product evaluations. Further, we have begun to market our existing technologies to other industries. However, there can be no assurance that we will be successful in these efforts, or that our efforts will result in a significant increase in revenues.

If we do not successfully compete in the markets in which we do business, our business and results of operations will be negatively affected. Our major competitors in the prober market are Tokyo Electron Limited (“TEL”) and Tokyo Seimitsu (“TSK”), both of which are based in Japan. In the prober market, these competitors have greater financial, engineering and manufacturing resources than we do as well as larger service organizations and long-standing customer relationships. Our competitors can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price/performance characteristics. Competitive pressures may force price reductions that could adversely affect our operating results. Although we believe we have certain technological and other advantages over our competitors, maintaining and capitalizing on these advantages will require us to continue a high level of investment in engineering, research and development, marketing, and customer service. We cannot assure you that we will have sufficient resources to continue to make these investments or that we will be able to make the technological advances necessary to maintain such competitive advantages.

If we do not successfully protect our intellectual property, our business could be negatively impacted. Our success depends in significant part on our intellectual property. While we attempt to protect our intellectual property through patents, copyrights and trade secrets, we believe that our success will depend more upon innovation, technological expertise and distribution strength. There can be no assurance that we will successfully protect our technology or that competitors will not be able to develop similar technology. No assurance can be given that the claims allowed on any patents we hold will be sufficiently broad to protect our technology. In addition, we cannot assure you that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide us with competitive advantages.

Our dependence on contract manufacturers and sole source suppliers may prevent us from delivering our products on time, may damage our customer relations, and may harm our business. On September 18, 2007, we signed a five year Manufacturing Services Agreement (“Agreement”) with Flextronics Industrial Ltd. to outsource our Singapore manufacturing to China. This agreement requires us to submit rolling unit forecasts, allows us to reschedule and modify the forecasts within certain period guidelines, and in certain circumstances allows us to share the benefits of cost reduction projects. We believe through outsourcing our manufacturing we can achieve cost efficiencies, volume flexibility, and better lead times. We cannot assure you that we will not experience short term manufacturing challenges such as delays in shipping or that we will achieve the expected cost efficiencies and volume flexibility. Further, reliance on a single third-party manufacturer exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality and high costs. We cannot be certain that existing or future contract manufacturers will be able to manufacture our products on a timely and cost-effective basis, or to our quality and performance specifications. Should our contract manufacturer be unable to meet our manufacturing requirements in a timely manner, whether as a result of transitional issues or otherwise, our ability to ship orders and to realize the related revenues when anticipated could be materially impacted.

We also use numerous suppliers to supply components and subassemblies for the manufacture and support of our products and systems. While we make reasonable efforts to ensure that such components and subassemblies are available from multiple suppliers, this is not always possible. Although we seek to reduce our dependence on these limited source suppliers, disruption or termination of certain of these sources could occur and such disruptions could have at least a temporary adverse effect on our results of operations and damage our customer relationships. Moreover, a prolonged inability to obtain certain components, or a significant increase in the price of one or more of these components, could have a material adverse effect on our business, financial condition and results of operations.

As part of our Agreement with Flextronics, Flextronics accepts purchase orders and forecasts from the Company which constitute authorization for Flextronics to procure inventory based on lead times and to procure certain special inventory such as long lead-time items. The Company does not take ownership of these Flextronics orders until the finished products are ready to be shipped on behalf of the Company. Under the agreement with Flextronics, the Company may be liable for inventory held by Flextronics to the extent it has placed an accepted purchase order or forecast. Flextronics open commitments and inventory on hand at February 28, 2009, based on the Company’s forecasts, were valued at $12.7 million. If the Flextronics inventory goes unused, the Company may be assessed carrying charges or obsolete charges which could have a negative impact on our results of operations.

If we do not successfully address the challenges inherent in conducting international sales and operations, our business and results of operations will be negatively impacted. We have experienced fluctuations in our international sales and operations. International sales accounted for 63%, 55% and 56% of our net sales for the nine months ended February 28, 2009, and the years ended May 31, 2008 and 2007, respectively. We expect international sales to continue to represent a significant percentage of net sales. We are subject to certain risks inherent in doing business in international markets, one or more of which could adversely affect our international sales and operations, including:

• the imposition of government controls on our business and/or business partners;

• fluctuations in the United States dollar, which could increase our foreign sales prices in local currencies;

• export license requirements;

• restrictions on the export of technology;

• changes in tariffs;

• legal and cultural differences in the conduct of business;

• difficulties in staffing and managing international operations;

• strikes;

• longer payment cycles;

• difficulties in collecting accounts receivable in foreign countries;

• withholding taxes that limit the repatriation of earnings;

• trade barriers and restrictions;

• immigration regulations that limit our ability to deploy employees;

• political instability;

• war and acts of terrorism;

• natural disasters; and

• variations in effective income tax rates among countries where we conduct business.

Although these and similar regulatory, geopolitical and global economic factors have not yet had a material adverse effect on our operations, there can be no assurance that such factors will not adversely impact our operations in the future or require us to modify our current business practices. In addition, the laws of certain foreign countries where we do business may not protect our intellectual property rights to the same extent as do the laws of the United States. Further, we have found it difficult to penetrate the large Japanese market, which represents a significant percentage of the worldwide wafer prober market. Our past sales in Japan have not been significant.

In addition, an increasing portion of our products and the products we purchase from our suppliers are sourced or manufactured in foreign locations, including Singapore and China, and a large portion of the devices our products test are fabricated and tested by foundries and subcontractors in Taiwan, Singapore, China and other parts of Asia. As a result, we are subject to a number of economic and other risks, particularly during times of political or financial instability in these regions. Disruption of manufacturing or supply sources in these international locations could have a material adverse impact on our ability to fill customer orders and potentially result in lost business.

Our business will be harmed if we cannot hire and retain key personnel. Our future success partly depends on our ability to hire and retain key personnel. We also need to attract additional skilled personnel in all areas to grow our business. While many of our current employees have many years of service with us, there can be no assurance that we will be able to retain our existing personnel or attract additional qualified employees in the future. We deem stock options to be an important part of our employees’ compensation. With our Common Stock trading at a price below the exercise price of most of our outstanding stock options, this may impact our ability to hire and retain key personnel.

Our outsource providers and distributors may fail to perform as we expect. Outsource providers have played and will play key roles in our manufacturing operations and in many of our transactional and administrative functions, such as information technology, facilities management, and certain elements of our finance organization. Also, we rely on distributors in certain geographies to sell our products. Although we aim at selecting reputable providers and secure their performance on terms documented in written contracts, it is possible that one or more of these providers could fail to perform as we expect and such failure could have an adverse impact on our business. In addition, the expansive role of outsource providers has required and will continue to require us to implement changes to our existing operations and to adopt new procedures to deal with and manage the performance of the outsource providers. Any delay or failure in the implementation of our operational changes and new procedures could adversely affect our customer relationships and/or have a negative effect on our operating results.

Material weaknesses or deficiencies in our internal control over financial reporting could harm stockholder and business confidence in our financial reporting. Maintaining an effective system of internal control over financial reporting is necessary for us to provide reliable financial reports. Further, Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the effectiveness of our internal control structure and procedures for financial reporting each year. As described in Item 9A(T) — Controls and Procedures of the Form 10-K for the year ended May 31, 2008, management, under the supervision of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), conducted an evaluation of disclosure our controls and procedures and internal control over financial reporting. Based on those evaluations, the CEO and CFO identified material weaknesses in internal control over financial reporting related to revenue recognition and inventory reserves. More specifically, appropriate evidence documenting persuasive evidence of an arrangement was lacking resulting in year-end audit adjustments to reverse revenue and inventory reserves were incorrectly adjusted in a manner which was not consistent with the Company’s policies or in accordance with generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of these material weaknesses in revenue recognition procedures and inventory reserves, our management concluded that our disclosure controls and procedures and internal control over financial reporting were not effective as of May 31, 2008. The Company is remediating these material weaknesses by: improving training of our sales force and accounting personnel on our revenue and inventory reserve policies and procedures, ensuring that appropriate evidence of an arrangement exists for revenue transactions, reviewing shipping terms to ensure proper revenue recognition under current arrangements, and adding controls around changes in shipping terms from other than EXWorks which is the standard commercial shipping terms used by the Company. We cannot assure you however that the measures we have taken will remediate these material weaknesses identified or that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal controls over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the Commission.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5. OTHER INFORMATION

Changes to Procedures for Security Holder Recommendations

There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors since the time of our last required disclosure.

ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q

a. Exhibits.

Exhibit Number

Incorporated by Reference

Filed

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

3.1

Certificate of Incorporation of Electroglas, Inc., as amended.

33-61528

6/23/1993

3.2

By-laws of Electroglas, Inc., as amended.

33-61528

6/23/1993

3.3

Certificate of Designation for Electroglas, Inc.

10K

3.3

3/30/1998

4.1

Indenture, dated as of March 26, 2007, by and among Electroglas, Inc., Electroglas International, Inc., and The Bank of New York, as trustee.

8-K

4.1

3/27/2007

4.2

Form of 6.25% Convertible Senior Subordinated Secured Notes due 2027.

8-K

4.2

3/27/2007

10.1

Amendment No. 5 to Loan and Security Agreement dated as of January 22, 2007, by and between Electroglas, Inc. and Comerica Bank.

8-K

10.1

1/24/2007

10.2

Securities Purchase Agreement, dated as of March 21, 2007, by and among Electroglas, Inc., Piper Jaffray & Co. and the buyers of the 6.25% Notes.

8-K

10.2

3/27/2007

10.3

Registration Rights Agreement, dated as of March 21, 2007, by and between Electroglas, Inc. and the buyers of the 6.25% Notes.

8-K

10.3

3/27/2007

10.4

Security Agreement, dated as of March 26, 2007, by and among Electroglas, Inc., Electroglas International, Inc. and The Bank of New York, as collateral agent.

8-K

10.4

3/27/2007

10.5

Intercreditor Agreement, dated as of March 26, 2007, by and among Electroglas, Inc., Electroglas International, Inc., Comerica Bank, and The Bank of New York.

8-K

10.5

3/27/2007

10.6

Amendment No. 6 to Loan and Security Agreement dated as of March 26, 2007, by and between Electroglas, Inc. and Comerica Bank.

10-Q

10.6

4/6/2007

10.7

Flextronics Manufacturing Services Agreement (Portions of the Exhibit 10.7 have been omitted pursuant to a request for confidential treatment.)

10-Q

10.7

10/9/2007

10.8

PAT Tool Program Memorandum of Understanding (Portions of the Exhibit 10.8 have been omitted pursuant to a request for confidential treatment.)

10-Q

10.8

10.9

Change of Control between Thomas M. Rohrs and Electroglas, Inc.

10-Q

10.9

10.10

Amendment No. 10 to Comerica Loan and Securities Agreement

10-Q

10.1

31.1

Certification of Warren C. Kocmond, Jr., Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.

31.2

Certification of Thomas E. Brunton, Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.

32.1

Certification of Warren C. Kocmond, Jr., Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification of Thomas E. Brunton, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ELECTROGLAS, INC.

DATE: April 7, 2009 BY: /s/ Thomas E. Brunton

Thomas E. Brunton

Chief Financial Officer, Principal Financial and Accounting Officer

ELECTROGLAS INC 10-Q