UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

For the transition period from                             to

Commission File Number 000-30637

AUGUST TECHNOLOGY CORPORATION

(Exact name of Registrant as specified in its charter)

(952) 820-0080

(Registrant’s telephone number, including area code)

N/A

(Former name, former address, and former fiscal year, if changed since last report.)

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 requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2).  Yes ý  No o

As of July 31, 2005, there were 18,122,976 shares of common stock outstanding.

AUGUST TECHNOLOGY CORPORATION

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

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AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

4

AUGUST TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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AUGUST TECHNOLOGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2005

(In thousands, except per share amounts)

(Unaudited)

Note 1 – Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations.  In the opinion of the management of August Technology Corporation (collectively with its subsidiaries, the “Company”), all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in the consolidated balance sheet at June 30, 2005, the consolidated statements of operations for the three and six months ended June 30, 2005 and 2004, and the consolidated statements of cash flows for the six months ended June 30, 2005 and 2004.  The statements of operations of the interim periods are not necessarily indicative of the results of operations that may be expected for any other period or for the year as a whole.  These consolidated financial statements and notes hereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on March 16, 2005.

The accompanying consolidated financial statements include the accounts of August Technology Corporation and its wholly owned subsidiaries.  All significant intercompany balances and transactions are eliminated in consolidation.

Management uses estimates and assumptions in preparing consolidated financial statements in accordance with accounting principles generally accepted in the United States of America.  Those estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported revenues and expenses during the reporting periods.  Actual results could differ from those estimates. 

Note 2 – Business Combinations

On January 21, 2005, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Nanometrics Merger Agreement”) with Nanometrics, Incorporated (“Nanometrics”), Major League Merger Corporation and Minor League Merger Corporation.  Under the terms of the Nanometrics Merger Agreement each share of the Company’s common stock was to be converted into the right to receive 0.6401 of a share of August Nanometrics common stock.  On June 27, 2005, the Company and Nanometrics terminated the Nanometrics Merger Agreement.  In accordance with the terms of the Nanometrics Merger Agreement, the Company paid Nanometrics a termination fee of $8,300, and reimbursed $2,600 of merger related expenses.

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On June 27, 2005, the Company entered into an Agreement and Plan of Merger (the “Rudolph Merger Agreement”) with Rudolph Technologies, Inc. (“Rudolph”) and NS Merger Sub, Inc.  Under the terms of the Rudolph Merger Agreement each of the Company’s shareholders will have the option to elect to receive either $10.50 per share in cash or 0.7625 of a share of Rudolph common stock, subject to proration and allocation, based on the total cash and shares available in the merger. The agreement requires that the total consideration for the transaction will include a minimum of $37,200 and a maximum of $60,000 of cash subject to shareholder election.  The aggregate consideration was approximately $193,000 as of June 27, 2005.

Note 3 – Stock-Based Compensation

The Company applies Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock-based compensation.  The exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant for all options granted, and thus, under APB 25, no compensation expense is recognized in the consolidated statements of operations.

The estimated per share weighted average fair value of all stock options granted during the three months ended June 30, 2005 and 2004 was $7.15 and $9.53, respectively, and for the six months ended June 30, 2005 and 2004 was $6.78 and $9.91, respectively.  The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:

Had the Company recorded compensation cost based on the estimated fair value on the date of grant, as defined by Statement of Financial Accounting Standards (“SFAS”) 123, “Accounting for Stock-Based Compensation,” the Company’s pro forma net income (loss) would have been as follows:

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On March 30, 2005, the board of directors authorized the Company to enter into an agreement to grant 175,000 nonqualified stock options to the Company’s President and Chief Operating Officer upon acceptance of the position.  The grant is not part of the Company’s 1997 Stock Incentive Plan, and was not approved by the Company’s shareholders.  The options were granted at fair market value on the date of grant, and vest ratably over five years from the date of grant.  In the event of a change in control, the board of directors may provide for the acceleration of vesting of the options.

Note 4 – Marketable Debt Securities

The amortized cost and estimated fair value of available-for-sale marketable debt securities were as follows:

The maturities of available-for-sale marketable debt securities were as follows:

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Net realized gains and losses were not material for the six months ended June 30, 2005 and 2004.

Note 5 – Accounts Receivable

Accounts receivable consisted of the following:

Note 6 – Inventories

Inventories consisted of the following:

Note 7 – Purchased Technology

Purchased technology was as follows:

Purchased technology increased $118 for the six months ended June 30, 2005 due to contingent consideration paid for the DMSVision acquisition discussed in Note 8 below.

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Amortization expense for the six months ended June 30, 2005 and 2004 was $724 and $174, respectively.  Assuming no additional change in the gross carrying value of purchased technology, the estimated amortization expense for the twelve months ending December 31, 2005 is $1,435 and for each of the next four years is $1,208, $800, $378 and none.

In December 2004, the Company purchased certain technology from Excelerate Technologies, Inc. (“Excelerate”).  The total consideration paid was $800, which included the forgiveness of a $500 convertible note receivable from Excelerate and $300 of cash, of which $150 was paid in January 2005.

Note 8 – Commitments and Contingencies

Warranties

The Company provides warranty coverage for its systems for a period of one year, including parts and labor necessary to repair the systems during the warranty period.  The estimated warranty cost is based on the Company’s historical experience rate of incurred expenses to corresponding system revenues.

The following table summarizes the activity related to the warranty liability during the six months ended June 30, 2005 and 2004:

Separation Agreements

In the second quarter of 2005, the Company entered into separation agreements with certain executives and other employees that resulted in an expense of $920, of which $29 was paid as of June 30, 2005.  The separation agreements require substantially all of the severance benefits to be paid by June 30, 2006.

Contingent Consideration

In connection with the July 27, 2004 acquisition of the DMSVision software division of Inspex, Inc (“DMSVision”), the Company is subject to a contingent consideration arrangement at June 30, 2005.  This arrangement is based upon new orders for DMSVision software licenses received in the twelve months after the acquisition.  The payment of the contingency results in an increase in the allocation of purchase price to purchased technology.  As a result, amortization expense related to this asset increases.  Amounts paid under this arrangement are not expected to have a material effect on the Company’s consolidated financial condition or results of operations.  The total contingent consideration the Company expects to pay related to the twelve months after the acquisition is $142, of which $24 and $118 was added to purchased technology in 2004 and 2005, respectively.  As of June 30, 2005, $90 remained unpaid.

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Legal Proceedings

From time to time in the ordinary course of business, the Company is subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations.  Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations.  Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings such as intellectual property and securities litigation, the results are difficult to predict at all.

The Company and each of its board of directors, Jeff O’Dell, James Bernards, Roger Gower, Michael Wright and Linda Hall Whitman, were named as defendants in two separate lawsuits that purported to be class action claims on behalf of the Company’s shareholders.  The Company received a summons and complaint with respect to the first of these proceedings on February 4, 2005 and the second on February 14, 2005.  Both lawsuits were brought in Minnesota State Court and claimed that the directors had breached their fiduciary duties to the Company’s shareholders in connection with their actions in agreeing to the proposed merger with Nanometrics Incorporated.  The plaintiffs in both actions sought various forms of injunctive relief including an order enjoining the Company and its board of directors from consummating the merger with Nanometrics.

The two proceedings were consolidated and heard as one case.  On April 19, 2005, the Court issued a 30 day stay of all proceedings.  On April 27, 2005, the plaintiffs scheduled a hearing on a motion to amend the complaint.  The hearing was scheduled for June 9, 2005.  On May 10, 2005 the Court issued an order dismissing the complaint for asserting derivative claims without complying with the rules governing derivative actions.  Thereafter the Court removed the hearing from the calendar.

On July 18, 2005, a purported shareholder class action lawsuit asserting derivative claims was filed in Minnesota state court against the Company and the individual members of the board named above as well as Lynn J. Davis, who joined the board on March 30, 2005 (the “Board”).  The lawsuit claims the directors have breached their fiduciary duties to the Company’s shareholders in connection with their actions in approving the merger agreement with Nanometrics, Inc. and subsequently terminating that merger agreement and entering into a new merger agreement with Rudolph Technologies, Inc.  The plaintiff seeks various forms of injunctive relief including an order enjoining the Company and the Board from consummating the proposed merger with Rudolph.

The plaintiff in the lawsuit filed on July 18, 2005 is Robert Etem, the owner of 4,200 shares of the Company’s common stock.  Mr. Etem was also a plaintiff in the lawsuit described above filed on February 14, 2005.

On July 14, 2005, the Company filed a patent infringement lawsuit against Camtek, Ltd. of Migdal Haemek, Israel.  The patent infringement lawsuit, filed in U.S. federal court in Minneapolis, alleges that Camtek’s line of inspection equipment sold under the “Falcon” trademark infringes on the Company’s U.S. patent no. 6,826,298.

Note 9 – Net Income (Loss) Per Share

The components of basic and diluted net income (loss) per share were as follows:

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The total weighted average number of stock options and warrants excluded from the calculation of potentially dilutive securities either due to the exercise price exceeding the average market price or the inclusion of such securities in a calculation of net income (loss) per share would have been anti-dilutive for the three months ended June 30, 2005 and 2004 were 2,106 and 330, respectively, and for the six months ended June 30, 2005 and 2004 were 2,053 and 218, respectively.

Note 10 – Accumulated Other Comprehensive Loss

The accumulated balances for each classification of accumulated other comprehensive loss are as follows:

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Note 11 – Shareholders’ Equity

Changes in shareholders’ equity during the six months ended June 30, 2005 were as follows:

In May 2005, the Company purchased 11,614 common shares from an executive officer for $120, which represented 90% of the market value on the date of purchase.  There are currently no plans to repurchase additional shares.

Shareholder Rights Plan

On June 27, 2005, the Board adopted a Shareholder Rights Plan to protect shareholders from coercive or otherwise unfair takeover tactics and to protect the interests of the Company’s shareholders.  Pursuant to the Rights Agreement relating to the Shareholder Rights Plan, the Board has declared a dividend of one preferred share purchase right (a “Right”) for each share of common stock outstanding at the close of business on June 27, 2005.  In general terms, the Rights Agreement works by imposing a significant penalty upon any person or group that acquires 10% or more of the Company’s outstanding common stock without the approval of the Board.  The Company does not believe the Rights Agreement will interfere with any merger or other business combination approved by the Board.

Each Right will allow its holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock for $27.00 once the Rights become exercisable.  The Rights will not be exercisable until fifteen days after the public announcement that a person or group has become an “Acquiring Person” by obtaining beneficial ownership of 10% or more of the Company’s outstanding common stock, or, if earlier, fifteen business days after a person or group begins a tender or exchange offer which, if completed, would result in that person or group becoming an Acquiring Person.  If a person or group becomes an Acquiring Person, all holders of Rights except the Acquiring Person, may, for $27.00 purchase shares of the Company’s common stock with a market value of $54.00, based on the market price of the common stock prior to such acquisition.  In addition, if the Company is later acquired in a merger or similar transaction after the Rights have become exercisable and a person or group is, or becomes, an Acquiring Person, all holders of Rights except the Acquiring Person may, for $27.00, purchase shares of the

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acquiring corporation with a market value of $54.00 based on the market price of the acquiring corporation’s stock, prior to such merger.  The Board may redeem the Rights for $.0005 per Right at any time before any person or group becomes an Acquiring Person.

Note 12 – Significant Customer, Product Line and Geographic Information

The percentage of net revenues derived from major customers was as follows:

*       Customer represented less than 10% of net revenues during the period.

The percentage of net revenues by major product line was as follows:

All of the Company’s tangible long-lived assets are located in the United States, except for an insignificant amount of property and equipment in Taiwan and South Korea.  The Company derives revenues from shipments to customers outside of the United States.  The percentage of net revenues by the geographic region in which the customer is located was as follows:

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Note 13 – Recent Accounting Pronouncements

In June 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections—a replacement of APB No. 20 and FAS No. 3.”  SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.  It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle.  SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable.  The correction of an error in previously issued financial statements is not an accounting change.  However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retrospectively.  Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by SFAS 154.  SFAS 154 is required to be adopted in fiscal years beginning after December 15, 2005.  Adoption of SFAS No. 154 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which is an interpretation of SFAS No. 143, “Accounting for Asset Retirement Obligations.”  The interpretation requires a liability for the fair value of a conditional asset retirement obligation be recognized if the fair value of the liability can be reasonably estimated.  The interpretation is effective no later than the end of fiscal years ending after December 15, 2005.  The interpretation is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment.”  SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance.  SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions.  SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant.  The cost will be recognized over the period during which an employee is required to provide services in exchange for the award.  The SEC issued guidance in April 2005 announcing that public companies will be required to adopt SFAS No. 123R by their first fiscal year beginning after June 15, 2005.  While the Company cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No. 123R, estimated compensation expense related to prior periods can be found in Note 3, “Stock-Based Compensation.”  The ultimate amount of increased compensation expense will be dependent on whether the Company adopts SFAS No. 123R using the modified prospective or retrospective method, the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors the Company is currently assessing.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4.”  SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and spoilage.  It also requires that allocation of fixed production overheads to inventory be based on the normal capacity of production facilities.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  Adoption of SFAS No. 151 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Factors That May Affect Future Results

Certain statements made in this Quarterly Report on Form 10-Q, as well as oral statements made by us from time to time, which are prefaced with words such as “expects,” “anticipates,” “believes,” “projects,” “intends,” “plans” and similar words and other statements of similar sense, are forward-looking statements.  Our forward-looking statements generally relate to our growth strategies, financial results, future financial projections, product development activities and sales efforts.  Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including but not limited to market acceptance of our products, our ability to successfully develop new products, our ability to protect our intellectual property, our dependence upon international customers and suppliers, our dependence on a small number of customers that account for a significant portion of revenues, availability of products from our suppliers, cyclicality in the microelectronic manufacturing equipment and other industries, management of growth, integration of acquired businesses, and the other risk factors detailed below and in our Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the SEC on March 16, 2005.  We disclaim any obligation to revise forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.  Because many factors are unforeseeable, the foregoing should not be considered an exhaustive list.

Introduction

The following discussion of our results of operations and financial condition should be read together with the other financial information and consolidated financial statements and related notes included in this Form 10-Q.  This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of a variety of factors.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We based these estimates and assumptions on historical experience and evaluate them on an on-going basis to help ensure they remain reasonable under current conditions.  Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the audit committee of our board of directors on a quarterly basis, and the audit committee has reviewed our critical accounting policies as described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004.  For the six months ended June 30, 2005, there were no changes to these critical accounting policies.

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Overview

We are a world-class provider of automated defect detection and product characterization systems for microelectronic device manufacturers.  Our systems provide manufacturers with information that enables process-enhancing decisions, ultimately lowering manufacturing costs and decreasing time-to-market.  We have traditionally provided systems to address the automated inspection needs of the early stages of the final manufacturing or back-end of the microelectronic device manufacturing process.  These needs were met primarily with our NSX Series and 3Di Series of products.  We have introduced the AXi Series and the E20 for edge and B20 for backside inspection systems (collectively, the “All Surface Inspection System”) for advanced macro defect detection primarily in the front-end of the wafer manufacturing process.  When used in conjunction with one another these systems allow a manufacturer to inspect the top, edge and back of a wafer’s surface.  We believe we are the first to offer all surface wafer inspection.  We continued to support front-end system demonstrations at many large semiconductor manufacturers during the quarter.  These demonstrations allow these customers to evaluate the benefits these systems provide.  We expect these demonstrations will lead to increased revenues six to nine months after shipment.

We complement this broad inspection capability with an expanding suite of software tools designed to enhance the speed and effectiveness of the process by which device manufacturers analyze defects, and make decisions regarding their manufacturing process to reduce or eliminate such defects.  We refer to this process as the “detection-to-decision” process.

Our business has been, and will continue to be, subject to the highly cyclical nature of the microelectronic device manufacturing markets we serve.  These cycles are caused by significant, and often rapid, fluctuations in the supply and demand of microelectronic devices driven by such factors as changes in technology and global economic conditions.  As a result of these fluctuations, and due to the fact that our quarterly revenues are comprised of systems with selling prices of between $150,000 and $1,000,000, a small change in the number of systems we sell may also cause significant changes in our operating results.  Because fluctuations in the timing of orders from our major customers or in the number of individual systems we sell could cause our revenues to fluctuate significantly in any given quarter or year, we do not believe that period-to-period comparisons of our financial results are necessarily meaningful, and they should not be relied upon as an indication of our future performance.  Additionally, the rate and timing of customer orders may vary significantly from month to month.  Accordingly, if sales of our products do not occur when we expect, and we are unable to adjust our estimates on a timely basis, our expenses and inventory levels may increase relative to revenues and total assets.

We have sold our systems to many of the leading microelectronic device manufacturers throughout the world.  Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue.  In the six months ended June 30, 2005 and 2004 sales to customers that individually represented at least ten percent of our revenues accounted for 18% and 25% of our net revenues, respectively.

Management focuses on several key financial metrics in evaluating our financial condition and operating performance.  Although we do not believe backlog is always an accurate indication of future revenues and performance, since only a portion of our revenues for any quarter include systems that were in backlog as of the beginning of that quarter, we do closely monitor the level of orders both geographically and by product line and in relation to the level of revenues, referred to as the book-to-bill ratio.  During the second quarter of 2005, our book-to-bill ratio was above parity.  A book-to-bill ratio above parity indicates an increasing level of backlog.  In addition to monitoring

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our level of orders and backlog, we focus on revenues by product family compared to prior-period and current-year plans, year-over-year revenue growth compared to the overall semiconductor equipment industry, operating profit or loss performance compared with prior-period and current-year plans and the level of operating cash flow.

Merger Activities

On January 21, 2005, we entered into an Agreement and Plan of Merger and Reorganization (the “Nanometrics Merger Agreement”) with Nanometrics, Incorporated (“Nanometrics”), Major League Merger Corporation and Minor League Merger Corporation.  Under the terms of the Nanometrics Merger Agreement each share of our common stock was to be converted into the right to receive 0.6401 of a share of August Nanometrics common stock.  On June 27, 2005, we and Nanometrics terminated the Nanometrics Merger Agreement.  In accordance with the terms of the Nanometrics Merger Agreement, we paid Nanometrics a termination fee of $8,300, and reimbursed $2,600 of merger related expenses.

On June 27, 2005, we entered into an Agreement and Plan of Merger (the “Rudolph Merger Agreement”) with Rudolph Technologies, Inc. (“Rudolph”) and NS Merger Sub, Inc.  Under the terms of the Rudolph Merger Agreement each of our shareholders will have the option to elect to receive either $10.50 per share in cash or 0.7625 of a share of Rudolph common stock, subject to proration and allocation, based on the total cash and shares available in the merger.  The agreement requires that the total consideration for the transaction will include a minimum of $37,200 and a maximum of $60,000 of cash subject to shareholder election.  The aggregate consideration was approximately $193,000 as of June 27, 2005.

On February 9, 2005, we received a letter from Kenneth Schroeder, President and Chief Executive Officer of KLA-Tencor Corporation (“KLA”), regarding KLA’s interest in pursuing a merger with us.  The letter stated that KLA proposed to acquire us in a transaction in which our shareholders would receive $11.50 per share.  KLA also stated that it would be willing to consider using stock as consideration.  Since the February 9 letter, KLA has made various public statements and additional communications to us (including a press release issued on July 13, 2005) stating that KLA continues to be interested in acquiring August Technology.  As of the date of this filing, KLA has been unwilling to execute a confidentiality agreement in a form acceptable to us and we have had no discussions with KLA regarding their proposal.

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Results of Operations