Edgar Filing: COHERENT INC

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 28, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33962

COHERENT, INC.

Delaware		94-1622541
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

5100 Patrick Henry Drive, Santa Clara, California 95054
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (408) 764-4000

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 x No o

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

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
(do not check if a smaller reporting company)

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

The number of shares outstanding of registrant’s common stock, par value $.01 per share, on July 31, 2008 was 23,729,545 shares

Table of Contents

COHERENT, INC.

INDEX

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Operations Three and nine months ended June 28, 2008 and June 30, 2007	4

	Condensed Consolidated Balance Sheets June 28, 2008 and September 29, 2007	5

	Condensed Consolidated Statements of Cash Flows Nine months ended June 28, 2008 and June 30, 2007	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

Part II.	Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults upon Senior Securities	47

Item 4.	Submission of Matters to a Vote of Security Holders	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

Signatures		49

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in or incorporated by reference in this quarterly report, other than statements of historical fact, are forward-looking statements. These statements are generally accompanied by words such as “trend,” “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “rely,” “believe,” “estimate,” “predict,” “intend,” “potential,” “continue,” “forecast” or the negative of such terms, or other comparable terminology, including without limitation statements made under “Future Trends”, “Our Strategy”, discussions regarding our bookings and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Actual results of Coherent, Inc. (referred to herein as the Company, we, our or Coherent) may differ significantly from those anticipated in these forward-looking statements as a result of various factors, including those discussed in the sections captioned “Future Trends,” “Risk Factors,” “Key Performance Indicators,” as well as any other cautionary language in this quarterly report. All forward-looking statements included in the document are based on information available to us on the date hereof. We undertake no obligation to update these forward-looking statements as a result of events or circumstances or to reflect the occurrence of unanticipated events or non-occurrence of anticipated events.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except per share data)

	Three Months Ended					Nine Months Ended
	June 28, 2008		June 30, 2007			June 28, 2008		June 30, 2007

Net sales	$	157,024	$	142,608		$	457,262	$	442,233
Cost of sales	87,765		85,470			260,385		258,651
Gross profit	69,259		57,138			196,877		183,582
Operating expenses:
Research and development	19,076		19,337			56,823		56,543
In-process research and development	—		2,200			—		2,200
Selling, general and administrative	39,480		39,095			115,682		109,718
Restructuring and other charges	—		—			—		248
Amortization of intangible assets	2,165		2,085			6,600		5,978
Total operating expenses	60,721		62,717			179,105		174,687
Income (loss) from operations	8,538		(5,579		)	17,772		8,895
Other income (net)	2,779		6,017			12,923		16,387
Income before income taxes	11,317		438			30,695		25,282
Provision for income taxes	2,915		1,201			11,439		8,005
Net income (loss)	$	8,402	$	(763	)	$	19,256	$	17,277

Net income (loss) per share:
Basic	$	0.36	$	(0.02	)	$	0.67	$	0.55
Diluted	$	0.35	$	(0.02	)	$	0.66	$	0.54

Shares used in computation:
Basic	23,514		31,417			28,775		31,391
Diluted	24,110		31,417			29,314		32,045

See Accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except par value)

	June 28, 2008		September 29, 2007

ASSETS
Current assets:
Cash and cash equivalents	$	194,131	$	315,927
Restricted cash	2,755		2,460
Short-term investments	3,586		45,896
Accounts receivable—net of allowances of $2,699 and $2,918, respectively	110,371		102,314
Inventories	123,444		112,893
Prepaid expenses and other assets	59,818		50,244
Deferred tax assets	37,862		35,844
Total current assets	531,967		665,578
Property and equipment, net	105,873		104,305
Goodwill	87,636		83,376
Intangible assets, net	30,589		35,570
Other assets	80,048		58,771
Total assets	$	836,113	$	947,600

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	366	$	—
Current portion of long-term obligations	9		9
Accounts payable	29,377		27,849
Income taxes payable	8,749		17,829
Other current liabilities	103,035		83,058
Total current liabilities	141,536		128,745
Long-term obligations	17		21
Other long-term liabilities	95,701		47,848
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, par value $.01 per share:
Authorized—500,000 shares
Outstanding—23,676 shares and 31,552 shares, respectively	235		313
Additional paid-in capital	161,607		380,516
Accumulated other comprehensive income	99,705		70,672
Retained earnings	337,312		319,485
Total stockholders’ equity	598,859		770,986
Total liabilities and stockholders’ equity	$	836,113	$	947,600

See Accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents

COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

	Nine Months Ended
	June 28, 2008			June 30, 2007

Cash flows from operating activities:
Net income	$	19,256		$	17,277
Adjustments to reconcile net income to net cash provided by operating activities:
Purchased in-process research and development	—			2,200
Depreciation and amortization	17,677			19,225
Amortization of intangible assets	6,600			5,978
Deferred income taxes	(8,334		)	(9,985		)
(Gain) loss on disposal of property and equipment	(79		)	1,659
Stock-based compensation	6,916			8,930
Excess tax benefit from stock-based compensation arrangements	(75		)	(77		)
Non-cash restructuring and other (recoveries)	1,163			(128		)
Amortization of bond issue costs	—			874
Other non-cash expense	294			196
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	(2,080		)	13,215
Inventories	(5,115		)	(9,956		)
Prepaid expenses and other assets	(17,002		)	(20,446		)
Other assets	1,397			(5,337		)
Accounts payable	535			3,286
Income taxes payable/receivable	8,891			7,355
Other current liabilities	14,524			11,086
Other long-term liabilities	(981		)	4,497
Net cash provided by operating activities	43,587			49,849

Cash flows from investing activities:
Purchases of property and equipment	(16,134		)	(17,713		)
Proceeds from dispositions of property and equipment	12,052			203
Purchases of available-for-sale securities	(107,403		)	(272,916		)
Proceeds from sales and maturities of available-for-sale securities	149,601			142,197
Acquisition of businesses, net of cash acquired	—			(14,175		)
Proceeds from sale of business	6,519			—
Change in restricted cash	(25		)	(448		)
Premiums paid for life insurance contracts	—			(2,800		)
Other—net	286			22
Net cash provided by (used in) investing activities	44,896			(165,630		)

Cash flows from financing activities:
Short-term borrowings	371			—
Long-term debt repayments	—			(210		)
Repayment of capital lease obligations	(7		)	(5		)
Cash overdrafts increase (decrease)	282			(1,919		)
Issuance of common stock under employee stock option and purchase plans	2,897			3,783
Repurchase of common stock	(228,214		)	—
Collection of notes receivable from common stock	—			324
Excess tax benefits from stock-based compensation arrangements	75			77
Net cash provided by (used in) financing activities	(224,596		)	2,050
Effect of exchange rate changes on cash and cash equivalents	14,317			7,399
Net decrease in cash and cash equivalents	(121,796		)	(106,332		)
Cash and cash equivalents, beginning of period	315,927			445,231
Cash and cash equivalents, end of period	$	194,131		$	338,899

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	559		$	4,234
Income taxes	$	14,457		$	11,974
Cash received during the period for:
Income taxes	$	4,318		$	1,731

Noncash investing and financing activities:
Unpaid property and equipment	$	2,013		$	813
Portion of deferred business acquisition costs included in other current liabilities	$	—		$	1,682
Net retirement of restricted stock awards	$	878		$	225
Unrealized loss on equity securities	$	45		$	35

See Accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

COHERENT, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These interim condensed consolidated financial statements and notes thereto should be read in conjunction with the Coherent, Inc. (referred to herein as the “Company,” “we,” “our” or “Coherent”) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended September 29, 2007. In the opinion of management, all adjustments necessary for a fair presentation have been made and include only normal recurring adjustments. Interim results of operations are not necessarily indicative of results to be expected for the year. Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2008 and 2007 include 52 weeks each.

Correction of an Error:

In July 2008, we determined that the purchase and sale activity of securities classified as cash equivalents had been improperly included in the presentation of purchases and sales of investments within the investing section of the statement of cash flows within the captions “Purchases of available-for-sale securities” and “Proceeds from sales and maturities of available-for-sale securities.” As a result, we have corrected this error in the accompanying statement of cash flows for the nine months ended June 30, 2007 by removing the purchases, sales and maturities of the securities classified as cash equivalents from the amounts previously reported. The correction of the error does not change the net effect of these purchases, maturities and sales of available for sale securities within cash flows from investing activities. For the nine months ended June 30, 2007, we previously reported purchases of available for sale securities of $624,150, which we have reduced by $351,234 of purchases related to cash equivalents to purchases of $272,916, as corrected. We previously reported sales and maturities of available-for-sale securities of $493,431, which we have reduced by $351,234 of sales and maturities related to cash equivalents to maturities and sales of $142,197, as corrected.

2. RECENT ACCOUNTING STANDARDS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No.109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In addition, in May 2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,”(“FSP FIN 48-1”) to amend FIN 48 by providing that previously unrecognized tax benefits can be recognized when the tax positions are effectively settled upon examination by a taxing authority. According to FSP FIN 48-1, an enterprise’s tax position will be considered effectively settled if the taxing authority has completed its examination, the enterprise does not plan to appeal, and the possibility is remote that the taxing authority would reexamine the tax position in the future. We adopted FIN 48 and FSP FIN 48-1 for our fiscal year 2008 beginning September 30, 2007. See Note 13, “Income Taxes” for additional information, including the effects of adoption on the Company’s Condensed Consolidated Financial Statements.

In June 2006, the FASB ratified the consensus on Emerging Issues Task Force (“EITF”) Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement” (“EITF 06-3”) which requires a policy be adopted to present externally imposed taxes on revenue producing transactions on either a gross or net basis. Coherent’s policy is to present such taxes on a gross basis. Gross or net presentation may be elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this issue would include taxes that are imposed on a revenue transaction between a seller and a customer. We adopted EITF 06-3 for our fiscal year beginning September 30, 2007. The adoption of EITF 06-3 did not have a material impact on our consolidated financial statements.

In December 2007, the FASB ratified the EITF’s Consensus for Issue No. 07-1, “Accounting for Collaborative Arrangements” (“EITF 07-1”), which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-1 will become effective beginning with our first fiscal quarter of 2009. We are currently evaluating the impact, if any, on our consolidated financial position and results of operations.

Table of Contents

In December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. SFAS 141(R) also requires that acquisition related costs be recognized separately from the acquisition. SFAS 141(R) is effective for us for acquisitions after the beginning of our fiscal year 2010.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS 157 is effective for us for interim periods within our fiscal year beginning September 28, 2008. We are currently assessing the impact that the adoption of SFAS 157 will have on our consolidated financial position and results of operations. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 which delayed the effective date of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We have not yet determined the impact that the implementation of SFAS 157 will have on our non-financial assets and liabilities; however we do not anticipate it to significantly impact our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 expands the use of fair value accounting but does not affect existing standards, which require assets or liabilities to be carried at fair value. Under SFAS 159, a company may elect to use fair value to measure certain financial assets and financial liabilities, on an instrument-by-instrument basis. If the fair value option is elected, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of SFAS 159, changes in fair value are recognized in earnings. SFAS 159 is effective for us for our fiscal year beginning September 28, 2008 with earlier adoption permitted. We have elected not to early adopt and are currently assessing the impact that the adoption of SFAS 159 will have on our consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133” (“SFAS 161”). This statement changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires us to provide enhanced disclosures about (a) how and why we use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows. SFAS 161 is effective for our interim period beginning December 28, 2008. We are currently assessing the impact that the adoption of SFAS 161 will have on our consolidated financial position, results of operations and cash flows.

In April 2008, the FASB issued FASB Staff Position No. SFAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of FSP SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”) and other applicable accounting literature. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. We will evaluate the potential impact of FSP SFAS 142-3 on acquisitions on a prospective basis.

In May 2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We are currently evaluating the potential impact, if any, of the adoption of SFAS 162 on our consolidated financial position, results of operations and cash flows.

3. REVENUE RECOGNITION

We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, the product has been delivered or the service has been rendered, the price is fixed or determinable and collection is probable. Revenue from product sales is recorded when all of the foregoing conditions are met and risk of loss and title passes to the customer. Our products typically include a one-year warranty and the estimated cost of product warranty claims (based on historical experience)

Table of Contents

is recorded at the time the sale is recognized. Sales to customers are generally not subject to any price protection or return rights.

The vast majority of our sales are made to original equipment manufacturers (“OEMs”), distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue from multiple element arrangements to the various elements based upon relative fair values, which is determined based on the price charged for each deliverable on a standalone basis.

Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and only certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited to performance under our published product specifications. For the few product sales that have customer acceptance provisions because of other than published specifications, (1) the products are tested and accepted by the customer at our site or by the customer’s acceptance of the results of our testing program prior to shipment to the customer, or (2) the revenue is deferred until customer acceptance occurs.

Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations; however, our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue related to installation services until completion of these services.

For most products, training is not provided; therefore, no post-delivery training obligation exists. However, when training is provided to our customers, it is typically priced separately and is recognized as revenue after these services have been provided.

4. SHORT-TERM INVESTMENTS

We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. Marketable short-term investments in debt securities are classified and accounted for as available-for-sale securities and are valued based on quoted market prices. Investments classified as available-for-sale are reported at fair value with unrealized gains and losses, net of related income taxes, recorded as a separate component of other comprehensive income (OCI) in stockholders’ equity until realized. Interest and amortization of premiums and discounts for debt securities are included in interest income. Gains and losses on securities sold are determined based on the specific identification method and are included in other income (expense). (All numbers in thousands).

	June 28, 2008
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	196,882	$	4	$	—		$	196,886
Less: restricted cash								(2,755		)
								$	194,131
Short-term investments:
Available-for-sale securities:
U.S. Treasury and agency obligations	$	406	$	2	—			$	408
Corporate notes and obligations	3,209		20		(51		)	3,178
Total short-term investments	$	3,615	$	22	$	(51	)	$	3,586

	September 29, 2007
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	318,352	$	35	$	—		$	318,387
Less: restricted cash								(2,460		)
								$	315,927
Short-term investments:
Available-for-sale securities:
U.S. Treasury and agency obligations	$	6,036	$	7	$	—		$	6,043
Corporate notes and obligations	39,740		132		(19		)	39,853
Total short-term investments	$	45,776	$	139	$	(19	)	$	45,896

At June 28, 2008 and September 29, 2007, $2.8 million and $2.5 million, respectively of cash was restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda Physik. The change in the balance was due to changes in currency exchange rates during the year.

Table of Contents

5. INTANGIBLE ASSETS

The changes in the carrying amount of goodwill by segment for the period from September 29, 2007 to June 28, 2008 are as follows (in thousands):

	Commercial Lasers and Components		Specialty Lasers and Systems		Total
Balance as of September 29, 2007	$	24,091	$	59,285	$	83,376
Translation adjustments and other	115		4,145		4,260
Balance as of June 29, 2008	$	24,206	$	63,430	$	87,636

Components of our amortizable intangible assets are as follows (in thousands):

	June 28, 2008							September 29, 2007
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Existing technology	$	55,942	$	(32,568	)	$	23,374	$	54,091	$	(26,955	)	$	27,136
Patents	11,291		(8,459		)	2,832		10,184		(6,943		)	3,241
Drawings	1,542		(1,542		)	—		1,390		(1,390		)	—
Order backlog	5,425		(5,404		)	21		4,907		(4,864		)	43
Customer lists	5,627		(3,196		)	2,431		5,366		(2,562		)	2,804
Trade name	4,134		(2,267		)	1,867		3,754		(1,751		)	2,003
Non-compete agreement	2,579		(2,515		)	64		2,408		(2,065		)	343
Total	$	86,540	$	(55,951	)	$	30,589	$	82,100	$	(46,530	)	$	35,570

Amortization expense for intangible assets for the nine months ended June 28, 2008 was $6.6 million. At June 28, 2008, estimated amortization expense for the remainder of fiscal 2008, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):

	Estimated Amortization Expense
2008 (remainder)	$	2,139
2009	8,285
2010	6,822
2011	5,321
2012	3,498
2013	2,094
Thereafter	2,430
Total	$	30,589

6. BALANCE SHEET DETAILS

Inventories consist of the following (in thousands):

	June 28, 2008		September 29, 2007
Purchased parts and assemblies	$	34,754	$	29,786
Work-in-process	49,255		44,368
Finished goods	39,435		38,739
Inventories	$	123,444	$	112,893

Prepaid expenses and other assets consist of the following (in thousands):

	June 28, 2008		September 29, 2007
Prepaid and refundable income taxes	$	16,172	$	8,616
Other taxes receivable	32,049		23,683
Prepaid expenses and other	11,597		17,945
Total prepaid expenses and other assets	$	59,818	$	50,244

Other assets consist of the following (in thousands):

	June 28, 2008		September 29, 2007
Assets related to deferred compensation arrangements	$	29,627	$	30,706
Deferred tax assets	47,312		25,165
Other assets	3,109		2,900
Total other assets	$	80,048	$	58,771

Table of Contents

Other current liabilities consist of the following (in thousands):

	June 28, 2008		September 29, 2007
Accrued payroll and benefits	$	32,121	$	28,247
Accrued expenses and other	11,529		18,471
Reserve for warranty	13,901		13,660
Other taxes payable	29,537		9,840
Deferred income	12,020		10,496
Customer deposits	2,288		1,868
Accrued restructuring charges	1,639		476
Total other current liabilities	$	103,035	$	83,058

On April 16, 2008, we announced that we entered into an agreement to sell certain assets of our Auburn Optics manufacturing operation to Research Electro-Optics, Inc. (“REO”), a privately held optics manufacturing and technology company. We also entered into a strategic supply agreement with REO. REO will provide optical manufacturing capabilities for us, including fabrication and coating of optical components. The transition of the optics manufacturing assets from Auburn to REO is expected to be completed no later than the end of the second quarter of fiscal 2009.

The following table presents our current liability as accrued on our balance sheet for restructuring charges. The table sets forth an analysis of the components of the restructuring charges and the payments made against the accrual through June 28, 2008 (in thousands):

	Severance Related			Facilities- related Charges			Other Restructuring Costs			Total
Balance at September 30,2006	$	—		$	1,616		$	—		$	1,616
Provisions	—			374			—			374
Deductions	—			(1,430		)	—			(1,430		)
Balance at June 30, 2007	$	—		$	560		$	—		$	560

Balance at September 29, 2007	$	—		$	476		$	—		$	476
Provisions	1,797			45			360			2,202
Deductions	(226		)	(516		)	(297		)	(1,039		)
Balance at June 28, 2008	$	1,571		$	5		$	63		$	1,639

The remaining restructuring accrual balance of approximately $1.6 million at June 28, 2008 is expected to result in cash expenditures through fiscal 2009. The severance related costs are primarily comprised of severance pay, outplacement services, medical and other related benefits for employees terminated due to the termination of activities in Auburn, California. In the first nine months of fiscal 2007, we recorded $1.4 million of payments made against our accrued restructuring charges for remaining lease liabilities and received sublease income of $0.3 million.

We provide warranties on certain of our product sales (generally one year) and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires us to make estimates of product return rates and expected costs to repair or replace the products under warranty. We currently establish warranty reserves based on historical warranty costs for each product line. If actual return rates and/or repair and replacement costs differ significantly from our estimates, adjustments to cost of sales may be required in future periods.

Components of the reserve for warranty costs during the first nine months of fiscal 2008 and 2007 were as follows (in thousands):

	Nine Months Ended
	June 28, 2008			June 30, 2007
Beginning balance	$	13,660		$	11,462
Additions related to current period sales	16,302			16,165
Warranty costs incurred in the current period	(16,689		)	(14,855		)
Accruals resulting from acquisitions	—			247
Adjustments to accruals related to prior period sales	628			302
Ending balance	$	13,901		$	13,321

Table of Contents

Other long-term liabilities consist of the following (in thousands):

	June 28, 2008		September 29, 2007
Deferred compensation	$	30,114	$	31,336
Long-term taxes payable	44,036		—
Deferred tax liabilities	14,356		10,433
Deferred income	1,836		1,585
Asset retirement obligations liability	1,429		1,256
Other long-term liabilities	3,930		3,238
Total other long-term liabilities	$	95,701	$	47,848

The following table reconciles changes in our asset retirement obligations liability, which is reported in other long-term liabilities on our condensed consolidated balance sheets (in thousands):

	Nine Months Ended
	June 28, 2008			June 30, 2007
Beginning balance	$	1,256		$	1,765
Adjustment to asset retirement obligations recognized	(16		)	51
Accretion recognized	59			113
Changes due to foreign currency exchange	130			91
Ending balance	$	1,429		$	2,020

7. SHORT-TERM BORROWINGS

We have several lines of credit which allow us to borrow in the applicable local currency. At June 28, 2008, these foreign lines of credit totaled $18.8 million, of which $16.6 million was unused and available. These credit facilities were used in Europe and Japan during the first nine months of fiscal 2008. In addition, our domestic line of credit, which was opened on March 31, 2008, includes a $40 million unsecured revolving credit account with Union Bank of California, which expires on March 31, 2010 and is subject to covenants related to financial ratios and tangible net worth. No amounts have been drawn upon our domestic line of credit as of June 28, 2008.

8. STOCK-BASED COMPENSATION

Stock-Based Benefit Plans

We have two Stock Option Plans for which all service providers are eligible participants and a Directors’ Stock Option Plan for which only non-employee directors are eligible participants. The Director’s Stock Option Plan is designed to work automatically without administration, however to the extent administration is necessary, it will be performed by the Board of Directors or a committee thereof. Under these three plans, we may grant options to purchase up to an aggregate of 5,500,000, 6,300,000 and 689,000 shares of common stock, respectively of which none, 3,026,758 and 177,000 shares, respectively, remain available for grant at June 28, 2008. Employee options are generally exercisable between two to four years from the grant date at a price equal to the fair market value of the common stock on the date of the grant and generally vest 25% to 50% annually. We settle stock option exercises with newly issued shares of common stock. Grants under employee plans expire six years from the original grant date, unless otherwise determined by the Board or a committee thereof, up to a maximum of ten years. Director options are automatically granted to our non-employee directors. Such directors initially receive a stock option for 24,000 shares exercisable over a three-year period and an award of restricted stock units of 2,000 shares which vest at the end of three years. Additionally, the non-employee directors receive an annual option grant of 6,000 shares exercisable as to 50% of the shares on the day prior to each of the next two annual stockholder meetings. Grants under director plans generally expire ten years from the original grant date. In addition, each non-employee director receives an annual grant of 2,000 shares of restricted stock units that vest on the day prior to the annual stockholder meeting held in the third calendar year following the date of grant.

Restricted stock awards, including restricted stock units granted under our Stock Option Plans are independent of option grants and are subject to restrictions. At June 28, 2008, we had 356,065 unvested shares of restricted stock, including 101,275 performance-based restricted stock awards and units, all of which are subject to forfeiture if employment terminates prior to the release of restrictions. During this period, ownership of the shares cannot be transferred. The service-based restricted awards generally vest three years from the date of grant and the restricted stock units vest annually over three years. The performance-based restricted stock awards are generally subject to annual vesting over three years depending upon the achievement of

Table of Contents

performance measurements tied to the Company’s internal metrics for revenue growth and adjusted EBITDA. The number of shares earned can range from 0% to 200% of the grant target for 2008. The Company granted performance-based restricted stock units during the second quarter of fiscal 2008 which have a single vesting measurement date of November 14, 2010, which vest as to anywhere between 0 and 300% of the targeted amount based upon achievement by the Company of (a) an annual revenue threshold amount and (b) adjusted EBITDA percentage targets. Shares of restricted stock (not including performance-based restricted stock or restricted stock units) have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is expensed ratably over the period the restrictions lapse.

We have an Employee Stock Purchase Plan (“ESPP”) whereby eligible employees may authorize payroll deductions of up to 10% of their regular base salary to purchase shares at the lower of 85% of the fair market value of the common stock on the date of commencement of the offering or on the last day of the six-month offering period. At June 28, 2008, 224,536 shares of our common stock were reserved for future issuance under the plan.

In the second quarter of fiscal 2007, the ESPP was suspended and employee contributions made to the ESPP were returned while a voluntary review of our historical stock option practices was conducted. The ESPP was reopened with an 8 month offering period ending October 31, 2008 and employees began making contributions during the second quarter of fiscal 2008.

SFAS 123(R)

In accordance with the fair value recognition provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”), we recognize compensation expense for all share-based payment awards on a straight-line basis over the respective requisite service period of the awards.

Determining Fair Value

Valuation and amortization method—We estimate the fair value of stock options granted using the Black-Scholes-Merton option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term—The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility—Our computation of expected volatility is based on a combination of historical volatility and market-based implied volatility.

Risk-Free Interest Rate—The risk-free interest rate used in the Black-Scholes-Merton valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend—The expected dividend assumption is based on our current expectations about our anticipated dividend policy.

There were no options granted for the three months ended June 28, 2008 and June 30, 2007. The fair values of our stock options granted to employees and shares purchased under the stock purchase plan for the nine months ended June 28, 2008 and June 30, 2007 were estimated using the following weighted-average assumptions:

	Employee Stock Option Plans												Employee Stock Purchase Plans
	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007(1)			June 28, 2008			June 30, 2007
Expected life in years	—			—			3.5			4.4			0.7			—			0.7			0.5
Expected volatility	—		%	—		%	29.5		%	34.2		%	31.9		%	—		%	31.9		%	29.0		%
Risk-free interest rate	—		%	—		%	3.9		%	4.7		%	1.8		%	—		%	1.8		%	5.1		%
Expected dividends	—			—			—			—			—			—			—			—
Weighted average fair value per share	$	—		$	—		$	8.78		$	12.04		$	7.31		$	—		$	7.31		$	8.43

(1) During the second quarter of fiscal 2007, the stock purchase plan was suspended and employee contributions were returned while a voluntary review of our historical stock option practices was conducted; therefore there are no fair values for the third quarter of fiscal 2007. The ESPP reopened in March 2008.

Table of Contents

Stock Compensation Expense

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and nine months ended June 28, 2008 and June 30, 2007 (in thousands):

	Three Months Ended						Nine Months Ended
	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Cost of sales	$	484		$	406		$	1,629		$	1,509
Research and development	561			408			1,688			1,707
Selling, general and administrative	2,275			1,224			7,657			6,068
Income tax benefit	(1,289		)	(479		)	(3,276		)	(3,052		)
	$	2,031		$	1,559		$	7,698		$	6,232

During the three and nine months ended June 28, 2008, $0.3 million and $1.0 million, respectively, for all stock plans was capitalized into inventory, $0.3 million and $0.8 million, respectively, was amortized to cost of sales and $0.4 million remained in inventory at June 28, 2008. During the three and nine months ended June 30, 2007, $0.2 million and $1.1 million, respectively, for all stock plans was capitalized into inventory, $0.4 million and $1.3 million, respectively, was amortized into cost of sales and $0.3 million remained in inventory at June 30, 2007. As required by SFAS 123(R), management made an estimate of expected forfeitures and is recognizing compensation costs only for those equity awards expected to vest.

At June 28, 2008, the total compensation cost related to unvested stock-based awards granted to employees under the Company’s stock option plans but not yet recognized was approximately $11.8 million, net of estimated forfeitures of $0.8 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 1.9 years and will be adjusted for subsequent changes in estimated forfeitures.

At June 28, 2008, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.5 million, which will be recognized over the offering period.

In accordance with SFAS 123(R), the cash flows resulting from excess tax benefits (tax benefits related to the excess of proceeds from an employee’s exercises of stock options over the stock-based compensation cost recognized for those options) are classified as financing cash flows. During the first nine months of fiscal 2008 and of fiscal 2007, we recorded less than $0.1 million of excess tax benefits as cash flows from financing activities.

Stock Options & Awards Activity

The following is a summary of option activity for our Stock Option Plans (in thousands, except per share amounts and remaining contractual term in years):

	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Outstanding at September 30, 2007	3,196		$	28.54
Granted	852		32.50
Exercised	(124	)	23.39
Forfeitures	(69	)	32.96
Expirations	(438	)	31.43
Outstanding at June 28, 2008	3,417		$	29.66	3.1	$	7,765

Vested and expected to vest at June 28, 2008	3,407		$	29.65	3.1	$	7,761

Exercisable at June 28, 2008	2,971		$	29.29	2.7	$	7,562

Table of Contents

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the 1.3 million outstanding options that were in-the-money at June 28, 2008. During the third quarter of fiscal 2008, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $0.4 million, determined as of the date of option exercise. There were no exercises of Company stock during the three months ended June 30, 2007, resulting in no intrinsic value realized during the period. During the nine months ended June 28, 2008 and June 30, 2007, the aggregate intrinsic value of options exercised under the Company’s stock option plans was $0.8 million and $0.5 million, respectively, determined as of the date of option exercise. The following table summarizes our restricted stock award activity, including restricted stock units, for the first nine months of fiscal 2008 (in thousands, except per share amounts):

	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested stock at September 30, 2007	261		$	33.02
Granted	261		28.70
Vested	(78	)	33.41
Forfeited	(88	)	33.25
Nonvested stock at June 28, 2008	356		$	29.71

Employee Stock Option Tender Offer

In April 2008, we initiated a tender offer related to certain discount options discovered during our voluntary review of our historical stock option practices held by non-executive employees. Discount options are options with an exercise price that is less than the fair market value of the shares underlying the option at the time of grant. The discounted options included in this offer were certain options which vested after December 31, 2004. During the tender offer period, employees had the ability to amend the exercise price per share for eligible options to the fair market value of the underlying option as of the measurement date of that option, and receive a cash payment for the difference between the discounted share price and the amended share price. This amendment was designed to allow holders of discount options to avoid certain adverse tax consequences associated with discount options. The offer expired on May 9, 2008. The incremental stock compensation expense resulting from the offer was $0.4 million which was recognized immediately as all eligible options were fully vested.

9. COMMITMENTS AND CONTINGENCIES

We are subject to legal claims and litigation arising in the ordinary course of business, such as product liability, employment or intellectual property claims, including, but not limited to, the matters described below. The outcome of any such matters is currently not determinable. Although we do not expect that such legal claims and litigation will ultimately have a material adverse effect on our consolidated financial position or results of operations, an adverse result in one or more matters could negatively affect our results in the period in which they occur.

Derivative Lawsuits—Between February 15, 2007 and March 2, 2007, three purported shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California against certain of Coherent’s current and former officers and directors. Coherent is named as a nominal defendant. The complaints generally allege that the defendants breached their fiduciary duties and violated the securities laws in connection with the granting of stock options, the accounting treatment for such grants, and the issuance of allegedly misleading public statements and stock sales by certain of the individual defendants. On May 29, 2007, these lawsuits were consolidated under the caption In re Coherent, Inc. Shareholder Derivative Litigation, Lead Case No. C-07-0955-JF (N.D. Cal.). On June 25, 2007, plaintiffs filed an amended consolidated complaint. The consolidated complaint asserts causes of action for alleged violations of federal securities laws, violations of California securities laws, breaches of fiduciary duty and/or aiding and abetting breaches of fiduciary duty, abuse of control, gross mismanagement, constructive fraud, corporate waste, unjust enrichment, insider selling and misappropriation of information. The consolidated complaint seeks, among other relief, disgorgement and damages in an unspecified amount, an accounting, rescission of allegedly improper stock option grants, punitive damages and attorneys’ fees and costs.

The Company’s Board of Directors has appointed a Special Litigation Committee (“SLC”) comprised of independent director Sandeep Vij to investigate and evaluate the claims asserted in the derivative litigation and to determine what action(s) should be taken with respect to the derivative litigation. The SLC’s investigation is ongoing.

Securities and Exchange Commission Inquiry—In 2006, the Company was advised that the San Francisco District Office of the Securities and Exchange Commission was conducting an informal inquiry relating to the Company’s past granting of stock options. In July 2008 the Company was formally notified by the Securities and Exchange Commission that its investigation had been terminated and that it will not recommend any enforcement action.

Table of Contents

Income Tax Audits—The Internal Revenue Service (“IRS”) is conducting an audit of our 2003 and 2004 tax returns. The IRS has issued a number of Notices of Proposed Adjustments to these returns. Among other items, the IRS has challenged our research and development credits and our extraterritorial income (“ETI”) exclusion. We have agreed to the various adjustments proposed by the IRS and we believe that we have adequately provided for these exposures and any other items identified by the IRS as a result of the audit of these tax years. As part of its audit of our 2003 and 2004 years, the IRS has requested information related to our stock option investigation and we intend to comply with this request and address any issues that are raised in a timely manner. The IRS has also indicated that it may consider an audit of our 2005 and 2006 tax returns and has requested stock option investigation information for these years.

The IRS is also auditing the research and development credits generated in the years 1999 through 2001 and carried forward to future tax years. We believe that we have adequately provided for any adjustments that may be proposed by the IRS related to these credits.

The German tax authorities are conducting an audit of our subsidiary in Göttingen for the tax years 1999 through 2005. We believe that we have adequately provided for any adjustments that may be proposed by the German tax authorities.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss), net of income taxes, are as follows (in thousands):

	Three Months Ended						Nine Months Ended
	June 28,			June 30,			June 28,		June 30,
	2008			2007			2008		2007

Net income (loss)	$	8,402		$	(763	)	$	19,256	$	17,277

Other comprehensive income (loss):
Translation adjustment	(2,327		)	3,393			28,887		14,499
Net gain on derivative instruments, net of taxes	—			14			3		17
Changes in unrealized losses on available-for-sale securities, net of taxes	14			22			143		137
Other comprehensive income (loss), net of tax	(2,313		)	3,429			29,033		14,653
Comprehensive income	$	6,089		$	2,666		$	48,289	$	31,930

The following summarizes activity in accumulated other comprehensive income (loss) related to derivatives, net of income taxes, held by us (in thousands):

Balance, October 1, 2006	$	(135	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	17
Balance, June 30, 2007	$	(118	)

Balance, September 30, 2007	$	(98	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	3
Balance, June 28, 2008	$	(95	)

Accumulated other comprehensive income (net of tax) at June 28, 2008 is comprised of accumulated translation adjustments of $99.8 million and net loss on derivative instruments of $0.1 million. Accumulated other comprehensive income (net of tax) at September 29, 2007 is comprised of accumulated translation adjustments of $71.0 million, net loss on derivative instruments of $0.1 million and unrealized loss on available-for-sale securities of $0.2 million, respectively.

11. EARNINGS PER SHARE

Basic earnings per share is computed based on the weighted average number of shares outstanding during the period, excluding unvested restricted stock. Diluted earnings per share is computed based on the weighted average number of shares outstanding during the period increased by the effect of dilutive employee stock awards, including stock options, restricted stock and stock purchase contracts, using the treasury stock method.

Table of Contents

The following table presents information necessary to calculate basic and diluted earnings (loss) per share (in thousands, except per share data):

	Three Months Ended					Nine Months Ended
	June 28,		June 30,			June 28,		June 30,
	2008		2007			2008		2007
Weighted average shares outstanding —basic (1)	23,514		31,417			28,775		31,391
Dilutive effect of employee stock awards	596		—			539		654
Weighted average shares outstanding—diluted	24,110		31,417			29,314		32,045

Net income (loss)	$	8,402	$	(763	)	$	19,256	$	17,277

Net income (loss) per basic share	$	0.36	$	(0.02	)	$	0.67	$	0.55
Net income (loss) per diluted share	$	0.35	$	(0.02	)	$	0.66	$	0.54

(1) Net of restricted stock

A total of 2,208,711 and 1,249,128 potentially dilutive securities have been excluded from the dilutive share calculation for the third quarter of fiscal 2008 and fiscal 2007, respectively, as their effect was anti-dilutive. A total of 2,346,743 and 1,419,491 potentially dilutive securities have been excluded from the dilutive share calculation for the nine months ended June 28, 2008 and June 30, 2007, respectively, as their effect was anti-dilutive.

In September 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”, that contingently convertible debt should be treated as convertible debt and included in the calculation of diluted EPS. The assumed proceeds under the treasury stock method were calculated by subtracting the aggregate weighted-average conversion price from the average market price of the shares related to the contingently convertible debt. As the market price for our shares did not reach the conversion price at any point during the three and nine months ended June 30, 2007, there was no dilutive effect from our $200.0 million 2.75% convertible subordinated notes in our diluted EPS calculation under the treasury stock method. Therefore we did not include any shares related to the convertible subordinated notes, in accordance with the provisions of EITF No. 90-19, “Convertible Bonds With Issuer Option to Settle in Cash Upon Conversion” and SFAS No. 128, “Earnings Per Share”.

As the contingently convertible debt was paid off on August 21, 2007, there is no impact from EITF No. 04-8 in the three and nine months ended June 28, 2008.

12. STOCK REPURCHASE

On February 12, 2008, the Company announced that the Board of Directors had authorized the Company to repurchase up to $225 million of its common stock through a modified “Dutch Auction” tender offer and an additional $25 million of its common stock, following the completion or termination of the tender offer, under its stock repurchase program, terminating no later than February 11, 2009. On March 17, 2008, we completed our tender offer, repurchased and retired 7,972,313 shares of outstanding common stock at a price of $28.50 per share for a total of $228.2 million, including expenses. Such repurchases were accounted for as a reduction in additional paid in capital. There were no repurchases during the third quarter of fiscal 2008.

13. INCOME TAXES

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS 109”). Under the provisions of SFAS 109, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the currently enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to the Company and its subsidiaries. The Company’s estimated effective tax rate for the three months and nine months ended June 28, 2008 was 25.8% and 37.3%, respectively. The difference between the statutory rate of 35% and the Company’s effective tax rate for the three months ended June 28, 2008 was due primarily to permanent differences related to the benefit of foreign tax credits and research and development credits and the reduction of deemed dividend inclusions under the Subpart F tax rules. The difference between the statutory rate of 35% and the Company’s effective tax rate for the nine months ended June 28, 2008 was due primarily to permanent differences related to foreign currency exchange gains on previously taxed income distributions from foreign subsidiaries and deemed dividend inclusions under the Subpart F tax rules, partially offset by the benefit of foreign tax credits and research and development tax credits.

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates,

Table of Contents

which involves estimating current tax exposures as well as making judgments regarding the recoverability of deferred tax assets in each jurisdiction. The estimates used could differ from actual results, which may have a significant impact on operating results in future periods.

Effective September 30, 2007, the Company adopted the provisions of FIN 48 and FSP FIN 48-1. Upon adoption, the Company recorded a cumulative effect of a change in accounting principle that resulted in a decrease to retained earnings of $1.4 million in accordance with the transition rules under FIN 48. The Company had historically classified interest and penalties and unrecognized tax benefits as current liabilities. With the adoption of FIN 48, the Company classifies gross interest and penalties and unrecognized tax benefits that are not expected to result in payment or receipt of cash within one year as non-current liabilities in the condensed consolidated balance sheets. The total amount of gross unrecognized tax benefits as of the date of adoption of FIN 48 was $44.9 million, of which $21.7 million, if recognized, would affect the Company’s effective tax rate. As of June 28, 2008, the total amount of gross unrecognized tax benefits was $50.6 million, of which $26.3 million, if recognized, would affect the Company’s effective tax rate. A portion of the increase in the Company’s unrecognized tax benefit during the three months ended June 28, 2008 related to losses reported on the filing of its tax return. The Company’s total gross unrecognized tax benefit was classified as non-current liabilities in the condensed consolidated balance sheets.

The Company’s policy to include interest and penalties related to unrecognized tax benefits within the provision for income taxes did not change as a result of adopting FIN 48. As of the date of adoption, the Company had accrued $4.7 million for the gross interest and penalties relating to the gross unrecognized tax benefits. As of June 28, 2008, the total amount of gross interest and penalties accrued was $6.0 million, which is classified as non-current liabilities in the condensed consolidated balance sheets.

The Company is subject to taxation and files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions. For U.S. federal income tax purposes, all years prior to 1999 are closed. The years 2003 and 2004 are currently under examination by the IRS. The IRS has also indicated that it may consider an audit of our 2005 and 2006 tax returns. In major state jurisdictions and major foreign jurisdictions, the years subsequent to 1998 generally remain open and could be subject to examination by the taxing authorities.

Management believes that it has adequately provided for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. Should any issues addressed in the Company’s tax audits be resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.

14. SEGMENT INFORMATION

During the second quarter of fiscal 2007, we established a new organizational and reporting structure whereby our previously single reportable operating segment was separated into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that product service and repairs are generally based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include OEM components and instrumentation and materials processing. SLS develops and manufacturers configurable, advanced-performance products largely serving the microelectronics and scientific research markets. The size and complexity of many of the SLS products generally require service to be performed at the customer site by factory-trained field service engineers.

We have identified CLC and SLS as operating segments for which discrete financial information is available. Both operating segments have engineering, marketing, product business management and product line management. A small portion of our outside revenue is attributable to projects and recently developed products for which a segment has not yet been determined. The associated direct and indirect costs are presented in the category of Corporate and other, along with other corporate costs as described below.

Pursuant to SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”, our Chief Executive Officer has been identified as the chief operating decision maker (CODM) as he assesses the performance of the segments and decides how to allocate resources to the segments. Income (loss) from operations is the measure of profit and loss that our CODM uses to assess performance and make decisions. Assets are not a measure used to assess the performance of the company by the CODM; therefore we do not report assets by segment internally or in our disclosures. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain research and development, management, finance, legal and human resources) and are included in the results below under Corporate and other in the reconciliation of operating results. Management does not consider unallocated Corporate and other costs in its measurement of segment performance.

Table of Contents

The following table provides net sales and income (loss) from operations for our operating segments (in thousands):

	Three Months Ended						Nine Months Ended
	June 28,			June 30,			June 28,			June 30,
	2008			2007			2008			2007
Net sales:
Commercial Lasers and Components	$	73,792		$	74,506		$	218,358		$	211,453
Specialty Lasers and Systems	83,206			68,050			238,828			229,136
Corporate and other	26			52			76			1,644
Total net sales	$	157,024		$	142,608		$	457,262		$	442,233

Income from operations:
Commercial Lasers and Components	$	6,385		$	3,333		$	21,184		$	19,198
Specialty Lasers and Systems	14,237			4,003			33,776			28,904
Corporate and other	(12,084		)	(12,915		)	(37,188		)	(39,207		)
Total income (loss) from operations	$	8,538		$	(5,579	)	$	17,772		$	8,895

15. SUBSEQUENT EVENTS

On June 30, 2008 we sold our interest in LTB Lasertechnik in Berlin GmbH, a German company for approximately $1.0 million, resulting in a gain of approximately $1.0 million to be reported in other income in the fourth quarter of fiscal 2008.

Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPANY OVERVIEW

BUSINESS BACKGROUND

We are one of the world’s leading suppliers of photonics-based solutions in a broad range of commercial and scientific research applications. We design, manufacture and market lasers, precision optics and related accessories for a diverse group of customers. Since inception in 1966, we have grown through internal expansion and through strategic acquisitions of complementary businesses, technologies, intellectual property, manufacturing processes and product offerings.

During the second quarter of fiscal 2007, we established a new organizational and reporting structure whereby our previously single reportable operating segment was separated into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). The new segmentation reflects the go-to-market strategies for various products and markets. While both segments work to deliver cost-effective photonics solutions, CLC focuses on higher volume products that are offered in set configurations. The product architectures are designed for easy exchange at the point of use such that substantially all product service and repairs are based upon advanced replacement and depot (i.e., factory) repair. CLC’s primary markets include OEM components and instrumentation and materials processing. SLS develops and manufactures configurable, advanced-performance products largely serving the microelectronics and scientific research markets. The size and complexity of many of the SLS products generally require service to be performed at the customer site by factory-trained field service engineers.

Income (loss) from operations is the measure of profit and loss that our chief operating decision maker (“CODM”) uses to assess performance and make decisions. Income (loss) from operations represents the net sales less the cost of sales and direct operating expenses incurred within the operating segments as well as allocated expenses such as shared sales and manufacturing costs. We do not allocate to our operating segments certain operating expenses, which we manage separately at the corporate level. These unallocated costs include stock-based compensation and corporate functions (certain research and development, management, finance, legal and human resources) and are included in Corporate and Other. Management does not consider unallocated Corporate and Other costs in its measurement of segment performance.

MARKET APPLICATIONS

Our products address a broad range of applications that we group into the following markets: Microelectronics, Materials Processing, OEM Components and Instrumentation, and Scientific Research and Government Programs. Effective the first quarter of fiscal 2008, we combined the former Graphic Arts and Display market applications for bookings and revenues into the OEM Components and Instrumentation market applications. Prior period market application information for bookings and revenues reflects this combination.

OUR STRATEGY

We strive to develop innovative and proprietary products and solutions that meet the needs of our customers and that are based on our core expertise in lasers and optical technologies. In pursuit of our strategy, we intend to:

· Leverage our technology portfolio and application engineering to lead the proliferation of photonics into broader markets—We will continue to identify opportunities in which our technology portfolio and application engineering can be used to offer innovative solutions and gain access to new markets.

· Optimize our leadership position in existing markets—There are a number of markets where we have historically been at the forefront of technological development and product deployment and from which we have derived a substantial portion of our revenues. We plan to optimize our financial returns from these markets.

· Maintain and develop additional strong collaborative customer and industry relationships—We believe that the Coherent brand name and reputation for product quality, technical performance and customer satisfaction will help us to further develop our loyal customer base. We plan to maintain our current customer relationships and develop new ones with customers who are industry leaders and work together with these customers to design and develop innovative product systems and solutions as they develop new technologies.

· Develop and acquire new technologies and market share—We will continue to enhance our market position through our existing technologies and develop new technologies through our internal research and development efforts, as well as through the acquisition of additional complementary technologies, intellectual property, manufacturing processes and product offerings.

Table of Contents

· Focus on long-term improvement of adjusted EBITDA expressed as a percentage of net sales—We define adjusted EBITDA as earnings before interest, taxes, depreciation, amortization, stock compensation expenses and certain other non-operating income and expense items.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and pursuant to the rules and regulations of the SEC. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We have identified the following as the items that require the most significant judgment and often involve complex estimation: revenue recognition, accounting for long-lived assets (including goodwill and intangible assets), inventory valuation, warranty reserves, stock-based compensation and accounting for income taxes.

Revenue Recognition

The vast majority of our sales are made to original equipment manufacturers (OEMs), distributors, resellers and end-users in the non-scientific market. Sales made to these customers do not require installation of the products by us and are not subject to other post-delivery obligations, except in occasional instances where we have agreed to perform installation or provide training. In those instances, we defer revenue related to installation services or training until these services have been rendered. We allocate revenue from multiple element arrangements to the various elements based upon relative fair values, which are determined based on the price charged for each deliverable on a standalone basis.

Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Failure to obtain anticipated orders due to delays or cancellations of orders could have a material adverse effect on our revenue. In addition, pressures from customers to reduce our prices or to modify our existing sales terms may have a material adverse effect on our revenue in future periods.

Our sales to distributors, resellers and end-user customers typically do not have customer acceptance provisions and only certain of our sales to OEM customers have customer acceptance provisions. Customer acceptance is generally limited to performance under our published product specifications. For the few product sales that have customer acceptance provisions because of higher than published specifications, (1) the products are tested and accepted by the customer at our site or by the customer’s acceptance of the results of our testing program prior to shipment to the customer, or (2) the revenue is deferred until customer acceptance occurs.

Sales to end-users in the scientific market typically require installation and, thus, involve post-delivery obligations; however our post-delivery installation obligations are not essential to the functionality of our products. We defer revenue related to installation services until completion of these services.

For most products, training is not provided; therefore, no post-delivery training obligation exists. However, when training is provided to our customers, it is typically priced separately and recognized as revenue after these services have been provided.

Long-Lived Assets

We evaluate long-lived assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. Reviews are performed to determine whether the carrying values of assets are impaired based on comparison to either the discounted expected future cash flows (in the case of goodwill) or to the undiscounted expected future cash flows (for all other long-lived assets). If the comparison indicates that impairment exists, the impaired asset is written down to its fair value. Significant management judgment is required in the forecast of future operating results that are used in the preparation of expected discounted and undiscounted cash flows.

At June 28, 2008, we had $118.2 million of goodwill and purchased intangible assets on our consolidated balance sheet. At June 28, 2008, we had $105.9 million of property and equipment on our consolidated balance sheet. The Company reviewed impairment indicators during the third quarter of fiscal 2008 and determined that no impairment was indicated.

Table of Contents

It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets may be required.

Inventory Valuation

We record our inventory at the lower of cost (computed on a first-in, first-out basis) or market. We write-down our inventory to its estimated market value based on assumptions about future demand and market conditions. Inventory write-downs are generally recorded within guidelines set by management when the inventory for a device exceeds 12 months of its demand and when individual parts have been in inventory for greater than 12 months. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required which could materially affect our future results of operations. Due to rapidly changing forecasts and orders, additional write-downs for excess or obsolete inventory, while not currently expected, could be required in the future. In the event that alternative future uses of fully written down inventories are identified, we may experience better than normal profit margins when such inventory is sold. Differences between actual results and previous estimates of excess and obsolete inventory could materially affect our future results of operations. We write-down our demo inventory by amortizing the cost of demo inventory over a twenty month period starting from the fourth month after such inventory is placed in service.

Warranty Reserves

Stock-Based Compensation

SFAS 123(R) requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the expected price volatility of the underlying stock. Our computation of expected volatility is based on a combination of historical volatility and market-based implied volatility.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets.

We record a valuation allowance to reduce our deferred tax assets to an amount that more likely than not will be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the allowance for the deferred tax assets would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the valuation allowance for the deferred tax assets would be charged to income in the period such determination was made.

Effective September 30, 2007, the Company adopted the provisions of FIN 48, which creates a single model to address accounting for uncertainty in tax positions by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. FIN 48 establishes a two-step approach for evaluating tax positions. The first step, recognition, occurs when a company concludes (based solely on the technical aspects of the matter) that a tax position is more likely than not to be sustained upon examination by a taxing authority. The second step, measurement, is only considered after step one has been satisfied and measures any tax benefit at the largest amount that is deemed more likely than not to be realized upon ultimate settlement of the uncertainty. These determinations involve significant judgment by management. Tax positions that fail to qualify for initial recognition are recognized in the first subsequent interim period that they meet the more likely than not standard or when they are resolved through negotiation or litigation with factual interpretation, judgment and certainty. Tax laws and regulations themselves are complex and are subject to change as a result of changes in fiscal policy, changes in legislation, evolution of regulations and court

Table of Contents

filings. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities.

KEY PERFORMANCE INDICATORS

The following is a summary of some of the quantitative performance indicators (as defined below) that may be used to assess our results of operations and financial condition:

	Three Months Ended
	June 28,			June 30,
	2008			2007			Change			% Change
	(Dollars in thousands)

Bookings	$	149,090		$	139,187		$	9,903		7.1	%
Net sales—CLC	$	73,792		$	74,506		$	(714	)	(1.0	)%
Net sales—SLS	$	83,206		$	68,050		$	15,156		22.3	%
Gross profit as a percentage of net sales—CLC	43.4		%	41.3		%	2.1		%	5.2	%
Gross profit as a percentage of net sales—SLS	45.3		%	39.8		%	5.5		%	13.9	%
Research and development as a percentage of net sales	12.1		%	13.6		%	(1.5		)%	(10.4	)%
Income before income taxes	$	11,317		$	438		$	10,879		2,483.8	%
Cash provided by operating activities	$	14,946		$	9,913		$	5,033		50.8	%
Days sales outstanding in receivables	63.3			63.4			(0.1		)	(0.2	)%
Days sales outstanding in inventories	70.8			72.6			(1.8		)	(2.6	)%
Capital spending as a percentage of net sales	4.4		%	3.6		%	0.8		%	21.0	%

	Nine Months Ended
	June 28,			June 30,
	2008			2007			Change			% Change
	(Dollars in thousands)

Bookings	$	452,525		$	427,260		$	25,265		5.9	%
Net sales—CLC	$	218,358		$	211,453		$	6,905		3.3	%
Net sales—SLS	$	238,828		$	229,136		$	9,692		4.2	%
Gross profit as a percentage of net sales—CLC	43.8		%	43.1		%	0.7		%	1.6	%
Gross profit as a percentage of net sales—SLS	43.1		%	40.7		%	2.4		%	5.9	%
Research and development as a percentage of net sales	12.4		%	12.8		%	(0.4		)%	(2.8	)%
Income before income taxes	$	30,695		$	25,282		$	5,413		21.4	%
Cash provided by operating activities	$	43,587		$	49,849		$	(6,262	)	(12.6	)%
Capital spending as a percentage of net sales	3.5		%	4.0		%	(0.5		)%	(12.0	)%

Definitions and analysis of these performance indicators are as follows:

Bookings

Bookings represent orders expected to be shipped within 12 months and services to be provided pursuant to service contracts. While we generally have not experienced a significant rate of cancellation, bookings are generally cancelable by our customers without substantial penalty and, therefore, we can not assure all bookings will be converted to net sales.

Third quarter bookings increased 7.1% and bookings for the nine months ended June 28, 2008 increased 5.9% from the same periods one year ago. Bookings increased in all four markets for the quarter and for the nine months, increases in the microelectronics and scientific and government programs markets were partially offset by decreases in the materials processing and OEM components and instrumentation markets.

Microelectronics

Orders from semiconductor capital equipment applications increased from the second quarter of fiscal 2008 due primarily to new system orders for lasers used in wafer and reticule inspection. We are cautiously optimistic that we will continue to outperform the industry due to several key design wins.

Bookings for lasers used in advanced packaging were stable. The microvia business posted good orders due to growth in handsets and flip-chip substrates. Laser-based silicon singulation and scribing continues to gain acceptance in the market. Our expectations are for further expansion in this market through our Avia™, Matrix™ and Talisker™ platforms. We are very pleased with the reception that the Talisker™ has received.

Table of Contents

Orders for flat panel display (“FPD”) manufacturing grew significantly on a sequential basis for systems and service. In keeping with our strategy to address more of the FPD value chain, system bookings included excimer lasers for lift-off applications, solid-state lasers for touchpad scribing, CO₂ lasers for glass cutting and line-beam optics upgrades. Service bookings were tied to maintenance contracts for our installed base of low temperature polysilicon (“LTPS”) annealing lasers.

Bookings for solar cell manufacturing again exhibited strong growth and we expect that fiscal 2008 bookings will be double that of fiscal 2007. Our solar-related business is based on UV lasers, where we provide an advantage to our customers. This is true for crystalline silicon and thin film applications, including edge isolation and patterning.

Scientific and Government Programs

Orders in the scientific market were flat even though last year’s numbers included bookings for custom laser systems, a business we previously announced we exited. The average run rate for custom laser systems was approximately $1-2 million per quarter.

We matched our record for Chameleon™ orders and continue to have solid market share with this product family. We plan to bolster this position through key product augmentations scheduled for fiscal 2009. We are also seeing greater adoption of the OPS-based Mantis™ laser as a seed source for high-performance amplifiers. These products, combined with the Legend Elite amplifiers, are among our strongest scientific product portfolios ever.

OEM Components and Instrumentation

Orders for instrumentation and OEM components no longer include orders for thermal imaging optics, a market which we exited in fiscal 2007. The third quarter is traditionally the slowest quarter of bookings for many of our accounts. This effect has been partially offset by sustained strength in OEM medical bookings, especially for refractive surgery lasers.

During the third fiscal quarter, we introduced an important extension of our patented OPS™ platform. The Genesis™ laser system is the first OPS-based laser to produce pure continuous wave output at 355nm with very high mode quality. Prior competitive products relied on inefficient gas tubes or more complex and expensive quasi-CW designs, which limited lifetime and/or scalability. The initial versions of Genesis™ are configured for the instrumentation market and revenue shipments have already begun. Future versions are expected to deliver higher powers and a range of wavelengths to support users in the microelectronics and scientific markets.

Materials Processing

The materials processing market remains in a dynamic state. Sluggishness in the U.S. and Chinese export market has been offset by new product growth in the Chinese domestic, Japanese and European markets. In general, these products offer better performance at a lower cost of ownership than other products in the market.

The E-Series CO₂™ laser has achieved a 100% qualification rate amongst customers who have performed evaluation testing. We are also making good inroads with our Matrix™ platform in rapid prototyping and specialty marking of ID cards and glass. Both platforms are scheduled for expansion over the next 12 months.

Net Sales

Net sales include sales of lasers, precision optics, related accessories and service contracts. Net sales for the third fiscal quarter decreased 1.0% in our CLC segment and increased 22.3% in our SLS segment from the same quarter one year ago. Net sales for the first nine months of fiscal 2008 increased 3.3% in our CLC segment and increased 4.2% in our SLS segment from the same period one year ago. For a description of the reasons for changes in net sales refer to the “Results of Operations” section of this quarterly report.

Gross Profit as a Percentage of Net Sales

Gross profit as a percentage of net sales (“gross profit percentage”) is calculated as gross profit for the period divided by net sales for the period. Gross profit percentage in the third quarter increased from 41.3% to 43.4% in our CLC segment and increased from 39.8% to 45.3% in our SLS segment from the same quarter one year ago. Gross profit percentage for the first nine months of fiscal 2008 increased from 43.1% to 43.8% in our CLC segment and increased from 40.7% to 43.1% in our SLS segment from the same period one year ago. For a description of the reasons for changes in gross profit refer to the “Results of Operations” section of this quarterly report.

Research and Development as a Percentage of Net Sales

Research and development as a percentage of net sales (“R&D percentage”) is calculated as research and development expense for the period divided by net sales for the period. Management considers R&D percentage to be an important indicator in managing our business as investing in new technologies is a key to future growth. R&D percentage decreased to 12.1% from 13.6% in the third

Table of Contents

fiscal quarter and decreased to 12.4% from 12.8% for the first nine months of fiscal 2008 compared to the same periods one year ago. For a more complete description of the reasons for changes in R&D percentage refer to the “Results of Operations” section of this quarterly report.

Net Cash Provided by Operating Activities

Net cash provided by operating activities shown on our Condensed Consolidated Statements of Cash Flows primarily represents the excess of cash collected from billings to our customers and other receipts over cash paid to our vendors for expenses and inventory purchases to run our business. This amount represents cash generated by current operations to pay for equipment, technology, and other investing activities, to repay debt, fund acquisitions, repurchase our common stock and for other financing purposes. We believe this is an important performance indicator because cash generation over the long term is essential to maintaining a healthy business and providing funds to help fuel growth. We believe generating positive cash from operations is an indication that our products are achieving a high level of customer satisfaction and that we are appropriately monitoring our expenses, inventory levels and cash collection efforts. For a more complete description of the reasons for changes in Net Cash Provided by Operating Activities refer to the “Liquidity and Capital Resources” section of this quarterly report.

Days Sales Outstanding in Receivables

We calculate days sales outstanding (“DSO”) in receivables as net receivables at the end of the period divided by net sales during the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in receivables indicates how well we are managing our collection of receivables, with lower DSO in receivables resulting in more cash flow available. The more money we have tied up in receivables, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our DSO in receivables for the third quarter of fiscal 2008 decreased 0.1 days from the same quarter one year ago, with improved collections of older receivables offset by the impact of foreign exchange rates.

Days Sales Outstanding in Inventories

We calculate DSO in inventories as net inventories at the end of the period divided by net sales during the period and then multiplied by the number of days in the period, using 90 days for quarters. DSO in inventories indicates how well we are managing our inventory levels, with lower DSO in inventories resulting in more cash flow available. The more money we have tied up in inventory, the less money we have available for research and development, acquisitions, expansion, marketing and other activities to grow our business. Our DSO in inventories for the third quarter of fiscal 2008 decreased 1.8 days from the same quarter one year ago primarily due to the large increase in sales volumes without a similar increase in inventories partially offset by the impact of foreign exchange rates.

Capital Spending as a Percentage of Net Sales

Capital spending as a percentage of net sales (“capital spending percentage”) is calculated as capital expenditures for the period divided by net sales for the period. Capital spending percentage indicates the extent to which we are expanding or improving our operations, including investments in technology. Management monitors capital spending levels as this assists management in measuring our cash flows, net of capital expenditures. Our capital spending percentage increased to 4.4% from 3.6% for the third quarter and decreased to 3.5% from 4.0% for the nine months from the same periods one year ago. We anticipate that capital spending for fiscal 2008 will be approximately 3.5% of net sales.

SIGNIFICANT EVENTS

On December 18, 2007, we announced that the Securities and Exchange Commission (“SEC”) notified us that it had denied our motion to stay the decision of the NASDAQ Stock Market LLC (“Nasdaq”), to suspend and delist our common stock. Therefore, effective at the opening of business on Wednesday, December 19, 2007, our common stock was suspended from trading on the Nasdaq Global Select Market, and was subsequently delisted. Following our delisting from the NASDAQ Global Select Market, we began trading on the Pink Sheet Electronic Quotation Service. Our shares of common stock were re-listed on the NASDAQ Global Select Market with the opening of trading on Thursday, February 14, 2008.

On February 12, 2008, the Company announced that the Board of Directors had authorized the Company to repurchase up to $225 million of its common stock through a modified “Dutch Auction” tender offer and an additional $25 million of its common stock, following the completion or termination of the tender offer, under its stock repurchase program, terminating no later than February 11, 2009. On March 17, 2008, we completed our tender offer and repurchased and retired 7,972,313 shares of outstanding common stock at a price of $28.50 per share for a total of $228.2 million, including expenses. Such repurchases were accounted for as a reduction in additional paid in capital.

Table of Contents

Effective March 31, 2008, we entered into a $40 million unsecured revolving credit account with Union Bank of California, which expires on March 31, 2010. Our Union Bank of California agreement is subject to covenants related to financial ratios and tangible net worth.

In April 2008, we initiated a tender offer related to certain discount options discovered during our voluntary review of our historical stock option practices. Discount options are options with an exercise price that is less than the fair market value of the shares underlying the option at the time of grant. The discounted options included in this offer were certain options which vested after December 31, 2004. During the tender offer period, employees had the ability to amend the exercise price per share for eligible options to the fair market value of the underlying option as of the measurement date of that option, and receive a cash payment for the difference between the discounted share price and the amended share price. This amendment was designed to allow holders of discount options to avoid certain adverse tax consequences associated with discount options. The offer expired on May 9, 2008. The incremental stock compensation expense resulting from the offer was $0.4 million which was recognized immediately as all eligible options were fully vested.

On July 10, 2008, the Securities and Exchange Commission formally notified us that its investigation of our historical stock option granting practices has been terminated and that it will not recommend any enforcement action.

RESULTS OF OPERATIONS

CONSOLIDATED SUMMARY

The following table sets forth, for the periods indicated, the percentage of total net sales represented by the line items reflected in our condensed consolidated statements of operations:

	Three Months Ended				Nine Months Ended
	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	55.9	%	59.9	%	56.9	%	58.5	%
Gross profit	44.1	%	40.1	%	43.1	%	41.5	%
Operating expenses:
Research and development	12.1	%	13.6	%	12.4	%	12.8	%
In-process research and development	—		1.5	%	—		0.5	%
Selling, general and administrative	25.2	%	27.4	%	25.3	%	24.8	%
Restructuring and other charges	—	%	—	%	—	%	0.1	%
Amortization of intangible assets	1.4	%	1.5	%	1.5	%	1.3	%
Total operating expenses	38.7	%	44.0	%	39.2	%	39.5	%
Income (loss) from operations	5.4	%	(3.9	)%	3.9	%	2.0	%
Other income (net)	1.8	%	4.2	%	2.8	%	3.7	%
Income before income taxes	7.2	%	0.3	%	6.7	%	5.7	%
Provision for income taxes	1.8	%	0.8	%	2.5	%	1.8	%
Net income (loss)	5.4	%	(0.5	)%	4.2	%	3.9	%

Net income for the third quarter of fiscal 2008 was $8.4 million ($0.35 per diluted share) including $1.4 million of after-tax restructuring costs, $0.9 million of after-tax costs related to litigation resulting from our internal stock option investigation and $2.0 million of after-tax stock-related compensation expense. Net loss for the third quarter of fiscal 2007 was $0.8 million ($0.02 per diluted share) including an in-process research and development (“IPR&D”) charge of $2.2 million associated with the purchase of Nuvonyx during the third quarter of fiscal 2007 and $1.8 million of after-tax costs related to our internal stock option investigation and litigation. Third quarter fiscal 2007 results also included approximately $1.6 million of after-tax stock-based compensation expense. Net income for the first nine months of fiscal 2008 was $19.3 million ($0.66 per diluted share) including $5.3 million of after-tax costs related to our restatement of financial statements and litigation resulting from our internal stock option investigation, $7.7 million of after-tax stock-related compensation expense, $1.4 million of after-tax restructuring costs and a $1.4 million tax expense in connection with an internal dividend from one of our European subsidiaries. Net income for the first nine months of fiscal 2007 was $17.3 million ($0.54 per diluted share) including $5.4 million of after-tax costs related to our internal stock option investigation, an IPR&D charge of $2.2 million associated with the purchase of Nuvonyx and $0.2 million in after-tax Excel Technology integration related costs. Results for the first nine months of fiscal 2007 also included approximately $6.2 million of after-tax stock-based compensation expense.

Table of Contents

NET SALES

Market Application

The following tables set forth, for the periods indicated, the amount of net sales and their relative percentages of total net sales by market application (dollars in thousands):

	Three Months Ended
	June 28, 2008				June 30, 2007
	Amount		Percentage of total net sales		Amount		Percentage of total net sales

Consolidated:
Microelectronics	$	52,439	33.4	%	$	47,582	33.4	%
OEM components and instrumentation	48,293		30.7	%	43,796		30.7	%
Materials processing	22,545		14.4	%	25,298		17.7	%
Scientific and government programs	33,747		21.5	%	25,932		18.2	%
Total	$	157,024	100.0	%	$	142,608	100.0	%

	Nine Months Ended
	June 28, 2008				June 30, 2007
	Amount		Percentage of total net sales		Amount		Percentage of total net sales

Consolidated:
Microelectronics	$	159,707	34.9	%	$	157,080	35.5	%
OEM components and instrumentation	132,346		29.0	%	125,808		28.4	%
Materials processing	70,429		15.4	%