Edgar Filing: COHERENT INC

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 April 4, 2009

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 o		Accelerated filer x

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 April 30, 2009 was 24,387,833 shares

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COHERENT, INC.

INDEX

		Page
Part I.	Financial Information

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Statements of Operations Three and six months ended April 4, 2009 and March 29, 2008	4

	Condensed Consolidated Balance Sheets April 4, 2009 and September 27, 2008	5

	Condensed Consolidated Statements of Cash Flows Six months ended April 4, 2009 and March 29, 2008	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.	Controls and Procedures	44

Part II.	Other Information

Item 1.	Legal Proceedings	44

Item 1A.	Risk Factors	46

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults upon Senior Securities	59

Item 4.	Submission of Matters to a Vote of Security Holders	59

Item 5.	Other Information	59

Item 6.	Exhibits	60

Signatures		61

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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.

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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						Six Months Ended
	April 4, 2009			March 29, 2008			April 4, 2009			March 29, 2008

Net sales	$	105,422		$	155,942		$	229,810		$	300,238
Cost of sales	65,815			88,818			139,814			172,620
Gross profit	39,607			67,124			89,996			127,618
Operating expenses:
Research and development	15,610			19,428			30,388			37,747
Selling, general and administrative	27,962			37,384			51,590			76,202
Impairment of goodwill	—			—			19,286			—
Amortization of intangible assets	1,894			2,229			3,837			4,435
Total operating expenses	45,466			59,041			105,101			118,384
Income (loss) from operations	(5,859		)	8,083			(15,105		)	9,234
Other income (expense):
Interest and dividend income	689			3,368			2,133			7,437
Interest expense	(32		)	(184		)	(109		)	(345		)
Other—net	(2,257		)	1,079			(7,854		)	3,052
Total other income (expense), net	(1,600		)	4,263			(5,830		)	10,144
Income (loss) before income taxes	(7,459		)	12,346			(20,935		)	19,378
Provision for income taxes	1,671			6,221			2,874			8,524
Net income (loss)	$	(9,130	)	$	6,125		$	(23,809	)	$	10,854

Net income (loss) per share:
Basic	$	(0.38	)	$	0.20		$	(0.98	)	$	0.35
Diluted	$	(0.38	)	$	0.19		$	(0.98	)	$	0.34

Shares used in computation:
Basic	24,258			31,394			24,202			31,406
Diluted	24,258			31,874			24,202			31,916

See Accompanying Notes to Condensed Consolidated Financial Statements

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COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except par value)

	April 4, 2009		September 27, 2008

ASSETS
Current assets:
Cash and cash equivalents	$	182,951	$	213,826
Restricted cash	—		2,645
Short-term investments	23,849		4,268
Accounts receivable—net of allowances of $2,235 and $2,494, respectively	81,302		96,611
Inventories	114,239		120,519
Prepaid expenses and other assets	48,314		41,793
Deferred tax assets	24,399		30,121
Total current assets	475,054		509,783
Property and equipment, net	100,094		100,996
Goodwill	63,513		86,818
Intangible assets, net	22,652		27,556
Other assets	79,885		81,230
Total assets	$	741,198	$	806,383

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	—	$	—
Current portion of long-term obligations	8		9
Accounts payable	20,316		26,333
Income taxes payable	1,956		7,847
Other current liabilities	74,249		79,138
Total current liabilities	96,529		113,327
Long-term obligations	9		15
Other long-term liabilities	83,325		94,606
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock, par value $.01 per share:
Authorized—500,000 shares
Outstanding—24,388 shares and 24,191 shares, respectively	243		241
Additional paid-in capital	184,940		177,646
Accumulated other comprehensive income	58,502		79,089
Retained earnings	317,650		341,459
Total stockholders’ equity	561,335		598,435
Total liabilities and stockholders’ equity	$	741,198	$	806,383

See Accompanying Notes to Condensed Consolidated Financial Statements.

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COHERENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

	Six Months Ended
	April 4, 2009			March 29, 2008
Cash flows from operating activities:
Net income (loss)	$	(23,809	)	$	10,854
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,716			12,241
Amortization of intangible assets	3,837			4,435
Deferred income taxes	(1,583		)	935
Loss (gain) on disposal of property and equipment	438			(87		)
Stock-based compensation	4,178			5,311
Excess tax benefit from stock-based compensation arrangements	(8		)	—
Impairment of goodwill	19,286			—
Non-cash restructuring and other	167			—
Other non-cash expense	34			152
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable	13,013			(2,211		)
Inventories	1,867			1,884
Prepaid expenses and other assets	(9,514		)	(14,402		)
Other assets	10,045			2,550
Accounts payable	(5,743		)	3,529
Income taxes payable/receivable	(2,025		)	1,764
Other current liabilities	(2,396		)	4,785
Other long-term liabilities	(9,976		)	(3,099		)
Net cash provided by operating activities	7,527			28,641

Cash flows from investing activities:
Purchases of property and equipment	(14,156		)	(9,213		)
Proceeds from dispositions of property and equipment	1,349			9,853
Purchases of available-for-sale securities	(44,986		)	(105,824		)
Proceeds from sales and maturities of available-for-sale securities	25,434			136,878
Proceeds from sale of business	—			6,519
Change in restricted cash	2,521			(25		)
Other—net	—			804
Net cash provided by (used in) investing activities	(29,838		)	38,992

Cash flows from financing activities:
Short-term borrowings	3			—
Short-term repayments	(3		)	—
Repayment of capital lease obligations	(4		)	(6		)
Cash overdrafts increase (decrease)	20			(874		)
Issuance of common stock under employee stock option and purchase plans	3,544			1,362
Repurchase of common stock	—			(228,147		)
Excess tax benefits from stock-based compensation arrangements	8			—
Net cash provided by (used in) financing activities	3,568			(227,665		)
Effect of exchange rate changes on cash and cash equivalents	(12,132		)	13,889
Net decrease in cash and cash equivalents	(30,875		)	(146,143		)
Cash and cash equivalents, beginning of period	213,826			315,927
Cash and cash equivalents, end of period	$	182,951		$	169,784

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	104		$	192
Income taxes	$	13,029		$	10,274
Cash received during the period for:
Income taxes	$	6,138		$	3,575

Non-cash investing and financing activities:
Unpaid property and equipment	$	1,492		$	2,423
Net retirement of restricted stock awards	$	394		$	—

See Accompanying Notes to Condensed Consolidated Financial Statements

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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,” “us” or “Coherent”) consolidated financial statements and notes thereto filed on Form 10-K for the fiscal year ended September 27, 2008. In the opinion of management, all adjustments necessary for a fair presentation of financial condition and results of operation as of and for the periods presented 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 or any other interim periods presented therein. Our fiscal year ends on the Saturday closest to September 30. Fiscal years 2009 and 2008 include 53 and 52 weeks, respectively.

Correction of an Error in Condensed Consolidated Statements of Cash Flows

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 consolidated 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 consolidated statement of cash flows for the six months ended March 29, 2008 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 six months ended March 29, 2008, we previously reported purchases of available for sale securities of $530,332, which we have reduced by $424,508 of purchases related to cash equivalents to purchases of $105,824, as corrected. We previously reported proceeds from sales and maturities of available-for-sale securities of $561,386, which we have reduced by $424,508 of sales and maturities related to cash equivalents to maturities and sales of $136,878, as corrected.

2. RECENT ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (“FASB”) ratified the Emerging Issues Task Force (“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. We adopted EITF 07-1 for our fiscal year beginning September 28, 2008. The adoption of EITF 07-1 did not have a material impact on our consolidated financial position and results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“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 and recorded as an expense. SFAS 141(R) is effective for us for acquisitions after the beginning of our fiscal year 2010. We are currently evaluating the potential impact, if any, of the adoption of FAS 141(R) on our consolidated financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS 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. We adopted SFAS 157 in our first quarter of fiscal 2009. The adoption of SFAS 157 for financial assets and financial liabilities did not have a significant impact on our consolidated financial position and results of operations.

In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”) 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. FSP 157-2 is effective for us for our fiscal year beginning October 4, 2009. We are currently evaluating the impact of the adoption of those provisions of SFAS 157 on our consolidated financial position and results of operations.

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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, changes in fair value are recognized in earnings. We adopted SFAS 159 in our first quarter of fiscal 2009. The adoption of SFAS 159 did not have a material impact 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. We adopted SFAS 161 in our second quarter of fiscal 2009. The adoption of SFAS 161 did not have a material impact on our consolidated financial position and results of operations.

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 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 do not expect that the adoption of SFAS 162 will have a significant impact on our consolidated financial position, results of operations and cash flows.

In April 2009, the FASB issued FSP FAS 141(R)-1 “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP 141(R)-1”) which amends the guidance in SFAS No. 141(R) to require contingent assets acquired and liabilities assumed in a business combination to be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the measurement period. If fair value cannot be reasonably estimated during the measurement period, the contingent asset or liability would be recognized in accordance with SFAS No. 5 “Accounting for Contingencies”, and FASB Interpretation (FIN) No. 14 “Reasonable Estimation of the Amount of a Loss”. Further, this FSP eliminated the specific subsequent accounting guidance for contingent assets and liabilities from SFAS No. 141(R), without significantly revising the guidance in SFAS No. 141. However, contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination would still be initially and subsequently measured at fair value in accordance with SFAS No. 141(R). This FSP is effective for all business acquisitions occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of FAS 141(R)-1 on our consolidated financial position, results of operations and cash flows.

In April 2009, the FASB issued FSP FAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1 (“FSP FAS 107-1 & APB 28-1”), “Interim Disclosures about Fair Value of Financial Instruments.” This FSP amends SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. We do not expect that the adoption of FSP FAS 107-1 & APB 28-1 will have a significant impact on our consolidated financial position, results of operations and cash flows.

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In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. We do not expect that the adoption of FSP FAS 115-2 and FAS 124-2 will have a significant impact on our consolidated financial position, results of operations and cash flows.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption. We do not expect that the adoption of FSP FAS 157-4 will have a significant impact on our consolidated financial position, results of operations and cash flows.

3. FAIR VALUE OF CASH EQUIVALENTS AND MARKETABLE SECURITIES

We measure our cash equivalents and marketable securities at fair value. The fair values of our financial assets and liabilities are determined using quoted market prices of identical assets or quoted market prices of similar assets from active markets. Level 1 valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 valuations are obtained from quoted market prices in active markets involving similar assets. Level 3 valuations would be based on unobservable inputs to a valuation model and include our own data about assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances; as of April 4, 2009, we did not have any assets or liabilities valued based on Level 3 valuations.

Financial assets and liabilities measured at fair value as of April 4, 2009 are summarized below (in thousands):

	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs			Total Fair Value
	(Level 1)		(Level 2)

Money market fund deposits (1)	$	22,462	$	—		$	22,462
Certificates of deposit (2)	—		120,909			120,909
U.S. Treasury and agency obligations (3)	—		25,764			25,764
Corporate notes and obligations (4)	—		749			749
Commercial paper (5)	—		11,464			11,464
Foreign currency contracts (6)	—		(162		)	(162		)
Total net assets measured at fair value	$	22,462	$	158,724		$	181,186

(1) Included in cash and cash equivalents on the Condensed Consolidated Balance Sheet.

(2) Includes $115,467 recorded in cash and cash equivalents and $5,442 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(3) Includes $10,198 recorded in cash and cash equivalents and $15,566 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(4) Included in short-term investments on the Condensed Consolidated Balance Sheet.

(5) Includes $9,372 recorded in cash and cash equivalents and $2,092 recorded in short-term investments on the Condensed Consolidated Balance Sheet.

(6) Includes $201 recorded in prepaid expenses and other assets and $363 recorded in other current liabilities on the Condensed Consolidated Balance Sheet.

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4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value. We enter into foreign exchange forwards to minimize the risks of foreign currency fluctuation of specific assets and liabilities on the balance sheet; these are not designated as hedging instruments under FAS 133.

Effective December 28, 2008, we adopted the changes to the disclosure requirements for derivative and hedging activities of SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). 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 and its related interpretations, and (c) how derivative instruments and related hedged items affect our financial position, financial performance, and cash flows.

We maintain operations in various countries outside of the United States and foreign subsidiaries that manufacture and sell our products in various global markets. The majority of our sales are transacted in U.S. dollars. However, we do generate revenues in other currencies, primarily the Euro and the Japanese Yen. As a result, our earnings and cash flows are exposed to fluctuations in foreign currency exchange rates. We attempt to limit these exposures through financial market instruments. We utilize derivative instruments, primarily forward contracts with maturities of two months or less, to manage our exposure associated with anticipated cash flows and net asset and liability positions denominated in foreign currencies. Gains and losses on the forward contracts are mitigated by gains and losses on the underlying instruments. We do not use derivative financial instruments for speculative or trading purposes. If a financial counterparty to any of our hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses.

For derivative instruments that are not designated as hedging instruments under SFAS 133, gains and losses are recognized in other income (expense).

The outstanding notional amounts of hedge contracts, with maximum maturity of 2 months, are as follows (in thousands):

	April 4, 2009			September 27, 2008
Other foreign currency hedge contracts
Purchase	$	10,447		$	22,310
Sell	(4,093		)	(8,470		)
Net	$	6,354		$	13,840

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The location and fair value amounts of our derivative instruments reported in our Condensed Consolidated Balance Sheets as of April 4, 2009 were as follows (in thousands):

	Asset Derivatives			Liability Derivatives
	April 4, 2009			April 4, 2009
	Balance Sheet			Balance Sheet
	Location	Fair Value		Location	Fair Value

Derivatives not designated as hedging instruments under SFAS 133
Foreign exchange contracts	Prepaid expenses and other assets	$	201	Other current liabilities	$	363

The location and amounts of non-designated derivative instruments’ gains and losses in the Condensed Consolidated Statements of Operations for the three and six months ended April 4, 2009 are as follows (in thousands):

		Amount of Gain or (Loss) Recognized in
	Location of Gain	Income on Derivatives
	(Loss) Recognized in Income on Derivatives	Three Months Ended April 4, 2009			Six Months Ended April 4, 2009
Derivatives not designated as hedging instruments under SFAS 133
Foreign exchange contracts	Other income (expense)	$	(1,417	)	$	(1,726	)

5. 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 warranty and the estimated cost of product warranty claims (based on historical experience) 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.

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.

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6. 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 in active markets involving similar assets. 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).

Cash, cash equivalents and short-term investments consist of the following (in thousands):

	April 4, 2009
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	182,947	$	4	$	—		$	182,951
Short-term investments:
Available-for-sale securities:
Commercial paper	$	2,092	$	—	$	—		$	2,092
Certificates of deposit	5,404		38		—			5,442
U.S. Treasury and agency obligations	15,552		14		—			15,566
Corporate notes and obligations	755		1		(7		)	749
Total short-term investments	$	23,803	$	53	$	(7	)	$	23,849

	September 27, 2008
	Cost Basis		Unrealized Gains		Unrealized Losses			Fair Value
Cash and cash equivalents	$	216,474	$	2	$	(5	)	$	216,471
Less: restricted cash								(2,645		)
								$	213,826
Short-term investments:
Available-for-sale securities:
Commercial paper	$	1,496	$	—	$	—		$	1,496
Certificates of deposit	900		5		—			905
U.S. Treasury and agency obligations	607		5		—			612
Corporate notes and obligations	1,254		7		(6		)	1,255
Total short-term investments	$	4,257	$	17	$	(6	)	$	4,268

At September 27, 2008, $2.6 million of cash was restricted for remaining close out costs associated with our purchase of the remaining outstanding shares of Lambda Physik. The cash was paid during the first fiscal quarter and no cash was restricted as of April 4, 2009.

7. GOODWILL AND INTANGIBLE ASSETS

During the three months ended December 27, 2008, our stock price declined substantially, which combined with expectations of declines in forecasted operating results due to the slowdown in the global economy, led the Company to conclude that a triggering event for review for potential goodwill impairment had occurred. Accordingly, as of December 27, 2008, we performed an interim goodwill impairment evaluation, as required under SFAS No. 142. Under SFAS No. 142, goodwill is tested for impairment first by comparing each reporting unit’s fair value to its respective carrying value. If such comparison indicates a potential impairment, then the impairment is determined as the difference between the recorded value of goodwill and its fair value. The performance of this test is a two-step process.

Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform Step 2 of the goodwill impairment test to determine the amount of impairment loss. Step 2 of the goodwill impairment test involves comparing the fair value of the affected reporting unit’s goodwill against the carrying value of that goodwill.

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The reporting units we evaluated for goodwill impairment have been determined to be the same as our operating segments in accordance with SFAS No. 142 and include Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). We determined the fair value of our reporting units for the Step 1 test using a weighting of the Income (discounted cash flow), Market and Transaction approach valuation methodologies. We completed Step 1 of the impairment test. Management reviewed the results of the Step 1 analysis and concluded that a Step 2 analysis was required only for the CLC reporting unit. Due to the extensive work involved in performing the Step 2 analysis, the Company had not completed its analysis for the CLC reporting unit at the time the Company’s quarterly report on Form 10-Q for the first quarter of fiscal 2009 was due. Our preliminary analysis indicated that the entire balance of the goodwill in the CLC reporting unit at that date was impaired and we recorded a non-cash goodwill impairment charge of $19.3 million in the first quarter of fiscal 2009. During the three months ended April 4, 2009, we completed the Step 2 analysis for the CLC reporting unit at December 27, 2008 and determined that the entire balance of goodwill in the CLC reporting unit at that date was impaired. The estimated fair value of our SLS reporting unit exceeded its carrying value so no further impairment analysis was required for this reporting unit.

The non-cash impairment of goodwill of $19.3 million was recorded in the three months ended December 27, 2008.

During the three months ended April 4, 2009, our expectations of declines in forecasted operating results due to the slowdown in the global economy and the further declines in our stock price led the Company to conclude that a triggering event for review for potential goodwill impairment had occurred. Accordingly, as of April 4, 2009, we performed an interim goodwill impairment evaluation, as required under SFAS No. 142. This interim impairment evaluation utilized the same valuation techniques used in our impairment valuation in the first quarter of fiscal 2009. Based on the results of our Step 1 analysis, we determined that no additional goodwill impairment was indicated.

The changes in the carrying amount of goodwill by segment for the period from September 27, 2008 to April 4, 2009 are as follows (in thousands):

	Commercial Lasers and Components			Specialty Lasers and Systems			Total
Balance as of September 27, 2008	$	23,786		$	63,032		$	86,818
Reclassification (see Note 17)	(4,500		)	4,500			—
Impairment loss	(19,286		)	—			(19,286		)
Translation adjustments and other	—			(4,019		)	(4,019		)
Balance as of April 4, 2009	$	—		$	63,513		$	63,513

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

	April 4, 2009							September 27, 2008
	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Existing technology	$	53,128	$	(35,377	)	$	17,751	$	54,615	$	(33,370	)	$	21,245
Patents	9,605		(7,859		)	1,746		10,496		(8,090		)	2,406
Drawings	1,311		(1,311		)	—		1,433		(1,433		)	—
Order backlog	4,637		(4,623		)	14		5,052		(5,034		)	18
Customer lists	5,231		(3,410		)	1,821		5,440		(3,253		)	2,187
Trade name	3,556		(2,272		)	1,284		3,861		(2,236		)	1,625
Non-compete agreement	2,315		(2,279		)	36		2,454		(2,379		)	75
Total	$	79,783	$	(57,131	)	$	22,652	$	83,351	$	(55,795	)	$	27,556

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Amortization expense for intangible assets for the six months ended April 4, 2009 and March 29, 2008 was $3.8 million and $4.4 million, respectively. At April 4, 2009, estimated amortization expense for the remainder of fiscal 2009, the next five succeeding fiscal years and all fiscal years thereafter are as follows (in thousands):

	Estimated Amortization Expense
2009 (remainder)	$	3,741
2010	6,419
2011	4,929
2012	3,232
2013	1,953
2014	1,089
Thereafter	1,289
Total	$	22,652

8. BALANCE SHEET DETAILS

Inventories consist of the following (in thousands):

	April 4, 2009		September 27, 2008
Purchased parts and assemblies	$	37,103	$	36,919
Work-in-process	35,585		46,128
Finished goods	41,551		37,472
Inventories	$	114,239	$	120,519

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

	April 4, 2009		September 27, 2008
Prepaid and refundable income taxes	$	20,420	$	23,277
Prepaid expenses and other	27,894		18,516
Total prepaid expenses and other assets	$	48,314	$	41,793

Other assets consist of the following (in thousands):

	April 4, 2009		September 27, 2008
Assets related to deferred compensation arrangements	$	18,395	$	28,122
Deferred tax assets	58,651		50,208
Other assets	2,839		2,900
Total other assets	$	79,885	$	81,230

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

	April 4, 2009		September 27, 2008
Accrued payroll and benefits	$	20,493	$	30,807
Reserve for warranty	11,638		13,214
Deferred income	12,317		12,096
Accrued expenses and other	8,547		12,252
Other taxes payable	14,588		4,858
Accrued restructuring charges	3,754		3,587
Customer deposits	2,912		2,324
Total other current liabilities	$	74,249	$	79,138

On April 16, 2008, we announced that we entered into an agreement to sell certain assets of our Auburn Optics (“Auburn”) 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 is providing optical manufacturing capabilities for us, including fabrication and coating of optical components. The transition of the optics manufacturing assets from Auburn to REO was substantially completed by the end of the second quarter of fiscal 2009. The transition has resulted in charges primarily for employee terminations, supplier qualification, moving costs for related equipment, and other exit related costs associated with a plan approved by management.

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During the second quarter of fiscal 2009, we announced our plans to close our facilities in Tampere, Finland and St. Louis, Missouri. The closure of our Finland and St. Louis sites are scheduled for completion by the end of fiscal 2010 and fiscal 2009, respectively. These closure plans have resulted in charges primarily for employee termination and other costs associated with a plan approved by management.

During fiscal 2008, we consolidated our German DPSS manufacturing into our Lübeck, Germany site. The transfer was completed in the fourth quarter of fiscal 2008. On October 13, 2008, we announced the consolidation of the remainder of our Munich facility into our Göttingen site. The transfer is scheduled for completion by the end of our third quarter of fiscal 2009. The consolidation and transfers have resulted in charges primarily for employee terminations, other exit related costs associated with a plan approved by management and a grant repayment liability.

We recognize restructuring costs in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Restructuring charges in the first six months of fiscal 2009 and 2008 are recorded in cost of sales, research and development and selling, general and administrative expenses in our consolidated statements of operations.

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, payments made against the accrual and other provisions for the first six months of fiscal 2009 and 2008 (in thousands):

	Severance Related			Facilities- related Charges			Other Restructuring Costs			Total
Balance at September 29, 2007	$	—		$	476		$	—		$	476
Provisions	—			—			—			—
Deductions	—			(476		)	—			(476		)
Balance at March 29, 2008	$	—		$	—		$	—		$	—

Balance at September 27, 2008	$	2,581		$	19		$	987		$	3,587
Provisions	5,862			950			2,275			9,087
Deductions	(5,668		)	(607		)	(2,645		)	(8,920		)
Balance at April 4, 2009	$	2,775		$	362		$	617		$	3,754

The severance related costs for the first six months of fiscal 2009 are primarily comprised of severance pay, outplacement services, medical and other related benefits for employees being terminated due to the transition of activities out of Auburn, California, Munich, Germany, St. Louis, Missouri and Tampere, Finland. The remaining severance related restructuring accrual balance of approximately $2.8 million at April 4, 2009 is expected to result in cash expenditures through the fourth quarter of fiscal 2010. The other restructuring costs are primarily for a grant repayment liability, project management fees and other exit related costs associated with a plan approved by management.

We provide warranties on certain of our product sales 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. The weighted average period covered is nearly 15 months. 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.

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Components of the reserve for warranty costs during the first six months of fiscal 2009 and 2008 were as follows (in thousands):

	Six Months Ended
	April 4, 2009			March 29, 2008
Beginning balance	$	13,214		$	13,660
Additions related to current period sales	6,178			10,571
Warranty costs incurred in the current period	(7,222		)	(11,099		)
Adjustments to accruals related to prior period sales	(532		)	658
Ending balance	$	11,638		$	13,790

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

	April 4, 2009		September 27, 2008
Long-term taxes payable	$	47,090	$	45,343
Deferred compensation	18,654		28,459
Deferred tax liabilities	10,162		13,738
Deferred income	1,948		1,800
Asset retirement obligations liability	1,454		1,464
Other long-term liabilities	4,017		3,802
Total other long-term liabilities	$	83,325	$	94,606

The following table reconciles changes in our asset retirement obligations liability (in thousands):

	Six Months Ended
	April 4, 2009			March 29, 2008
Beginning balance	$	1,464		$	1,256
Adjustment to asset retirement obligations recognized	388			(16		)
Accretion recognized	53			34
Changes due to foreign currency exchange	(50		)	158
Ending balance	$	1,855		$	1,432

At April 4, 2009, $401,000 of the asset retirement liability is reported in other current liabilities and $1,454,000 is reported in other long-term liabilities on our condensed consolidated balance sheets. At March 29, 2008, the asset retirement liability is reported in other long-term liabilities on our condensed consolidated balance sheets.

9. SHORT-TERM BORROWINGS

We have several lines of credit which allow us to borrow in the applicable local currency. At April 4, 2009, these foreign lines of credit totaled $15.7 million, of which $14.1 million was unused and available. These credit facilities were used in Europe during the first six months of fiscal 2009 as guarantees. 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 with which we are currently in compliance. No amounts have been drawn upon our domestic line of credit as of April 4, 2009.

10. STOCK-BASED COMPENSATION

Stock-Based Benefit Plans

We have two Stock Option Plans for which all employees and service providers are eligible participants and a non-employee Directors’ Stock Option Plan for which only non-employee directors are eligible participants. The Directors’ 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 an independent 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 zero, 2,867,003 and 129,000 shares, respectively, remain available for grant at April 4, 2009. Employee options are generally exercisable between two and 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. The Company settles stock option exercises with newly issued shares of common stock. Grants under employee plans generally expire six years from the original grant date. 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. Additionally, the non-employee directors receive an annual stock 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 the Directors’ Stock Option Plan 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.

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Under one of our Stock Option Plans, certain employees and non-employee directors are eligible for grants of restricted stock awards and/or restricted stock units. Restricted stock awards and restricted stock units are independent of option grants and are subject to restrictions. All of the shares of restricted stock outstanding at April 4, 2009 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. 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. Restricted stock (not including performance-based restricted stock and restricted stock units) has the same cash dividend and voting rights as other common stock and is considered to be currently issued and outstanding. The cost of the awards and units, 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 had 409,561 shares and units of restricted stock outstanding at April 4, 2009 and 341,015 shares and units of restricted stock outstanding at September 27, 2008.

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 April 4, 2009, 670,324 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.

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The fair values of our stock options granted to employees and shares purchased under the employee stock purchase plan for the three months ended April 4, 2009 and March 29, 2008 were estimated using the following weighted-average assumptions:

	Employee Stock Option Plans												Employee Stock Purchase Plan
	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	April 4, 2009			March 29, 2008			April 4, 2009			March 29, 2008			April 4, 2009			March 29, 2008			April 4, 2009			March 29, 2008 (1)
Expected life in years	5.6			3.1			4.2			3.5			0.5			0.7			0.5			0.7
Expected volatility	48.0		%	29.5		%	48.0		%	29.5		%	44.1		%	31.9		%	40.5		%	31.9		%
Risk-free interest rate	2.1		%	2.1		%	1.95		%	3.9		%	1.1		%	1.8		%	1.3		%	1.8		%
Expected dividends	—			—			—			—			—			—			—			—
Weighted average fair value per share	$	7.27		$	6.47		$	8.92		$	8.78		$	6.95		$	7.31		$	7.06		$	7.31

(1) During the second quarter of fiscal 2007, the ESPP 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 first quarter of fiscal 2008. There was no activity under the ESPP during the first quarter of fiscal 2008. The ESPP reopened in March 2008.

Stock Compensation Expense

The following table shows total stock-based compensation expense included in the condensed consolidated statements of operations for the three and six months ended April 4, 2009 and March 29, 2008 (in thousands):

	Three Months Ended						Six Months Ended
	April 4, 2009			March 29, 2008			April 4, 2009			March 29, 2008
Cost of sales	177			$	759		$	461		$	1,144
Research and development	239			808			434			1,127
Selling, general and administrative	2,009			3,382			3,220			5,383
Income tax benefit	(453		)	(1,215		)	(990		)	(1,987		)
	$	1,972		$	3,734		$	3,125		$	5,667

During the three and six months ended April 4, 2009, $0.3 million and $0.5 million, respectively, for all stock plans was capitalized into inventory, $0.2 million and $0.5 million, respectively, was amortized to cost of sales and $0.3 million remained in inventory at April 4, 2009. During the three and six months ended March 29, 2008, $0.4 million and $0.6 million, respectively, for all stock plans was capitalized into inventory, $0.3 million and $0.5 million, respectively, was amortized to cost of sales and $0.4 million remained in inventory at March 29, 2008. 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 April 4, 2009, 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 $9.6 million, net of estimated forfeitures of $1.3 million. This cost will be amortized on a straight-line basis over a weighted-average period of approximately 2.3 years and will be adjusted for subsequent changes in estimated forfeitures.

At April 4, 2009, total compensation cost related to options to purchase common shares under the ESPP but not yet vested was approximately $0.1 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 six months of fiscal 2009 and fiscal 2008, we recorded an immaterial amount of excess tax benefits as cash flows from financing activities.

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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 27, 2008	2,880		$	30.31
Granted	467		22.44
Exercised	(9	)	25.37
Forfeitures	(14	)	28.42
Expirations	(332	)	24.36
Outstanding at April 4, 2009	2,992		$	29.77	3.3	$	120

Vested and expected to vest at April 4, 2009	2,940		$	29.88	3.3	$	115

Exercisable at April 4, 2009	2,133		$	30.87	2.5	$	—

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock. There were less than 0.1 million outstanding options that were in-the-money at April 4, 2009. No options were exercised under the Company’s stock option plans during the second fiscal quarter of 2009, therefore there was no intrinsic value realized in that period. During the first quarter of fiscal 2009, the aggregate intrinsic value of options exercised under the Company’s stock option plans was less than $0.1 million, determined as of the date of option exercise. During the second 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 options that were exercised under the Company’s stock option plans during the first fiscal quarter of 2008, therefore there was no intrinsic value realized in that period.

The following table summarizes our restricted stock award and restricted stock unit activity for the first six months of fiscal 2009 (in thousands, except per share amounts):

	Number of Shares		Weighted Average Grant Date Fair Value per Share
Nonvested stock at September 27, 2008	341		$	29.70
Granted	173		22.46
Vested	(64	)	29.60
Forfeited	(40	)	31.15
Nonvested stock at April 4, 2009	410		$	26.52

11. 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.

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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. Motions to dismiss the consolidated complaint have been filed by defendants and those motions have not been ruled upon by the court.

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.

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 (“NOPAs”) 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 received a NOPA from the IRS in October 2008 to decrease the amount of research and development credits generated in years 2000 and 2001. We responded to this NOPA and intend to dispute the adjustment with the IRS through the appeals process available to us. While we believe that we have adequately provided for any adjustments that may be proposed by the IRS related to these credits, there exists the possibility of a material adverse impact on our results of operations in the event that this issue is resolved unfavorably to us.

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.

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12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended						Six Months Ended
	April 4,			March 29,			April 4,			March 29,
	2009			2008			2009			2008

Net income (loss)	$	(9,130	)	$	6,125		$	(23,809	)	$	10,854

Other comprehensive income (loss):
Translation adjustment	(10,437		)	28,028			(20,598		)	31,214
Net gain on derivative instruments, net of taxes	2			2			4			1
Changes in unrealized gains (losses) on available-for-sale securities, net of taxes	—			(25		)	7			129
Other comprehensive income (loss), net of tax	(10,435		)	28,005			(20,587		)	31,344
Comprehensive income (loss)	$	(19,565	)	$	34,130		$	(44,396	)	$	42,198

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

Balance, September 30, 2007	$	(98	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	3
Balance, March 29, 2008	$	(95	)

Balance, September 27, 2008	$	(93	)
Changes in fair value of derivatives	—
Net losses reclassified from OCI	4
Balance, April 4, 2009	$	(89	)

Accumulated other comprehensive income (net of tax) at April 4, 2009 is comprised of accumulated translation adjustments of $58.6 million and net loss on derivative instruments of $0.1 million. Accumulated other comprehensive income (net of tax) at September 27, 2008 is comprised of accumulated translation adjustments of $79.2 million and net loss on derivative instruments of $0.1 million.

13. 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 awards and stock purchase contracts, using the treasury stock method.

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

	Three Months Ended					Six Months Ended
	April 4,			March 29,		April 4,			March 29,
	2009			2008		2009			2008
Weighted average shares outstanding —basic (1)	24,258			31,394		24,202			31,406
Dilutive effect of employee stock awards	—			480		—			510
Weighted average shares outstanding—diluted	24,258			31,874		24,202			31,916

Net income (loss)	$	(9,130	)	$	6,125	$	(23,809	)	$	10,854

Net income (loss) per basic share	$	(0.38	)	$	0.20	$	(0.98	)	$	0.35
Net income (loss) per diluted share	$	(0.38	)	$	0.19	$	(0.98	)	$	0.34

(1) Net of restricted stock

As the Company incurred a net loss for the second quarter and first six months of fiscal 2009, all potentially dilutive securities from stock options, employee stock purchase plan and restricted stock awards have been excluded from the diluted net loss per share computation as their effects were deemed anti-dilutive. A total of 2,348,968 and 2,430,969 potentially dilutive securities have been excluded from the dilutive share calculation for the second quarter and first six months of fiscal 2008, respectively, as their effect was anti-dilutive.

14. 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 fiscal 2009. The remaining repurchase program expired on February 11, 2009.

15. OTHER INCOME (EXPENSE)

Other income (expense) is as follows (in thousands):

	Three Months Ended						Six Months Ended
	April 4, 2009			March, 29, 2008			April 4, 2009			March, 29, 2008
Interest and dividend income	$	689		$	3,368		$	2,133		$	7,437
Interest expense	(32		)	(184		)	(109		)	(345		)
Foreign exchange gain (loss)	(1,806		)	1,082			(1,304		)	2,506
Loss on investments, net	(1,222		)	(1,139		)	(8,020		)	(177		)
Other—net	771			1,136			1,470			723
Other income (expense), net	$	(1,600	)	$	4,263		$	(5,830	)	$	10,144

16. 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.

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Income tax expense includes a provision for federal, state and foreign taxes based on the annual estimated effective tax rate applicable to us and our subsidiaries. Our estimated effective tax rate for the three months and six months ended April 4, 2009 was (22.4%) and (13.7%), respectively. The difference between the statutory rate of 35% and our effective tax rate of (22.4%) for the three months ended April 4, 2009 was due primarily to permanent differences related to an increase in valuation allowance against California research and development tax credits as a result of California legislation enacted in February 2009, an unrealized loss on life insurance policy investments related to our deferred compensation plan and deemed dividend inclusions under the Subpart F tax rules. These amounts are partially offset by permanent differences related to the benefit of foreign tax credits and federal research and development credits. The difference between the statutory rate of 35% and our effective tax rate of (13.7%) for the six months ended April 4, 2009 was due primarily to permanent differences related to the non-deductibility of the goodwill impairment, an increase in valuation allowance against California research and development tax credits as a result of California legislation enacted in February 2009 and certain foreign net operating loss carryforwards, an unrealized loss on life insurance policy investments related to our deferred compensation plan and deemed dividend inclusions under the Subpart F tax rules. These amounts are partially offset by permanent differences related to the benefit of foreign tax credits and the benefit of federal research and development tax credits, including additional credits reinstated from fiscal 2008 resulting from the enactment of the “Emergency Economic Stabilization Act of 2008.”

Determining the consolidated provision for income taxes, income tax liabilities and deferred tax assets and liabilities involves judgment. We calculate and provide for income taxes in each of the tax jurisdictions in which we operate, 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.

As of April 4, 2009, the total amount of gross unrecognized tax benefits was $52.6 million, of which $28.3 million, if recognized, would affect our effective tax rate. Our total gross unrecognized tax benefits were classified as other long-term liabilities in the condensed consolidated balance sheets.

Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. As of April 4, 2009, the total amount of gross interest and penalties accrued was $7.3 million, which is classified as other long-term liabilities in the condensed consolidated balance sheets.

We are subject to taxation and file 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 is also auditing the research and development credits generated in the years 1999 through 2001 and carried forward to future years. We responded to a NOPA issued by the IRS in October 2008 to decrease the amount of research and development credits generated in 2000 and 2001 and we intend to dispute the proposed adjustment with the IRS through the appeals process available to us. The IRS has also indicated that it may consider an audit of our 2005 and 2006 tax returns. In our major state jurisdiction and our major foreign jurisdiction, the years subsequent to 1998 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 our tax audits be resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, we do not believe it is reasonably possible that our unrecognized tax benefits would materially change in the next 12 months.

The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008,” was enacted on October 3, 2008. Under the Act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The effects of the change in the tax law are recognized in our first quarter of fiscal 2009, which is the quarter that the law was enacted. In addition to the federal legislation, California Assembly Bill 1452 was enacted on September 30, 2008. This legislation limits the utilization of the California research and development credit to 50% of the California tax liability for tax years beginning on or after January 1, 2008 and before January 1, 2010. New California budget legislation was also signed on February 20, 2009 that allows taxpayers to make an annual election of a single sales factor apportionment formula for tax years beginning on or after January 1, 2011. The effects of the new California budget legislation are recognized in our second quarter of fiscal 2009.

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17. SEGMENT INFORMATION

We are organized into two reportable 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.

Effective as of the beginning of the first quarter of fiscal 2009, in order to align all of our diode-pumped solid state (“DPSS”) technology into the same reportable operating segment, management moved the DPSS Germany and Crystal product families from the CLC segment into the SLS segment, including $4.5 million of goodwill. This allows for leverage and efficiencies in many parts of the business. Crystal is primarily an internal supplier that supports the DPSS product family. This concentrates all DPSS product families in the SLS segment effective as of the first quarter of fiscal 2009. All of reporting has been aligned to reflect the revised reportable operating segments (CLC and SLS) and prior periods have been restated.

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 by segment 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.

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

	Three Months Ended						Six Months Ended
	April 4,			March 29,			April 4,			March 29,
	2009			2008			2009			2008
Net sales:
Commercial Lasers and Components	$	30,828		$	53,871		$	68,208		$	101,119
Specialty Laser Systems	74,569			102,046			161,552			199,069
Corporate and other	25			25			50			50
Total net sales	$	105,422		$	155,942		$	229,810		$	300,238

Income (loss) from operations:
Commercial Lasers and Components	$	(7,508	)	$	4,652		$	(31,276	)	$	5,474
Specialty Laser Systems	7,891			14,963			21,624			28,864
Corporate and other	(6,242		)	(11,532		)	(5,453		)	(25,104		)
Total income (loss) from operations	$	(5,859	)	$	8,083		$	(15,105	)	$	9,234

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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.

We are organized into two operating segments: Commercial Lasers and Components (“CLC”) and Specialty Lasers and Systems (“SLS”). This 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.

Effective as of the beginning of the first quarter of fiscal 2009, in order to align all of our diode-pumped solid state (“DPSS”) technology into the same reportable operating segment, management moved the DPSS Germany and Crystal product families from the CLC segment into the SLS segment. This allows for leverage and efficiencies in many parts of the business. Crystal is primarily an internal supplier that supports the DPSS product family. This concentrates all DPSS product families in the SLS segment effective as of the first quarter of fiscal 2009. All of reporting has been aligned to reflect the revised reportable operating segments (CLC and SLS) and prior periods have been restated.

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.

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.

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· 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.

· 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. Key initiatives to reach our goals for EBITDA improvements include our program of consolidating manufacturing locations, rationalizing our supply chain and logistics and selective outsourcing of manufacturing operations.

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.

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 and amortizable intangible 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 the undiscounted expected future cash flows identifiable to such long-lived and amortizable intangible assets. If the comparison indicates that impairment exists, the impaired asset is written down to its fair value.

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In accordance with paragraph 30 of SFAS 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), we have determined that our reporting units are the same as our operating segments as each constitutes a business for which discrete financial information is available and for which segment management regularly reviews the operating results. We make this determination in a manner consistent with how the operating segments are managed. Based on this analysis, we have identified two reporting units which are our reportable segments: CLC and SLS.

In accordance with SFAS No. 142, goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired (see Note 7 in the Notes to Condensed Consolidated Financial Statements). We perform our annual impairment tests at the beginning of the fourth quarter of each fiscal year using the opening balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.

During the three months ended December 27, 2008, our stock price declined substantially which, combined with expectations of declines in forecasted operating results due to the slowdown in the global economy, led the Company to conclude that a triggering event for review for potential goodwill impairment had occurred. Accordingly, as of December 27, 2008, we performed an interim goodwill impairment evaluation, as required under SFAS No. 142. Under SFAS No. 142, goodwill is tested for impairment by comparing the respective fair value with the respective carrying value of the reporting unit. If such comparison indicates a potential impairment, then the impairment is determined as the difference between the recorded value of goodwill and its fair value. The performance of this test is a two-step process.

Step 1 of the impairment test involves comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform Step 2 of the goodwill impairment test to determine the amount of impairment loss. Step 2 of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill against the carrying value of that goodwill.

We rely on the following three valuation approaches to determine the fair value of both of our reporting units. (1) The Income approach utilizes the discounted cash flow model to provide an estimation of fair value based on the cash flows that a business expects to generate. These cash flows are based on forecasts developed internally by management which are then discounted at an after tax rate of return required by equity and debt market participants of a business enterprise. This rate of return or cost of capital is weighted based on the capitalization of comparable companies. (2) The Market approach determines fair value by comparing the reporting units to comparable companies in similar lines of business that are publicly traded. Total Enterprise Value (TEV) multiples such as TEV to revenues and TEV to earnings (if applicable) before interest and taxes of the publicly traded companies are calculated. These multiples are then applied to the reporting unit’s operating results to obtain an estimate of fair value. (3) The Transaction approach estimates the fair value of the reporting unit based on market prices in actual transactions. A comparison is done between the reporting units and other similar businesses. Total Enterprise Value multiples for revenue and earnings as noted in the Market approach above are calculated from the comparable companies and then applied to the reporting unit’s operating results to obtain an estimate of fair value. Each of these three approaches captures aspects of value in each reporting unit. The Income approach captures our expected future performance, the Market approach captures how investors view the reporting units through other competitors; and, the Transaction approach captures value through transactions for sales of similar types of companies. We believe these valuation approaches are proven valuation techniques and methodologies for our industry and are widely accepted by investors.

We weighted each of these approaches equally as none are perceived by us to deliver any greater indication of value than the other. The sensitivity analysis performed by management determined that by changing the weighting placed on the three approaches, the result of the Step 1 test for both reporting units was not affected.

The valuation analysis requires significant judgments and estimates to be made by management in particular related to the forecast. The assumed growth rates and gross margins as well as period expenses were determined based on internally developed forecasts considering future plans of the Company. The assumptions used were management’s best estimates based on projected results and market conditions as of the date of testing. In order to test the sensitivity of these fair values, management further reviewed other scenarios relative to these assumptions to see if the resulting impact on fair values would have resulted in a different Step 1 conclusion for the CLC and SLS reporting units.

Based on these forecast scenarios, the fair value of both reporting units was re-calculated. In addition, this sensitivity analysis applied more conservative assumptions with regard to control premiums as well as multipliers used in the Market approach and the Transaction approach. In each of the sensitivity analyses performed, the CLC reporting unit failed and the SLS reporting unit passed. None of the outcomes of the sensitivity analyses performed would have impacted our Step 1 conclusions or the non-cash impairment charge for goodwill of $19.3 million recorded in the three months ended December 27, 2008.

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Sensitivity was also applied to the discount rate used in the Income approach for both the CLC and SLS reporting units. At December 27, 2008, the discount rate for the CLC reporting unit could have been reduced by more than 40% and still resulted in a failure. For the SLS reporting unit, the discount rate could have been increased by more than 40% and still resulted in no impairment.

During the three months ended April 4, 2009, our expectations of declines in forecasted operating results due to the slowdown in the global economy and the further declines in our stock price led the Company to conclude that a triggering event for review for potential goodwill impairment had occurred. Accordingly, as of April 4, 2009, we performed an interim goodwill impairment evaluation, as required under SFAS No. 142. This interim impairment evaluation utilized the same valuation techniques used in our impairment valuation in the first quarter of fiscal 2009. A similar sensitivity analysis was also done at April 4, 2009 where we determined that the discount rate used in the Income approach for the SLS reporting unit could have been increased by approximately 20% and still resulted in no impairment. Based on the results of our Step 1 analysis, we determined that no additional goodwill impairment was indicated.

At April 4, 2009, we had $63.5 million of goodwill on our condensed consolidated balance sheet. At April 4, 2009, we had $100.1 million of property and equipment and $22.7 million of purchased intangible assets on our condensed consolidated balance sheet.

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 addition, if the price of our common stock were to significantly decrease combined with any other adverse change in market conditions, thus indicating that the underlying fair value of our reporting units or other long-lived assets may have decreased, we may be required to assess the recoverability of such assets in the period such circumstances are identified. 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

We provide warranties on certain of our product sales 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. The weighted average warranty period covered is nearly 15 months. 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.

Stock-Based Compensation

We account for share-based compensation using the fair value recognition provisions of SFAS 123(R). We estimate the fair value of stock options granted using the Black-Scholes Merton model. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. We amortize the fair value of stock options on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. We value restricted stock units using the intrinsic value method. We amortize the value of restricted stock units on a straight-line basis over the restriction period.

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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, the expected price volatility of the underlying stock and an estimate of expected forfeitures. Our computation of expected volatility considers historical volatility and market-based implied volatility. Our estimate of expected forfeitures is based on historical employee data and could differ from actual forfeitures.

See Note 10 in the Notes to the Condensed Consolidated Financial Statements for a description of our share-based employee compensation plans and the assumptions we use to calculate the fair value of share-based employee compensation.

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, we 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 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:

Table of Contents

	Three Months Ended
	April 4, 2009			March 29, 2008			Change			% Change
	(Dollars in thousands)

Bookings	$	93,843		$	148,578		$	(54,735	)	(36.8	)%
Net sales–Commercial Lasers and Components	$	30,828		$	53,871		$	(23,043	)	(42.8	)%
Net sales–Specialty Lasers and Systems	$	74,569		$	102,046		$	(27,477	)	(26.9	)%
Gross profit as a percentage of net sales–Commercial Lasers and Components	22.7		%	44.3		%	(21.6		)%	(48.7	)%
Gross profit as a percentage of net sales–Specialty Lasers and Systems	44.0		%	43.2		%	0.8		%	1.7	%
Research and development as a percentage of net sales	14.8		%	12.5		%	2.3		%	18.9	%
Income (loss) before income taxes	$	(7,459	)	$	12,346		$	(19,805	)	(160.4	)%
Net cash provided by operating activities	$	16,925		$	15,564		$	1,361		8.7	%
Days sales outstanding in receivables	69.4			65.0			4.4			6.7	%
Days sales outstanding in inventories	97.5			67.3			30.2			45.0	%
Capital spending as a percentage of net sales	5.0		%	2.9		%	2.1		%	71.3	%

	Six Months Ended
	April 4,		March 29,
	2009		2008		Change			% Change
	(Dollars in thousands)

Bookings	$	197,162	$	303,435	$	(106,273	)	(35.0	)%
Net sales–CLC	$	68,208	$	101,119	$	(32,911	)	(32.5	)%
Net sales–SLS	$	161,552	$	199,069	$	(37,517	)	(18.8	)%
Gross profit as a percentage of net sales–CLC