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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 September 29, 2007

OR



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

For the transition period
fromto

Commission File Number: 0-12853

ELECTRO
SCIENTIFIC INDUSTRIES, INC.



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Oregon                                                         |  | 93-0370304                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|13900 N.W. Science Park Drive, Portland, Oregon                |  | 97229                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number: (503) 641-4141

Registrants web address: www.esi.com

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 ̈

Indicate by check mark whether the registrant is large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x                Non-accelerated filer ̈

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

The number of shares outstanding of the Registrants Common Stock at November 5, 2007 was 27,813,446 shares.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                               |  |                                                                                                                                                         |  |     
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                                                                         |  | Page
|PART I - FINANCIAL INFORMATION |  |                                                                                                                                                        
|                               |  |                                                                                                                                                        
|Item 1.                        |  | Financial Statements (unaudited)                                                                                                                        |  | 2   
|                               |  |                                                                                                                                                        
|                               |  | Consolidated Condensed Balance Sheets  September 29, 2007 and June 2, 2007                                                                             |  | 2   
|                               |  |                                                                                                                                                        
|                               |  | Consolidated Condensed Statements of Operations  Three Months Ended September 29, 2007 and September 2, 2006, and One Month Ended June 30, 2007        |  | 3   
|                               |  |                                                                                                                                                        
|                               |  | Consolidated Condensed Statements of Cash Flows  Three Months Ended September 29, 2007 and September 2, 2006, and Four Months Ended September 29, 2007 |  | 4   
|                               |  |                                                                                                                                                        
|                               |  | Notes to Consolidated Condensed Financial Statements                                                                                                    |  | 5   
|                               |  |                                                                                                                                                        
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                   |  | 17  
|                               |  |                                                                                                                                                        
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                              |  | 25  
|                               |  |                                                                                                                                                        
|Item 4.                        |  | Controls and Procedures                                                                                                                                 |  | 26  
|                               | 
|PART II  OTHER INFORMATION    |  |                                                                                                                                                        
|                               |  |                                                                                                                                                        
|Item 1.                        |  | Legal Proceedings                                                                                                                                       |  | 27  
|                               |  |                                                                                                                                                        
|Item 1A.                       |  | Risk Factors                                                                                                                                            |  | 28  
|                               |  |                                                                                                                                                        
|Item 2.                        |  | Issuer Purchases of Equity Securities                                                                                                                   |  | 36  
|                               |  |                                                                                                                                                        
|Item 5.                        |  | Other Information                                                                                                                                       |  | 36  
|                               |  |                                                                                                                                                        
|Item 6.                        |  | Exhibits                                                                                                                                                |  | 37  
|                               | 
|Signatures                     |  | 38                                                                                                                                                     



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements (unaudited)
|------- | --------------------------------

ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                                            |  |                   |         |             |   |        
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ----------- | - | -------
|                                                                                                            |  | September 29,2007 |         | June 2,2007
|Assets                                                                                                      |  |                   |         |             |   |        
|Current assets:                                                                                             |  |                   |         |             |   |        
|Cash and cash equivalents                                                                                   |  | $                 | 102,795 |             | $ | 100,462
|Marketable securities                                                                                       |  |                   | 53,166  |             |   | 124,607
|                                                                                                            |  |                   |         |             |   |        
|Total cash and securities                                                                                   |  |                   | 155,961 |             |   | 225,069
|Trade receivables, net of allowances of $759 and $626                                                       |  |                   | 56,489  |             |   | 55,722 
|Inventories                                                                                                 |  |                   | 91,891  |             |   | 80,981 
|Shipped systems pending acceptance                                                                          |  |                   | 6,714   |             |   | 1,817  
|Deferred income tax asset, net                                                                              |  |                   | 10,214  |             |   | 9,504  
|Prepaid and other current assets                                                                            |  |                   | 9,399   |             |   | 5,776  
|                                                                                                            |  |                   |         |             |   |        
|Total current assets                                                                                        |  |                   | 330,668 |             |   | 378,869
|Long-term marketable securities                                                                             |  |                   | 23,246  |             |   | 3,622  
|Property, plant and equipment, net of accumulated depreciation of $63,783 and $58,701                       |  |                   | 46,782  |             |   | 43,859 
|Deferred income tax asset, net                                                                              |  |                   | 7,996   |             |   | 11,246 
|Goodwill                                                                                                    |  |                   | 12,866  |             |   | 1,442  
|Acquired intangible assets, net of accumulated amortization of $567 and $0                                  |  |                   | 11,744  |             |   |       
|Other assets                                                                                                |  |                   | 33,307  |             |   | 26,630 
|                                                                                                            |  |                   |         |             |   |        
|Total assets                                                                                                |  | $                 | 466,609 |             | $ | 465,668
|                                                                                                            |  |                   |         |             |   |        
|Liabilities and Shareholders Equity                                                                        |  |                   |         |             |   |        
|Current liabilities:                                                                                        |  |                   |         |             |   |        
|Accounts payable                                                                                            |  | $                 | 16,217  |             | $ | 13,826 
|Accrued liabilities                                                                                         |  |                   | 28,081  |             |   | 25,465 
|Deferred revenue                                                                                            |  |                   | 19,365  |             |   | 12,290 
|                                                                                                            |  |                   |         |             |   |        
|Total current liabilities                                                                                   |  |                   | 63,663  |             |   | 51,581 
|Income tax liability                                                                                        |  |                   | 7,843   |             |   | 5,757  
|Commitments and contingencies                                                                               |  |                   |         |             |   |        
|Shareholders equity:                                                                                       |  |                   |         |             |   |        
|Preferred stock, without par value; 1,000 shares authorized; no shares issued                               |  |                   |        |             |   |       
|Common stock, without par value; 100,000 shares authorized; 27,844 and 28,766 shares issued and outstanding |  |                   | 142,160 |             |   | 162,719
|Retained earnings                                                                                           |  |                   | 252,494 |             |   | 245,546
|Accumulated other comprehensive income                                                                      |  |                   | 449     |             |   | 65     
|                                                                                                            |  |                   |         |             |   |        
|Total shareholders equity                                                                                  |  |                   | 395,103 |             |   | 408,330
|                                                                                                            |  |                   |         |             |   |        
|Total liabilities and shareholders equity                                                                  |  | $                 | 466,609 |             | $ | 465,668
|                                                                                                            |  |                   |         |             |   |        

The accompanying notes are an integral part of these statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|------------------------------------------------------- |  | -------------------------- | ------ | ----------------- | ------------------- | ------ | ------------- |  | - | ------
|                                                        |  | For the three months ended |        |                   | For the month ended
|                                                        |  | September 29, 2007         |        | September 2, 2006 |                     |        | June 30, 2007
|Net sales                                               |  | $                          | 82,318 |                   | $                   | 60,368 |               |  | $ | 16,961
|Cost of sales                                           |  |                            | 45,509 |                   |                     | 34,103 |               |  |   | 8,886 
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Gross profit                                            |  |                            | 36,809 |                   |                     | 26,265 |               |  |   | 8,075 
|Operating expenses:                                     |  |                            |        |                   |                     |        |               |  |   |       
|Selling, service and administration                     |  |                            | 15,380 |                   |                     | 12,051 |               |  |   | 3,745 
|Research, development and engineering                   |  |                            | 11,093 |                   |                     | 9,304  |               |  |   | 2,886 
|Write-off of acquired in-process research & development |  |                            | 2,800  |                   |                     |       |               |  |   |      
|Insurance recovery                                      |  |                            |       |                   |                     | (1,287 | )             |  |   |      
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|                                                        |  |                            | 29,273 |                   |                     | 20,068 |               |  |   | 6,631 
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Operating income                                        |  |                            | 7,536  |                   |                     | 6,197  |               |  |   | 1,444 
|Interest and other income, net                          |  |                            | 2,060  |                   |                     | 2,812  |               |  |   | 816   
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Income before income taxes                              |  |                            | 9,596  |                   |                     | 9,009  |               |  |   | 2,260 
|Provision for income taxes                              |  |                            | 4,066  |                   |                     | 2,807  |               |  |   | 842   
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Net income                                              |  | $                          | 5,530  |                   | $                   | 6,202  |               |  | $ | 1,418 
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Net income per share - basic                            |  | $                          | 0.20   |                   | $                   | 0.21   |               |  | $ | 0.05  
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Net income per share - fully diluted                    |  | $                          | 0.19   |                   | $                   | 0.21   |               |  | $ | 0.05  
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Weighted average number of shares - basic               |  |                            | 28,161 |                   |                     | 29,076 |               |  |   | 28,617
|                                                        |  |                            |        |                   |                     |        |               |  |   |       
|Weighted average number of shares - fully diluted       |  |                            | 28,647 |                   |                     | 29,243 |               |  |   | 29,038
|                                                        |  |                            |        |                   |                     |        |               |  |   |       

The accompanying notes are an integral part of these statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|--------------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ------------------------ | - | -------- | ------------------ |  | - | -------- | -
|                                                                                        |  | For the three months ended |          |   | For the fourmonths ended |  
|                                                                                        |  | September 29, 2007         |          |   | September 2, 2006        |   |          | September 29, 2007 | 
|Cash flows from operating activities:                                                   |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Net income                                                                              |  | $                          | 5,530    |   |                          | $ | 6,202    |                    |  | $ | 6,948    |  
|Adjustments to reconcile net income to cash provided by (used in) operating activities: |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Depreciation                                                                            |  |                            | 2,353    |   |                          |   | 1,969    |                    |  |   | 3,034    |  
|Amortization of intangible assets                                                       |  |                            | 567      |   |                          |   |         |                    |  |   | 567      |  
|Write-off of in-process research & development                                          |  |                            | 2,800    |   |                          |   |         |                    |  |   | 2,800    |  
|Insurance recovery                                                                      |  |                            |         |   |                          |   | (1,287   | )                  |  |   |         |  
|Stock-based compensation expense                                                        |  |                            | 1,044    |   |                          |   | 577      |                    |  |   | 1,239    |  
|Provision for doubtful accounts                                                         |  |                            |         |   |                          |   | 104      |                    |  |   |         |  
|Loss on disposal of property and equipment                                              |  |                            | 2        |   |                          |   |         |                    |  |   | 3        |  
|Deferred income taxes                                                                   |  |                            | (73      | ) |                          |   | 2,711    |                    |  |   | (73      | )
|Changes in operating accounts, net of assets acquired:                                  |  |                            |          |   |                          |   |          |                    |  |   |          |  
|(Increase) decrease in trade receivables, net                                           |  |                            | 1,210    |   |                          |   | (12,723  | )                  |  |   | 6,120    |  
|(Increase) decrease in inventories                                                      |  |                            | 137      |   |                          |   | (6,744   | )                  |  |   | (4,608   | )
|(Increase) decrease in shipped systems pending acceptance                               |  |                            | (4,588   | ) |                          |   | 588      |                    |  |   | (4,897   | )
|(Increase) decrease in prepaid and other current assets                                 |  |                            | 879      |   |                          |   | (1,124   | )                  |  |   | 558      |  
|Increase (decrease) in accounts payable and other current liabilities                   |  |                            | (6,880   | ) |                          |   | 1,539    |                    |  |   | (4,849   | )
|Increase (decrease) in deferred revenue                                                 |  |                            | 5,218    |   |                          |   | (1,162   | )                  |  |   | 5,472    |  
|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Net cash provided by (used in) operating activities                                     |  |                            | 8,199    |   |                          |   | (9,350   | )                  |  |   | 12,314   |  
|Cash flows from investing activities:                                                   |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Purchase of property, plant and equipment                                               |  |                            | (1,907   | ) |                          |   | (4,285   | )                  |  |   | (2,473   | )
|Purchase of securities                                                                  |  |                            | (134,041 | ) |                          |   | (135,617 | )                  |  |   | (167,482 | )
|Proceeds from sales of securities and maturing securities                               |  |                            | 163,156  |   |                          |   | 147,195  |                    |  |   | 219,210  |  
|Cash paid for acquisition of NWR, net of cash acquired                                  |  |                            | (36,159  | ) |                          |   |         |                    |  |   | (36,159  | )
|Minority equity investment                                                              |  |                            |         |   |                          |   | (6,000   | )                  |  |   |         |  
|Insurance recovery                                                                      |  |                            |         |   |                          |   | 1,287    |                    |  |   |         |  
|(Increase) decrease in other assets                                                     |  |                            | 1,123    |   |                          |   | 1,430    |                    |  |   | (1,077   | )
|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Net cash provided by (used in) investing activities                                     |  |                            | (7,828   | ) |                          |   | 4,010    |                    |  |   | 12,019   |  
|Cash flows from financing activities:                                                   |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Proceeds from exercise of stock options and stock plans                                 |  |                            | 2,037    |   |                          |   | 665      |                    |  |   | 2,184    |  
|Share repurchases                                                                       |  |                            | (18,878  | ) |                          |   |         |                    |  |   | (24,866  | )
|Excess tax benefits realized from stock options exercised                               |  |                            | 682      |   |                          |   | 40       |                    |  |   | 682      |  
|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Net cash provided by (used in) financing activities                                     |  |                            | (16,159  | ) |                          |   | 705      |                    |  |   | (22,000  | )
|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Net change in cash and cash equivalents                                                 |  |                            | (15,788  | ) |                          |   | (4,635   | )                  |  |   | 2,333    |  
|Cash and cash equivalents:                                                              |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Beginning of period                                                                     |  |                            | 118,583  |   |                          |   | 79,961   |                    |  |   | 100,462  |  
|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|End of period                                                                           |  | $                          | 102,795  |   |                          | $ | 75,326   |                    |  | $ | 102,795  |  
|                                                                                        |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Supplemental cash flow information:                                                     |  |                            |          |   |                          |   |          |                    |  |   |          |  
|Cash paid for interest                                                                  |  | $                          |         |   |                          | $ | (1       | )                  |  | $ |         |  
|Income tax refunds received                                                             |  |                            | 18       |   |                          |   | 8        |                    |  |   | 18       |  
|Cash paid for income taxes                                                              |  |                            | (4,173   | ) |                          |   | (328     | )                  |  |   | (4,173   | )

The accompanying notes are an integral part of these statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - Basis of
Presentation

These unaudited interim consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in these
interim statements. Accordingly, these interim statements include all adjustments (consisting of only normal recurring adjustments and accruals) necessary for a fair presentation of results for the interim periods presented. These consolidated
condensed financial statements are to be read in conjunction with the financial statements and notes included in the Companys Annual Report on Form 10-K.

Results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. With the exception of the adoption of Financial Accounting Standards Board Interpretation No. 48 Accounting
for Uncertainty in Income Taxes (FIN 48) as discussed in Note 16, the Companys significant accounting policies remain unchanged from those presented in Note 1 to the consolidated financial statements included in the
Companys Annual Report on Form 10-K filed for the fiscal year ended June 2, 2007.

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from those estimates. Management believes that the estimates used are reasonable. Significant estimates made by management
include: inventory write-downs; allowances for uncollectible trade accounts receivables; valuation of minority equity investments, long-lived assets valuations; product warranty reserves; loss contingency reserves; revenue recognition; purchase
accounting; stock compensation valuation and income tax benefits, expenses and deferred taxes.

On July 3, 2007, the Companys Board of Directors
approved a change in the Companys reporting periods that results in a fiscal year end on the Saturday nearest March 31. Accordingly, the Companys fiscal year 2008 will consist of approximately a ten month period containing 43 weeks
ending on March 29, 2008. The Company has elected to file its interim financial statements in Quarterly Reports on Form 10-Q based on the reporting periods in its new fiscal year ending March 29, 2008. The current year financial statements
are presented for the three months ended September 29, 2007 and the one month ended June 30, 2007. Due to the implementation of its enterprise resource system in the fourth quarter of fiscal 2006, the Company performed full close and
reporting procedures on a fiscal quarter basis only during fiscal 2007 and comparative data for the three months ended September 30, 2006 are not available and are not cost beneficial to prepare. As such, comparative data has been provided for
the prior year using the fiscal quarter ending on the date nearest to September 29, which is the first quarter of fiscal 2007 ended September 2, 2006. The Company believes that the first quarter of fiscal 2007 provides a meaningful
comparison to the second quarter of fiscal 2008. The Company does not believe that there are any meaningful factors, seasonal or otherwise, that would impact the comparability of information or trends, if results for the three months ended
September 30, 2006 were presented in lieu of results for the first quarter of fiscal 2007.

Certain reclassifications have been made in the
accompanying consolidated condensed financial statements for prior periods to conform to the current presentation.



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During the third quarter of fiscal 2007, the Company revised its results of operations for the first quarter of fiscal
2007 for certain immaterial corrections and the amounts presented for the three months ended September 2, 2006 in the consolidated condensed financial statements and related notes are the revised amounts, as shown in the table below.



|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  
|----------------------------------------------- |  | ------------------------------------ | ------ | - | ---------- | - | ------ | ---------- |  | - | ------ | -
|                                                |  | Three months ended September 2, 2006 |       
|(in thousands, except per share amounts)        |  | As Reported                          |        |   | Adjustment |   |        | As Revised | 
|Consolidated Condensed Statement of Operations: |  |                                      |        |   |            |   |        |            | 
|Net sales                                       |  | $                                    | 60,164 |   |            | $ | 204    |            |  | $ | 60,368 |  
|Cost of sales                                   |  |                                      | 32,883 |   |            |   | 1,220  |            |  |   | 34,103 |  
|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  
|Gross profit                                    |  |                                      | 27,281 |   |            |   | (1,016 | )          |  |   | 26,265 |  
|Selling, service and administration             |  |                                      | 12,158 |   |            |   | (107   | )          |  |   | 12,051 |  
|Research, development and engineering           |  |                                      | 9,304  |   |            |   |       |            |  |   | 9,304  |  
|Insurance recovery                              |  |                                      | (1,287 | ) |            |   |       |            |  |   | (1,287 | )
|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  
|Operating income                                |  |                                      | 7,106  |   |            |   | (909   | )          |  |   | 6,197  |  
|Interest and other income, net                  |  |                                      | 2,910  |   |            |   | (98    | )          |  |   | 2,812  |  
|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  
|Income before income taxes                      |  |                                      | 10,016 |   |            |   | (1,007 | )          |  |   | 9,009  |  
|Provision for income taxes                      |  |                                      | 3,244  |   |            |   | (437   | )          |  |   | 2,807  |  
|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  
|Net income                                      |  | $                                    | 6,772  |   |            | $ | (570   | )          |  | $ | 6,202  |  
|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  
|Net income per share - basic and diluted        |  | $                                    | 0.23   |   |            | $ | (0.02  | )          |  | $ | 0.21   |  
|                                                |  |                                      |        |   |            |   |        |            |  |   |        |  

As shown in the table above, the revisions to the first quarter of fiscal year 2007 include the following:



| |  |  | Increase in net sales of $0.2 million related to deferral of the fair value of certain undelivered elements and the timing of recording credit memos issued to
certain customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in cost of sales of $1.2 million primarily related to inaccurate inventory transactions recorded within the new enterprise resource planning (ERP) system
and, to a lesser degree, late freight and duty invoices received from an offshore service provider;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decrease in variable expenses included in selling, service and administration of $0.1 million resulting from the above adjustments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Decrease in other income of $0.1 million due to revised net foreign exchange loss; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Net decrease in tax expense of $0.4 million resulting from the above revisions.
| | - |  | -------------------------------------------------------------------------------

Based on the above adjustments, the net cash used in operating activities presented in the consolidated condensed statement of cash flows for the first quarter of fiscal 2007 decreased by $0.7 million and net cash
provided by investing activities increased by $0.7 million.

Note 2  Acquisition of New Wave Research, Incorporated

On July 20, 2007, the Company acquired New Wave Research, Incorporated (NWR), a privately held company headquartered in Fremont, California. NWR is a
global leader in the development of high-end lasers and laser-based systems and its products are used in the semiconductor market for sapphire wafer scribing, flat-panel display repair and semiconductor failure analysis, among other applications.
The acquisition was an investment aimed at leveraging the companies combined core competencies into adjacent markets and driving revenue growth and shareholder value, which supports the premium paid over the fair market value of individual
assets.

The Company acquired 100% of NWRs outstanding common stock for approximately $36.2 million, comprised of $34.9 million in cash and
merger-related transaction costs of $1.3 million. The contractual



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purchase price of $36.0 million was reduced by $1.1 million related to certain net working capital adjustments and indemnity payments agreed to prior to
closing. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analysis supporting the purchase price allocation includes a valuation of assets and liabilities as of the closing date,
a third party valuation of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. The purchase price allocation is subject to
further changes, including the finalization of purchase price adjustments for payments to former NWR shareholders relating to the amount of NWRs net working capital on the date of acquisition, the resolution of various tax-related matters and
liabilities and additional merger-related transaction costs.

The following table presents the preliminary allocation of the purchase price of $36.2
million to the assets acquired and liabilities assumed based on their fair values (in thousands):



|                                           |  |   |         |  
|------------------------------------------ |  | - | ------- | -
|Accounts receivable                        |  | $ | 5,437   |  
|Inventory                                  |  |   | 6,110   |  
|Prepaid expense and other current assets   |  |   | 3,457   |  
|Property, plant and equipment              |  |   | 2,579   |  
|Intangible assets                          |  |   | 12,311  |  
|In-process research & development          |  |   | 2,800   |  
|Goodwill                                   |  |   | 11,424  |  
|Other long-term assets                     |  |   | 1,129   |  
|Accounts payable and accrued liabilities   |  |   | (12,915 | )
|Deferred revenue(1)                        |  |   | (1,603  | )
|                                           |  |   |         |  
|Net assets acquired                        |  |   | 30,729  |  
|Escrow deposits pending disbursement(2)    |  |   | 5,430   |  
|                                           |  |   |         |  
|Total purchase price, net of cash acquired |  | $ | 36,159  |  
|                                           |  |   |         |  



|(1) | The amount recorded for deferred revenue represents the fair value of the remaining obligation assumed related to custom acceptance criteria and remaining revenue on extended
warranties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The final disbursement of escrow deposits will increase the goodwill recorded in the acquisition by the amount of the disbursement. This amount is included in other long-term assets
at September 29, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents the details of the intangible assets purchased in the NWR acquisition as of
July 20, 2007 and accumulated amortization to date at September 29, 2007 (in thousands):



|                                                       |  |             |  |                                    |        |                          |   |      |                                     |  |   |       
|------------------------------------------------------ |  | ----------- |  | ---------------------------------- | ------ | ------------------------ | - | ---- | ----------------------------------- |  | - | ------
|                                                       |  | Useful life |  | Estimated Fair Value atAcquisition |        | Accumulated Amortization |   |      | Recorded value at September 29,2007
|Developed technology                                   |  | 7 years     |  | $                                  | 8,100  |                          | $ | (222 | )                                   |  | $ | 7,878 
|Customer relationships                                 |  | 6 years     |  |                                    | 2,700  |                          |   | (148 | )                                   |  |   | 2,552 
|Customer backlog                                       |  | 1 year      |  |                                    | 700    |                          |   | (134 | )                                   |  |   | 566   
|Trade name and trademarks                              |  | 3 years     |  |                                    | 400    |                          |   | (26  | )                                   |  |   | 374   
|Change of control agreements                           |  | 1 year      |  |                                    | 100    |                          |   | (19  | )                                   |  |   | 81    
|Fair value of below-market lease (non-current portion) |  | 3.8years    |  |                                    | 311    |                          |   | (18  | )                                   |  |   | 293   
|                                                       |  |             |  |                                    |        |                          |   |      |                                     |  |   |       
|Subtotal  long term                                   |  |             |  |                                    | 12,311 |                          |   | (567 | )                                   |  |   | 11,744
|Fair value of below-market lease (current portion)     |  |             |  |                                    | 110    |                          |   |     |                                     |  |   | 110   
|                                                       |  |             |  |                                    |        |                          |   |      |                                     |  |   |       
|Total acquired intangible assets                       |  |             |  | $                                  | 12,421 |                          | $ | (567 | )                                   |  | $ | 11,854
|                                                       |  |             |  |                                    |        |                          |   |      |                                     |  |   |       

Amortization expense for intangible assets purchased in the NWR acquisition was approximately $0.6 million for the
three month period ended September 29, 2007 and has been recorded in the consolidated condensed statement of operations as follows (in thousands):



|                                    |  |   |    
|----------------------------------- |  | - | ---
|Cost of sales                       |  | $ | 222
|Selling, service and administration |  |   | 345
|                                    |  |   |    
|                                    |  | $ | 567
|                                    |  |   |    



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The estimated amortization expense of intangible assets purchased in the NWR acquisition for the current fiscal year,
including amounts amortized to date, and in future years is as follows (in thousands):



|            |  |              |       
|----------- |  | ------------ | ------
|Fiscal Year |  | Amortization
|2008        |  | $            | 2,052 
|2009        |  |              | 2,330 
|2010        |  |              | 1,954 
|2011        |  |              | 1,734 
|2012        |  |              | 1,472 
|2013        |  |              | 1,325 
|2014        |  |              | 1,197 
|2015        |  |              | 357   
|            |  |              |       
|            |  | $            | 12,421
|            |  |              |       

At the acquisition date, NWR had in-process research and development valued at $2.8 million and the immediate
write-off of this amount has been included in operating expenses for the three month period ended September 29, 2007. The in-process research and development related to three programs consisting of development on a diode-pumped solid-state LED
wafer-scribing system, a next-generation Advanced Beam Delivery System and a next-generation laser product. The value of the in-process research and development was based on the excess earnings method of the income approach, which measures the value
of an asset by calculating the present value of related future economic benefits, such as cash earnings. In determining the value of in-process research and development, the assumed commercialization date for these products was April 2008. The
modeled cash flow was discounted back to the net present value and was based on estimates of revenues and operating profits related to the project. Significant assumptions used in the valuation of in-process research and development included: stage
of development of the project, future revenues, the estimated life of the products underlying technology, future operating expenses, and a discount rate of 18% to reflect present value.

Purchase accounting adjustments were made to record inventory at fair value on the date of acquisition. These adjustments resulted in $0.9 million in additional purchase
accounting charges to cost of sales in the second quarter of fiscal 2008.

The NWR results of operations are included in our consolidated financial
statements from the date of acquisition forward. The NWR acquisition was not significant, as defined in Regulation S-X of the Securities and Exchange Commission, compared to our overall financial position. Accordingly, pro forma financial statements
of the combined entities are not presented.

Note 3  Marketable Securities

As of September 29, 2007, the Company had a total of $19.6 million invested in auction rate securities. These securities historically provided short-term liquidity through a Dutch auction process that reset the
applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism allows existing investors to either retain their holdings or liquidate their holdings by selling such securities at par. The recent uncertainties
in the credit markets have reduced the liquidity of these securities as recent auctions have not been completed. As such, the Company has reclassified these securities, which were previously included in current assets, as long-term marketable
securities on the consolidated condensed balance sheet at September 29, 2007. The Company believes that these securities will ultimately be liquidated in orderly transactions at an amount equal to the cost of the assets and as such, no
unrealized gain or loss has been recorded in other comprehensive income. These investments continue to be of high credit quality and the respective credit ratings of the securities issuers have not been lowered. Accordingly, the Company believes
there has been no impairment of the value of these securities.



8



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Note 4  Inventories

Inventories are principally valued at standard costs, which approximate the lower of cost (on a first-in, first-out basis) or market. Components of inventories were as follows (in thousands):



|                                  |  |                   |        |             |   |       
|--------------------------------- |  | ----------------- | ------ | ----------- | - | ------
|                                  |  | September 29,2007 |        | June 2,2007
|Raw materials and purchased parts |  | $                 | 54,139 |             | $ | 50,021
|Work-in-process                   |  |                   | 23,517 |             |   | 19,170
|Finished goods                    |  |                   | 14,235 |             |   | 11,790
|                                  |  |                   |        |             |   |       
|                                  |  | $                 | 91,891 |             | $ | 80,981
|                                  |  |                   |        |             |   |       

Note 5  Other Assets

Other assets consisted of the following (in thousands):



|                                    |  |                   |        |             |   |       
|----------------------------------- |  | ----------------- | ------ | ----------- | - | ------
|                                    |  | September 29,2007 |        | June 2,2007
|Patents, net                        |  | $                 | 168    |             | $ | 188   
|Consignment and demo equipment, net |  |                   | 6,859  |             |   | 7,516 
|Minority equity investment          |  |                   | 11,000 |             |   | 11,000
|All-Ring patent suit court bond     |  |                   | 9,046  |             |   | 6,901 
|Acquisition escrow deposit          |  |                   | 5,430  |             |   |      
|Other                               |  |                   | 804    |             |   | 1,025 
|                                    |  |                   |        |             |   |       
|                                    |  | $                 | 33,307 |             | $ | 26,630
|                                    |  |                   |        |             |   |       

As discussed in Note 15, in June 2007, the Company paid an additional $2.1 million to increase its Taiwan dollar
security bond posted with the Kaohsiung Court in Taiwan related to the filing of a patent infringement suit against All Ring Tech Co., Ltd. in that jurisdiction.

As discussed in Note 2, the escrow deposits totaling $5.4 million related to the NWR acquisition are included in other assets pending final disbursement.

Note 6  Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):



|                          |  |                   |        |             |   |       
|------------------------- |  | ----------------- | ------ | ----------- | - | ------
|                          |  | September 29,2007 |        | June 2,2007
|Payroll-related           |  | $                 | 8,281  |             | $ | 11,391
|Product warranty          |  |                   | 4,424  |             |   | 3,893 
|Income taxes payable      |  |                   | 3,664  |             |   | 2,961 
|Value-added taxes payable |  |                   | 1,613  |             |   | 648   
|Unbilled receipts         |  |                   | 2,510  |             |   | 908   
|Other                     |  |                   | 7,589  |             |   | 5,664 
|                          |  |                   |        |             |   |       
|                          |  | $                 | 28,081 |             | $ | 25,465
|                          |  |                   |        |             |   |       

See Note 7 for a discussion of the accrual for product warranty.



9



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Note 7  Product Warranty

The Company evaluates obligations related to product warranties quarterly. A standard one-year warranty is provided on products. Warranty charges are comprised of costs to service the warranty, including labor to
repair the system and replacement parts for defective items, as well as other costs incidental to the repairs. Warranty charges are recorded net of any cost recoveries resulting from either successful repair of damaged parts or from warranties
offered by the Companys suppliers for defective components. Using historical data, the Company estimates average warranty cost per system or part type and records the provision for such charges as an element of cost of goods sold upon
recognition of the related revenue. Additionally, the overall warranty accrual balance is separately analyzed using the remaining warranty periods outstanding on systems and items under warranty, and any resulting changes in estimates are recorded
as an adjustment to cost of sales. If circumstances change, or if a material change in warranty-related incidents occurs, the estimate of the warranty accrual could change significantly. Accrued product warranty is included on the consolidated
condensed balance sheets as a component of accrued liabilities.

Following is a reconciliation of the change in the aggregate accrual for product warranty
for the three months ended September 29, 2007 and September 2, 2006 and the four months ended September 29, 2007 (in thousands):



|                                    |  |                    |        |   |                  |   |        |                   |  |   |        |  
|----------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ----------------- |  | - | ------ | -
|                                    |  | Three months ended |        |   | Four monthsended |  
|                                    |  | September 29,2007  |        |   | September 2,2006 |   |        | September 29,2007 | 
|Product warranty accrual, beginning |  | $                  | 3,630  |   |                  | $ | 3,716  |                   |  | $ | 3,893  |  
|NWR warranty reserve acquired       |  |                    | 774    |   |                  |   |       |                   |  |   | 774    |  
|Warranty charges incurred           |  |                    | (2,348 | ) |                  |   | (2,830 | )                 |  |   | (3,040 | )
|Inventory credits                   |  |                    | 1,901  |   |                  |   | 1,453  |                   |  |   | 1,742  |  
|Provision for warranty charges      |  |                    | 467    |   |                  |   | 1,427  |                   |  |   | 1,055  |  
|                                    |  |                    |        |   |                  |   |        |                   |  |   |        |  
|Product warranty accrual, ending    |  | $                  | 4,424  |   |                  | $ | 3,766  |                   |  | $ | 4,424  |  
|                                    |  |                    |        |   |                  |   |        |                   |  |   |        |  

Note 8  Deferred Revenue

Generally, revenue is recognized upon fulfillment of acceptance criteria at the Companys factory and title transfer which frequently occur at the time of delivery to a common carrier. Revenue is deferred when
title transfer is pending and/or acceptance criteria have not yet been fulfilled. These deferred revenue occurrences include sales to Japanese end-user customers, shipments of substantially new products and shipments with custom specifications and
acceptance criteria. In sales involving multiple element arrangements, the fair value of any undelivered elements, including installation services, is deferred until the elements are delivered and acceptance criteria are met. Revenue related to
maintenance and service contracts is deferred and recognized ratably over the duration of the contracts.

The following is a reconciliation of the changes
in deferred revenue for the three months ended September 29, 2007 and September 2, 2006 and the four months ended September 29, 2007 (in thousands):



|                              |  |                    |        |   |                   |   |        |                   |  |   |         |  
|----------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ----------------- |  | - | ------- | -
|                              |  | Three months ended |        |   | Four months ended |  
|                              |  | September 29,2007  |        |   | September 2,2006  |   |        | September 29,2007 | 
|Deferred revenue, beginning   |  | $                  | 12,544 |   |                   | $ | 13,321 |                   |  | $ | 12,290  |  
|NWR deferred revenue acquired |  |                    | 1,603  |   |                   |   |       |                   |  |   | 1,603   |  
|Revenue deferred              |  |                    | 14,005 |   |                   |   | 5,632  |                   |  |   | 16,003  |  
|Revenue recognized            |  |                    | (8,787 | ) |                   |   | (6,794 | )                 |  |   | (10,531 | )
|                              |  |                    |        |   |                   |   |        |                   |  |   |         |  
|Deferred revenue, ending      |  | $                  | 19,365 |   |                   | $ | 12,159 |                   |  | $ | 19,365  |  
|                              |  |                    |        |   |                   |   |        |                   |  |   |         |  



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Note 9  Earnings Per Share

The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share (EPS) for the three months ended September 29, 2007 and September 2,
2006 (in thousands):



|                                                      |  |                    |       |                    |        |        |   |        |  |       
|----------------------------------------------------- |  | ------------------ | ----- | ------------------ | ------ | ------ | - | ------ |  | ------
|                                                      |  | Three months ended |       | Three months ended
|                                                      |  | September 29, 2007 |       | September 2, 2006 
|                                                      |  | Income             |       | Shares             |        | Income |   | Shares
|Net income available to common shareholders  basic   |  | $                  | 5,530 |                    | 28,161 |        | $ | 6,202  |  | 29,076
|Effect of dilutive shares                             |  |                    |      |                    | 486    |        |   |       |  | 167   
|                                                      |  |                    |       |                    |        |        |   |        |  |       
|Net income available to common shareholders  diluted |  | $                  | 5,530 |                    | 28,647 |        | $ | 6,202  |  | 29,243
|                                                      |  |                    |       |                    |        |        |   |        |  |       

The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and
diluted EPS for the one month ended June 30, 2007 (in thousands):



|                                                      |  |                 |       |        |       
|----------------------------------------------------- |  | --------------- | ----- | ------ | ------
|                                                      |  | One month ended
|                                                      |  | June 30, 2007  
|                                                      |  | Income          |       | Shares
|Net income available to common shareholders  basic   |  | $               | 1,418 |        | 28,617
|Effect of dilutive shares                             |  |                 |      |        | 421   
|                                                      |  |                 |       |        |       
|Net income available to common shareholders  diluted |  | $               | 1,418 |        | 29,038
|                                                      |  |                 |       |        |       

In the diluted EPS calculations for the three months ended September 29, 2007 and September 2, 2006,
employee stock options equal to 2,591,734 and 3,678,219 common stock equivalent shares, respectively, were excluded because inclusion would have had an antidilutive effect. In the diluted EPS calculation for the one month ended June 30, 2007,
2,671,805 antidilutive common stock equivalent shares were excluded.

Note 10  Comprehensive Income

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



|                                                                          |  |                    |       |   |                 |   |       |          |  |   |      
|------------------------------------------------------------------------- |  | ------------------ | ----- | - | --------------- | - | ----- | -------- |  | - | -----
|                                                                          |  | Three months ended |       |   | One month ended
|                                                                          |  | September 29,      |       |   | September 2,    |   |       | June 30,
|                                                                          |  | 2007               |       |   | 2006            |   |       | 2007    
|Net income                                                                |  | $                  | 5,530 |   |                 | $ | 6,202 |          |  | $ | 1,418
|Other comprehensive income                                                |  |                    | 5     |   |                 |   | (5    | )        |  |   |     
|Foreign currency translation adjustment                                   |  |                    | 333   |   |                 |   | (184  | )        |  |   | 135  
|Net unrealized gain (loss) on securities classified as available for sale |  |                    | (134  | ) |                 |   | 263   |          |  |   | 45   
|                                                                          |  |                    |       |   |                 |   |       |          |  |   |      
|                                                                          |  | $                  | 5,734 |   |                 | $ | 6,276 |          |  | $ | 1,598
|                                                                          |  |                    |       |   |                 |   |       |          |  |   |      



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Note 11  Share Repurchase Program

On March 9, 2007, the Companys Board of Directors authorized the repurchase of up to $50 million in shares of the Companys outstanding common stock beginning April 17, 2007 through transactions
in the open market or in negotiated transactions with brokers or shareholders. During the three months ended September 29, 2007, approximately 825,000 shares were repurchased at a total purchase price of $18.8 million. Approximately 1,125,000
shares were purchased in the four months ended September 29, 2007 at a total purchase price of $25.1 million. Cash used to settle the repurchase transactions in the four months ended September 29, 2007 totaled $24.9 million and is
reflected as a component of cash used in financing activities in the consolidated statements of cash flows. Accrued liabilities include $0.8 million and $0.6 million for amounts owed on the unsettled repurchase transactions as of September 29,
2007 and June 2, 2007, respectively. On October 9, 2007, the Company suspended purchase transactions under its share repurchase program. In total, the Company repurchased approximately 1.7 million shares for $37.3 million.

Note 12  Stock-Based Compensation Plans

The Company uses
the Black-Scholes model to estimate the fair value of all stock-based compensation awards on the date of grant, except for unvested stock awards which are valued at the fair market value on the date of award. The Company generally recognizes
compensation expense for options and unvested stock awards on a straight-line basis over the requisite service period of each award.

Stock-based
compensation was included in our consolidated statements of operations as follows (in thousands):



|                                                          |  |                    |       |   |                  |   |      |               |  |   |     |  
|--------------------------------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ---- | ------------- |  | - | --- | -
|                                                          |  | Three months ended |       |   | One monthended   |  
|                                                          |  | September 29, 2007 |       |   | September 2,2006 |   |      | June 30, 2007 | 
|Cost of sales                                             |  | $                  | 130   |   |                  | $ | 108  |               |  | $ | 27  |  
|Selling, service, and administration                      |  |                    | 702   |   |                  |   | 344  |               |  |   | 124 |  
|Research, development, and engineering                    |  |                    | 212   |   |                  |   | 125  |               |  |   | 44  |  
|                                                          |  |                    |       |   |                  |   |      |               |  |   |     |  
|Stock-based compensation expense before income taxes      |  |                    | 1,044 |   |                  |   | 577  |               |  |   | 195 |  
|Income tax benefit                                        |  |                    | (288  | ) |                  |   | (154 | )             |  |   | (45 | )
|                                                          |  |                    |       |   |                  |   |      |               |  |   |     |  
|Total stock-based compensation expense after income taxes |  | $                  | 756   |   |                  | $ | 423  |               |  | $ | 150 |  
|                                                          |  |                    |       |   |                  |   |      |               |  |   |     |  

The total amount of cash received from the exercise of stock options and stock plans for the three months ended
September 29, 2007 was $2.0 million. For the three months ended September 29, 2007, there was $0.7 million in excess tax benefit realized from the exercise of stock options and ESPP purchases. The total amount of cash received from the
exercise of stock options and stock plans for the month ended June 30, 2007 was $0.1 million. For the month ended June 30, 2007, there was no excess tax benefit realized from the exercise of stock options and ESPP purchases. Upon exercise
of stock options, the Company issues new shares of common stock from its authorized shares.

As of September 29, 2007, no stock-based compensation
costs were capitalized and the Company had $12.8 million of total unamortized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 3.1 years.



12



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At September 29, 2007, the Company had 9,741,096 shares of its common stock reserved for issuance under all of its
plans combined. Of those shares, 4,592,272 are subject to issuance under currently outstanding stock options and stock awards and 5,148,824 shares are available for future grants. The weighted-average fair-value of stock-based compensation awards,
including stock option awards granted and vested during the period, unvested stock awards granted during the period and the intrinsic value of stock options exercised during the period were (in thousands, except per share data):



|                                           |  |                    |       |                  |   |               |  |   |      
|------------------------------------------ |  | ------------------ | ----- | ---------------- | - | ------------- |  | - | -----
|                                           |  | Three months ended |       | One monthended  
|                                           |  | September 29, 2007 |       | September 2,2006 |   | June 30, 2007
|Stock Option Awards:                       |  |                    |       |                  |   |               |  |   |      
|Grant date fair value per share            |  | $                  | 10.82 |                  | $ |              |  | $ |     
|Total fair value of options granted        |  |                    | 1,780 |                  |   |              |  |   |     
|Total fair value of options vested         |  |                    | 699   |                  |   | 450           |  |   | 5    
|Total intrinsic value of options exercised |  |                    | 514   |                  |   | 19            |  |   | 6    
|Unvested Stock Awards:                     |  |                    |       |                  |   |               |  |   |      
|Grant date fair value per share            |  | $                  | 22.73 |                  | $ | 18.64         |  | $ | 20.86
|Total fair value of awards granted         |  |                    | 8,419 |                  |   | 1,746         |  |   | 17   
|Employee Stock Purchase Plan:              |  |                    |       |                  |   |               |  |   |      
|Grant date fair value per share            |  | $                  | 6.50  |                  | $ | 5.52          |  |   |     
|Total grant date fair value                |  |                    | 63    |                  |   | 387           |  |   |     

Information with respect to stock option activity for the four months ended September 29, 2007 is as follows:



|                                                     |  |           |   |  |                               |       |                                         |            |                                         |   |      
|---------------------------------------------------- |  | --------- | - |  | ----------------------------- | ----- | --------------------------------------- | ---------- | --------------------------------------- | - | -----
|                                                     |  | Shares    |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm |            | AggregateIntrinsic Value (in thousands)
|Outstanding as of June 3, 2007                       |  | 4,292,422 |   |  | $                             | 25.03 |                                         |            |                                         |   |      
|Granted                                              |  | 164,499   |   |  | $                             | 20.06 |                                         |            |                                         |   |      
|Exercised                                            |  | (124,862  | ) |  | $                             | 19.37 |                                         |            |                                         |   |      
|Expired or forfeited                                 |  | (273,084  | ) |  | $                             | 22.35 |                                         |            |                                         |   |      
|                                                     |  |           |   |  |                               |       |                                         |            |                                         |   |      
|Outstanding as of September 29, 2007                 |  | 4,058,975 |   |  | $                             | 25.18 |                                         | 6.13 years |                                         | $ | 9,185
|                                                     |  |           |   |  |                               |       |                                         |            |                                         |   |      
|Vested and expected to vest as of September 29, 2007 |  | 4,026,895 |   |  | $                             | 25.22 |                                         | 6.10 years |                                         | $ | 9,082
|                                                     |  |           |   |  |                               |       |                                         |            |                                         |   |      
|Exercisable as of September 29, 2007                 |  | 3,778,463 |   |  | $                             | 25.54 |                                         | 5.90 years |                                         | $ | 8,163
|                                                     |  |           |   |  |                               |       |                                         |            |                                         |   |      

Information with respect to unvested stock awards activity for the four months ended September 29, 2007 is as
follows:



|                                     |  |         |   |  |                               |       |                                         |            |                                                    |   |       
|------------------------------------ |  | ------- | - |  | ----------------------------- | ----- | --------------------------------------- | ---------- | -------------------------------------------------- | - | ------
|                                     |  | Shares  |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm |            | WeightedAverage GrantDate
FairValue (in thousands)
|Outstanding as of June 3, 2007       |  | 223,194 |   |  | $                             | 20.01 |                                         |            |                                                    |   |       
|Granted                              |  | 371,841 |   |  | $                             | 22.73 |                                         |            |                                                    |   |       
|Exercised                            |  | (57,488 | ) |  | $                             | 24.34 |                                         |            |                                                    |   |       
|Expired or forfeited                 |  | (4,250  | ) |  | $                             | 22.66 |                                         |            |                                                    |   |       
|                                     |  |         |   |  |                               |       |                                         |            |                                                    |   |       
|Outstanding as of September 29, 2007 |  | 533,297 |   |  | $                             | 21.71 |                                         | 2.72 years |                                                    | $ | 12,778
|                                     |  |         |   |  |                               |       |                                         |            |                                                    |   |       



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Note 13  Geographic and Product Information

Net sales by product type were as follows (in thousands):



|                                   |  |                    |        |                  |   |              |  |   |       
|---------------------------------- |  | ------------------ | ------ | ---------------- | - | ------------ |  | - | ------
|                                   |  | Three months ended |        | One month ended 
|                                   |  | September 29,2007  |        | September 2,2006 |   | June 30,2007
|Semiconductor Group                |  | $                  | 38,176 |                  | $ | 31,884       |  | $ | 7,566 
|Passive Component Group            |  |                    | 23,791 |                  |   | 18,661       |  |   | 4,418 
|Interconnect Micro-Machining Group |  |                    | 20,351 |                  |   | 9,823        |  |   | 4,977 
|                                   |  |                    |        |                  |   |              |  |   |       
|                                   |  | $                  | 82,318 |                  | $ | 60,368       |  | $ | 16,961
|                                   |  |                    |        |                  |   |              |  |   |       

Sales by geographic area, based on the location of the end user, were as follows (in thousands):



|         |  |                    |        |                  |   |              |  |   |       
|-------- |  | ------------------ | ------ | ---------------- | - | ------------ |  | - | ------
|         |  | Three months ended |        | One month ended 
|         |  | September 29,2007  |        | September 2,2006 |   | June 30,2007
|Asia     |  | $                  | 63,586 |                  | $ | 43,653       |  | $ | 15,626
|Americas |  |                    | 12,930 |                  |   | 13,005       |  |   | 951   
|Europe   |  |                    | 5,802  |                  |   | 3,710        |  |   | 384   
|         |  |                    |        |                  |   |              |  |   |       
|         |  | $                  | 82,318 |                  | $ | 60,368       |  | $ | 16,961
|         |  |                    |        |                  |   |              |  |   |       

Note 14  Insurance Recovery

In June 2006, the Company received $1.3 million in insurance proceeds for demonstration systems that were destroyed in a fire at a customers plant. As the book value of these assets had previously been written
off, the Company recorded a gain on the recovery which is included as an offset to operating expenses in the consolidated condensed statement of operations.

Note 15  Legal Proceedings

All Ring Patent Infringement Prosecution

In August 2005, the Company commenced a proceeding in the Kaohsiung District Court of Taiwan (the Court) directed against All Ring Tech Co., Ltd. (All Ring) of Taiwan.
The Company alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes ESIs Taiwan Patent No. 207469, entitled Circuit Component Handler (the 207469 patent). This patent corresponds to
ESIs U.S. Patent No. 5,842,579. The patented technology is used in the Model 3340 Multifunction MLCC Tester. The Court issued a Provisional Attachment Order (PAO) in August 2005 and All Ring filed a bond with the Court to obtain relief
from the attachment of its assets. In July 2007, pursuant to the Companys application, the Court issued a second PAO and approximately US$6.0 million was restricted in All Rings accounts. All Ring appealed the second PAO to the High
Court in August 2007 and the High Court revoked the second PAO in September 2007. The Company has appealed the High Courts decision and the Supreme Court has not yet ruled on the Companys appeal. The second PAO remains in effect unless
and until the High Courts ruling becomes final.

Pursuant to the Courts orders, in October 2005 the Company was required to post with the Court
a Taiwan dollar security bond, which is valued at approximately US$6.9 million and is included in other assets on the Companys consolidated condensed balance sheets. An additional bond amount of US$2.1 million was posted in June 2007 related
to the second Provisional Attachment Order.



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In October 2005, the Court executed a Preliminary Injunction Order that prohibits All Ring from manufacturing, selling,
offering for sale or using the Capacitor Tester until final judgment is entered in the formal patent infringement action. In October 2007, All Ring filed an application to revoke the Preliminary Injunction Order. The Company has filed a defense
brief responding to the application and the Court has not yet ruled on the application.

In October 2005, the Company filed a formal patent infringement
action against All Ring in the Court. In May 2006, after all parties filed briefs on the topic, the Court appointed an expert to conduct a patent infringement assessment. The Court-appointed expert has completed the assessment of the Capacitor
Tester and concluded that it infringes every claim of the 207469 patent. The Court-appointed expert subsequently concluded that All Rings RK-T2000 also infringes on every claim of the 207469 patent and that All Rings RK-L50 infringes on
a number of the claims as well.

In November 2005, All Ring filed a cancellation action against ESIs 207469 patent in the Taiwan Intellectual
Property Office (the IPO). On July 5, 2007, the IPO issued a notice requiring the Company to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. The Company filed a response canceling the two claims
and amending the remaining claims accordingly in August 2007. The Company intends to vigorously pursue its patent infringement claims against All Ring and defend against the cancellation action.

Note 16  Adoption of FIN 48

Effective June 3, 2007, the
Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 specifies the way companies are to account for uncertainty in income tax reporting, and
prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. The Company has previously accounted for uncertain tax positions under SFAS 5 and SFAS 109. The
adoption of FIN 48 has not resulted in any adjustments to existing reserves for income taxes as of the beginning of fiscal 2008.

As of June 3, 2007,
the total gross amount of reserves for income taxes, which is reported as non-current income tax liabilities, was $5.8 million. Any future adjustments to reserves for income taxes will be recorded as an increase or decrease to provision for income
taxes and would impact the effective tax rate. In addition, interest is accrued related to reserves for income taxes and penalties in the provision for income taxes. The gross amount of interest accrued as of the beginning of our 2008 fiscal year
was $0.4 million.

As of September 29, 2007, the total gross reserves for income tax was $8.1 million, of which $7.8 million was included in
non-current income tax liabilities and $0.3 million was included in current income taxes payable. These reserves are inclusive of $0.7 million of accrued interest. The $2.0 million increase in income tax reserves from June 2, 2007 is due to the
inclusion of the NWR tax reserves. Any future adjustments to the reserves related to the NWR acquisition would be reflected as an adjustment to goodwill and would not impact the effective tax rate. The Company anticipates no significant changes in
unrecognized tax benefits in the next 12 months as the result of examinations or lapse of statutes of limitation.



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The Company operates globally but considers its significant tax jurisdictions to include the United States, Taiwan,
China, Korea, Japan, Singapore and the United Kingdom. As of June 3, 2007, the following tax years remained subject to examination by the major tax jurisdictions indicated:



|                    |  |                 
|------------------- |  | ----------------
|Major Jurisdictions |  | Open Tax Years  
|                    | 
|China               |  | 2004 and forward
|                    | 
|Japan               |  | 2003 and forward
|                    | 
|Korea               |  | 2001 and forward
|                    | 
|Singapore           |  | 2000 and forward
|                    | 
|Taiwan              |  | 2001 and forward
|                    | 
|United Kingdom      |  | 2000 and forward
|                    | 
|United States       |  | 2003 and forward

Note 17  New Accounting Pronouncements

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 and expands disclosures about fair
value measurements. SFAS 157 does not impose fair value measurements on items not already accounted for at fair value; rather it applies, with certain exceptions, to other accounting pronouncements that either require or permit fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, of adopting SFAS 157 on its financial position and
results of operations.

In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company has not yet determined the impact that the elective adoption of SFAS 159 may have on our results of operations or financial position.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward Looking Statements

The statements contained in this report
that are not statements of historical fact, including without limitation statements containing the words believes, expects and similar words, constitute forward-looking statements that are subject to a number of risks and
uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that such forward-looking statements are subject to an inherent risk that actual results may materially differ as a result of many factors,
including the risks described in Part II, Item 1A. under the heading Risk Factors.

Overview

Electro Scientific Industries, Inc. and its subsidiaries (ESI) provide high-technology manufacturing equipment to the global electronics market, including advanced laser
systems that are used to microengineer electronic device features in high-volume production environments. Our customers are primarily manufacturers of semiconductors, passive components and interconnect devices. Our equipment enables these
manufacturers to achieve the yield and productivity gains in their manufacturing processes that can be critical to their profitability. The components and devices manufactured by our customers are used in a wide variety of end products in the
computer, consumer electronics, and communications industries.

We supply advanced laser microengineering systems that allow electronics manufacturers to
physically alter select device features during high-volume production in order to heighten performance and boost production yields of semiconductor devices, passive components and circuitry, high-density interconnect (HDI) circuit boards, advanced
semiconductor packaging and high-bright LEDs and flat panel LCD displays. Laser microengineering comprises a set of precise fine-tuning processes (laser micro-machining, link cutting and via drilling) that require application-specific laser systems
able to meet semiconductor and microelectronics manufacturers exacting performance and productivity requirements.

Additionally, we produce
high-speed test, inspection and termination equipment used in the high-volume production of multi-layer ceramic capacitors (MLCC) and other passive components, as well as original equipment manufacturer machine vision products.

Acquisition of New Wave Research, Incorporated

On July 20,
2007, we acquired New Wave Research, Incorporated (NWR), a privately held company headquartered in Fremont, California. NWR is a global leader in the development of high-end lasers and laser-based systems and its products are used in the
semiconductor market for sapphire wafer scribing, flat-panel display repair and semiconductor failure analysis, among other applications. The acquisition was an investment aimed at leveraging our combined core competencies into adjacent markets and
driving revenue growth and shareholder value.

We acquired 100% of NWRs outstanding common stock for approximately $36.2 million, comprised of $34.9
million in cash and merger-related transaction costs of $1.3 million. The contractual purchase price of $36.0 million was reduced by $1.1 million related to certain net working capital adjustments and indemnity payments agreed to prior to closing.
The results for the current quarter include the results of our NWR division from the date of acquisition forward.

Purchase accounting charges totaling
$4.3 million were recorded in the three months ended September 29, 2007, comprised of $1.1 million included in cost of sales related to the fair value adjustments to



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##### Table of Contents

inventory and amortization of acquired intangibles and $3.2 million included in operating expenses for the amortization of acquired intangibles. The purchase
accounting charges included in operating expenses were largely comprised of the write-off of $2.8 million of in-process research & developments, as further discussed below in the comparison of current quarter results to the first quarter of
fiscal 2007.

Change in Fiscal Reporting Periods

On
July 3, 2007, our Board of Directors approved a change in ESIs reporting periods that results in a fiscal year end on the Saturday nearest March 31. Accordingly, our fiscal year 2008 will consist of approximately a ten month period
containing 43 weeks ending on March 29, 2008. We have elected to file our interim financial statements in Quarterly Reports on Form 10-Q based on the reporting periods of our new fiscal year ending March 29, 2008. Due to the implementation
of our enterprise resource system in the fourth quarter of fiscal 2006, we performed full close and reporting procedures on a fiscal quarter basis only during fiscal 2007. Accordingly, comparative data for the three months ended September 30,
2007 is not available and is not cost beneficial to prepare. We believe that the first quarter of fiscal 2007, the three months ended September 2, 2006, provides a meaningful comparison to the second quarter of fiscal 2008. We do not believe
that there are any meaningful factors, seasonal or otherwise, that would impact the comparability of information or trends, if the results for the three months ended September 30, 2006 were presented in lieu of results for the first quarter of
fiscal 2007.

Summary of Sequential Quarterly Results

Due to the change in our fiscal year, the following information includes results from our second quarter of fiscal 2008, the three month period ended September 29, 2007. Where appropriate, we make sequential comparisons to the fourth
quarter of fiscal 2007, which was our last full three-month fiscal period prior to the current fiscal quarter.

The second quarter of fiscal 2008 reflected
another period of strong demand for our products stimulated by industry strength and successful introduction of new products. Orders of $74.3 million increased $2.1 million, including $5.6 million due to the acquisition of NWR. Excluding the
contribution of NWR, orders decreased by 3% in the current quarter compared to the fourth quarter of fiscal 2007, primarily due to the timing of orders in our semiconductor group, partially offset by increases in our other product groups.

Orders for our semiconductor group products decreased by 35% compared to the fourth quarter of fiscal 2007, despite a 5% increase resulting from the
acquisition of NWR. The remaining 40% decrease is largely due to the timing of specific large orders received in the first period of fiscal 2008, which consisted of the four weeks ending June 30, 2007. Despite the impact of timing on our
semiconductor group product orders, we experienced continued strength in demand for our semiconductor group products on a fiscal year-to-date basis.

Passive component group orders increased by 36% compared to the fourth quarter of fiscal 2007, driven by multiple orders for our new Model 3550 high capacitance testing system and large orders for our 3300 series and 6650 test systems. This
reflects continued strength in the MLCC manufacturing market and our continued penetration into the Japanese MLCC market.

Due to increasing focus on tools
designed for micro-machining applications, we have designated our electronic interconnect products as the interconnect/micro-machining group (IMG). Orders for our IMG products increased by 64%, including an increase of 23% due to the acquisition of
NWR. This growth in orders is due to strong demand for micro-machining applications and our continued expansion in the flex-circuit and IC packaging segments of this market.



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##### Table of Contents

Gross margins were 44.7% on net sales of $82.3 million in the second quarter of fiscal 2008, compared to 46.4% on net
sales of $71.7 million in the fourth quarter of fiscal 2007. Included in cost of sales in the current quarter were $1.1 million in purchase accounting charges, which resulted in a 1.3 percentage point reduction of gross margin in the current
quarter.

Operating expenses increased $6.5 million to $29.3 million in the second quarter of fiscal 2008, compared to $22.8 million in the fourth quarter
of fiscal 2007. The increase included $3.2 million in purchase accounting charges, including $2.8 million to write off in-process research & development, and $3.7 million in NWR operating expenses.

Operating income decreased to $7.5 million in the second quarter of fiscal 2008, compared to $10.5 million in the fourth quarter of fiscal 2007. Non-operating income
decreased to $2.1 million from $2.6 million, primarily due to lower interest income resulting from lower average invested assets resulting from funds used for the acquisition of NWR and share repurchases.

The tax provision decreased to $4.1 million in the current quarter compared to $5.2 million in the fourth quarter of fiscal 2007, but the effective tax rate increased to
42% compared to 39%. The second quarter effective tax rate exceeded our normalized estimated effective tax rate of 32% as the $4.3 million in purchase accounting charges are not deductible for tax purposes but do reduce pretax income. Net income for
the current quarter was $5.5 million or $0.20 per basic and $0.19 per diluted share, compared to net income of $7.9 million or $0.27 per basic and diluted share in the fourth quarter of fiscal 2007.

Revision of Statement of Operations for the First Quarter of Fiscal 2007

During the third quarter of fiscal 2007, we revised our results of operations for the first quarter of fiscal 2007 for certain immaterial corrections. The amounts presented for the three months ended September 2, 2006 in the
consolidated condensed financial statements and related managements discussion and analysis include these adjustments, which are detailed in Note 1 to the consolidated condensed financial statements presented in Part I, Item 1 of this
Report on Form 10-Q.

Results of Operations  Comparison of the three month periods ended September 29, 2007 and September 2, 2006

Due to the change in our fiscal reporting periods, current year financial statements are presented for the three months ended September 29, 2007 and
the one month ended June 30, 2007. For the purposes of managements discussion and analysis, comparative data has been provided for the prior year using the fiscal quarter ending on the date nearest to September 29, which is the three
months ended September 2, 2006. Prior year comparative data is not available for the one-month period ended June 30, 2007. The results for the current quarter include the results of our NWR division from the date of acquisition forward.



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##### Table of Contents

The following table sets forth results of operations data as a percentage of net sales.



|                                                        |  |                    |   |  |              |  
|------------------------------------------------------- |  | ------------------ | - |  | ------------ | -
|                                                        |  | Three months ended |  
|                                                        |  | September 29,      |   |  | September 2, |  
|                                                        |  | 2007               |   |  | 2006         |  
|Net sales                                               |  | 100.0              | % |  | 100.0        | %
|Cost of sales                                           |  | 55.3               |   |  | 56.5         |  
|                                                        |  |                    |   |  |              |  
|Gross margin                                            |  | 44.7               |   |  | 43.5         |  
|Selling, service and administrative                     |  | 18.7               |   |  | 20.0         |  
|Research, development and engineering                   |  | 13.5               |   |  | 15.4         |  
|Write-off of acquired in-process research & development |  | 3.4                |   |  |             |  
|Insurance recovery                                      |  |                   |   |  | (2.1         | )
|                                                        |  |                    |   |  |              |  
|Operating income                                        |  | 9.2                |   |  | 10.3         |  
|Total other income, net                                 |  | 2.5                |   |  | 4.7          |  
|                                                        |  |                    |   |  |              |  
|Income before taxes                                     |  | 11.7               |   |  | 14.9         |  
|Income tax provision                                    |  | 4.9                |   |  | 4.6          |  
|                                                        |  |                    |   |  |              |  
|Net income                                              |  | 6.7                | % |  | 10.3         | %
|                                                        |  |                    |   |  |              |  

Net Sales

Net sales were $82.3 million for the quarter ended September 29, 2007, an increase of $21.9 million or 36% compared to net sales of $60.4 million for the quarter ended September 2, 2007. The overall increase was driven by
increases in all three of our product groups, as well as the impact of NWR net sales totaling $5.2 million for the period after the acquisition on July 20, 2007.

Information regarding our net sales by product group is as follows (net sales in thousands):



|                                   |  |                    |        |               |                   |   |           |   |               |  |       |  
|---------------------------------- |  | ------------------ | ------ | ------------- | ----------------- | - | --------- | - | ------------- |  | ----- | -
|                                   |  | Three months ended |       
|                                   |  | September 29, 2007 |        |               | September 2, 2006 |  
|                                   |  | Net Sales          |        | % ofNet Sales |                   |   | Net Sales |   | % ofNet Sales | 
|Semiconductor (SG)                 |  | $                  | 38,176 |               | 46.4              | % |           | $ | 31,884        |  | 52.8  | %
|Passive Components (PCG)           |  |                    | 23,791 |               | 28.9              |   |           |   | 18,661        |  | 30.9  |  
|Interconnect/micro-machining (IMG) |  |                    | 20,351 |               | 24.7              |   |           |   | 9,823         |  | 16.3  |  
|                                   |  |                    |        |               |                   |   |           |   |               |  |       |  
|                                   |  | $                  | 82,318 |               | 100.0             | % |           | $ | 60,368        |  | 100.0 | %
|                                   |  |                    |        |               |                   |   |           |   |               |  |       |  

SG sales in the second quarter of fiscal 2008 increased $6.3 million or 20% compared to the first quarter of
fiscal 2007, including an increase of $2.6 million resulting from the acquisition of NWR. The remaining net sales increase was primarily due to increased volume sales of our dual-beam UV-based Model 9850.

Second quarter PCG sales increased $5.1 million or 27% compared to sales in the first quarter of fiscal 2007. The rise in PCG net sales was driven by strong demand for
our Model 3300 series electrical test systems, and increased penetration in the Asian market, as manufacturers seek to build production capacity for MLCC products. End-market demand for MLCC products has increased for wireless handsets, dual core
microprocessors, flat panel displays and automotive electronics.

IMG sales were $20.4 million in the second quarter of fiscal 2008, an increase of $10.6
million or 108% compared to IMG sales of $9.8 million in the first quarter of fiscal 2007, including an increase of $2.6 million resulting from the acquisition of NWR. The remaining increase was led by sales volumes of our Model 5300 series UV laser
micro-via drilling systems.



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##### Table of Contents

Net sales by geographic region were as follows (net sales in thousands):



|         |  |                    |        |               |                   |   |           |   |               |  |       |  
|-------- |  | ------------------ | ------ | ------------- | ----------------- | - | --------- | - | ------------- |  | ----- | -
|         |  | Three months ended |       
|         |  | September 29, 2007 |        |               | September 2, 2006 |  
|         |  | Net Sales          |        | % ofNet Sales |                   |   | Net Sales |   | % ofNet Sales | 
|Asia     |  | $                  | 63,586 |               | 77.3              | % |           | $ | 43,653        |  | 72.3  | %
|Americas |  |                    | 12,930 |               | 15.7              |   |           |   | 13,005        |  | 21.5  |  
|Europe   |  |                    | 5,802  |               | 7.0               |   |           |   | 3,710         |  | 6.2   |  
|         |  |                    |        |               |                   |   |           |   |               |  |       |  
|         |  | $                  | 82,318 |               | 100.0             | % |           | $ | 60,368        |  | 100.0 | %
|         |  |                    |        |               |                   |   |           |   |               |  |       |  

Compared to the first quarter of fiscal 2007, the percentage of net sales to Asia in the current quarter of fiscal
2008 increased by 5 percentage points. The net $19.9 million increase in net sales to Asia was driven primarily by increases in China and Korea resulting from volume increases in net sales of SG products, and increases in Japan due to higher net
sales of PCG products. Partially offsetting these increases, the impact of NWR net sales by region reduced our percentage of total net sales to Asia by approximately 2 percentage points, compared to 79.5% percent of total net sales excluding NWR in
the second quarter of fiscal 2008.

Gross Profit

Gross profit was $36.8 million (44.7% of net sales) for the second quarter of fiscal 2008 compared to $26.3 million (43.5% of net sales) for the first quarter of fiscal 2007. Cost of sales in the current quarter included $1.1 million in
purchase accounting charges, which reduced the gross margin percentage by 1.3 percentage points. Excluding the impact of purchase accounting, the 2.5 percentage point increase in gross profit is due to volume-based manufacturing efficiencies on
shipments that increased by $27.8 million or 46%, which includes $6.1 million in NWR shipments compared to first quarter of fiscal 2007.

Operating
Expenses

Selling, Service and Administrative Expenses

The primary items included in selling, service and administrative expenses are labor and other employee-related expenses, travel expenses, professional fees and facilities costs. Selling, service and administrative expenses were $15.4
million (18.7% of net sales) in the second quarter of fiscal 2008, an increase of $3.3 million compared to $12.1 million (20.0% of net sales) in the first quarter of fiscal 2007. The increase was significantly impacted by the acquisition of NWR,
which added $2.6 million in operating expenses. The remaining increase was primarily due to expenses to support higher volume sales and service activity as well as incremental costs related to the acquisition and integration of NWR.

Research, Development and Engineering Expenses

Research, development
and engineering expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. Expenses associated with research, development and engineering totaled $11.1 million
(13.5% of net sales) for the second quarter of fiscal 2008, representing a $1.8 million increase from $9.3 million (15.4% of net sales) for the first quarter of fiscal 2007, including an increase of $1.2 million related to the acquisition of NWR.
The remaining $0.6 million increase is primarily related to increased project materials and project consulting costs as well as higher professional fees related to patents.



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Write-off of In-process Research & Development

At the acquisition date, NWR had in-process research and development valued at $2.8 million and the immediate write-off of this amount has been included in operating
expenses for the three-month period ended September 29, 2007. The in-process research and development related to three programs consisting of development on a diode-pumped solid-state LED wafer-scribing system, a next-generation Advanced Beam
Delivery System and a next-generation laser product. The value of the in-process research and development was based on the excess earnings method of the income approach, which measures the value of an asset by calculating the present value of
related future economic benefits, such as cash earnings. In determining the value of in-process research and development, the assumed commercialization date for these products was April 2008. The modeled cash flow was discounted back to the net
present value and was based on estimates of revenues and operating profits related to the project. Significant assumptions used in the valuation of in-process research and development included: stage of development of the project, future revenues,
the estimated life of the products underlying technology, future operating expenses, and a discount rate of 18% to reflect present value.

Insurance Recovery

In June 2006, the Company received $1.3 million in insurance proceeds for demonstration systems that were destroyed in a
fire at a customers plant. As the book value of these assets had previously been written off we recorded a gain on the recovery which is included as an offset to operating expenses in the consolidated statement of operations in the first
quarter of fiscal 2007.

Interest and Other Income, Net

Net interest and other income was $2.1 million in the second quarter of 2008 compared to $2.8 million in the first quarter of 2007, a decrease of $0.7 million. The decrease was primarily due to a reduction in interest income resulting from
lower average invested assets due to the funding of our acquisition of NWR and the impact of our share repurchase program. Our average invested assets were $201.7 million in the second quarter of fiscal 2008 compared to $221.4 million in the first
quarter of fiscal 2007. Additionally, during the first quarter of fiscal 2007, we recorded $0.3 million in non-recurring interest income on income tax refunds.

Income Taxes

The income tax provision recorded for the second quarter of fiscal 2008 was $4.1 million on pretax income of $9.6
million, an effective rate of 42%. Comparatively, the income tax provision was $2.1 million on pretax income of $5.9 million in the first quarter of fiscal 2007, an effective tax rate of 36%. Excluding purchase accounting charges of $4.3 million,
the effective tax rate would be 29%, as these charges are not deductible for tax return purposes but do reduce pretax income for financial reporting purposes.

The effective tax rate for the third quarter of fiscal 2008 is expected to be approximately 37%. The projected decrease in the effective tax rate results from the reduction in purchase accounting adjustments from $4.3 million in the current
quarter to approximately $1.0 million for the third quarter of fiscal 2008. This will result in a reduction in the effective tax rate of approximately 5%. Our effective tax rate is subject to fluctuation based upon the occurrence and timing of
numerous discrete events, including, for example, changes in tax laws or their interpretations, extensions or expirations of research and experimentation credits, closure of tax years subject to examination and finalization of income tax returns.
Based on currently available information, we are not aware of any such discrete events which are likely to occur that would have a materially adverse effect on our financial position, expected cash flows or results of operations. We expect our
normalized annual effective tax rate to be approximately 32%, excluding the impact of purchase accounting. We anticipate no significant changes in unrecognized tax benefits in the next 12 months as the result of examinations or lapse of statutes of
limitation.



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##### Table of Contents

Net Income

Net income for the second quarter of fiscal 2008 was $5.5 million (6.7% of net sales), or $0.20 per basic share and $0.19 per diluted share, compared to a net income of $6.2 million (10.3% of net sales), or $0.21 per share on a basic and
fully diluted basis in the first quarter of fiscal year 2007. Net income in the current quarter was impacted by purchase accounting adjustments totaling $4.3 million, which reduced earnings per share by $0.15 per basic and diluted share.

Financial Condition and Liquidity

At September 29, 2007, our
principal sources of liquidity consisted of cash, cash equivalents and marketable securities of $179.2 million and accounts receivable of $56.5 million. At September 29, 2007, we had a current ratio of 5.2:1 and no long-term debt. Working
capital decreased to $267.0 million at September 29, 2007 from $327.3 million at June 2, 2007, primarily due to the use of cash for the acquisition of NWR and the funding of our share repurchase program.

On July 20, 2007 we completed our acquisition of NWR for approximately $36.2 million including merger-related transaction fees and net of cash acquired.

On March 9, 2007, the Board of Directors authorized the repurchase of up to $50 million in shares of our outstanding common stock beginning April 17, 2007
through transactions in the open market or in negotiated transactions with brokers or shareholders. Through the end of the second quarter of fiscal 2008, we had funded approximately $34.7 million in share repurchases. We suspended purchase
transactions under our current share repurchase program effective October 9, 2007. In total, we repurchased a total of approximately 1.7 million shares for $37.3 million. We believe that our existing cash, cash equivalents and marketable
securities are adequate to fund our operations for at least the next twelve months.

As of September 29, 2007, we had a total of $19.6 million
invested in auction rate securities. Historically, these securities provided liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism allowed
existing investors to either retain their holdings or liquidate their holdings by selling such securities at par. The recent uncertainties in the credit markets have reduced the liquidity of these securities as recent auctions have not been
completed. We believe that these securities will ultimately be liquidated in orderly transactions in the future and we do not expect to need to sell these securities to fund our operations in the next twelve months.

Cash flows provided by operating activities totaled $12.3 million in the period from June 3, 2007 through September 29, 2007. Cash totaling $14.5 million was
provided by net income adjusted for non-cash items. Other significant factors impacting cash flows from operations included collections on trade receivables, purchases of inventories and increases in current liabilities.

Net trade receivables were $56.5 million at September 29, 2007, compared to $55.7 million at June 2, 2007, an increase of $0.8 million, which includes the
acquisition of NWR receivables of $5.5 million. Cash flows from the collection of accounts receivable for the four months ended September 29, 2007 totaled $6.1 million and a higher percentage of shipments were sent mid-quarter, resulting in a
greater percentage being collected prior to the end of the period. Days sales outstanding decreased from 71 days at June 2, 2007 to 63 at the end of the current quarter.



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Net inventories increased $10.9 million from June 2, 2007 to $91.9 million at September 29, 2007, which
includes the acquisition of NWR inventories of $5.5 million. The remaining $5.4 million increase is comprised primarily of an increase in raw materials and work-in-process inventories to meet expected demand for passive component and interconnect
products.

Operating cash flows from changes in deferred revenue, net of related changes in shipped systems pending acceptance, totaled $0.6 million.

Payables and current liabilities were $44.3 million at September 29, 2007 compared to $39.3 million at June 2, 2007, and increase of $5.0
million which includes the acquisition of $10.8 million in NWR liabilities. Cash used to settle current liabilities totaled $4.8 million, primarily due to the annual profit sharing payment for fiscal 2007 paid in August.

Cash flows provided by investing activities totaled $12.0 million for the four months ended September 29, 2007. We also generated $51.7 million net in cash and cash
equivalents through the maturity and sale of investments in our portfolio of marketable securities. We invested approximately $36.2 million in the acquisition of NWR. Additionally, we invested $2.5 million in property, plant and equipment and other
assets.

Cash flows used in financing activities of $22.0 million were comprised of $24.9 million in cash used to settle repurchase transactions for
approximately 1.1 million shares of ESI common stock pursuant to the share repurchase program discussed above, partially offset by $2.9 million in proceeds and tax benefits from the exercise of stock options and ESPP purchases for the four
months ended September 29, 2007.

Critical Accounting Policies and Estimates

Except as detailed below, we reaffirm the critical accounting policies and our use of estimates as reported in our annual report on Form 10-K for our fiscal year ended June 2, 2007 as filed with the Securities
and Exchange Commission on August 15, 2007.

Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets pursuant to SFAS No. 141 Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets, which requires that
goodwill no longer be amortized, but instead be tested for impairment at least annually in accordance with the provision of SFAS No. 142. We will perform our annual impairment test in the fourth quarter of fiscal 2008. SFAS No. 142
requires purchased intangible assets, other than goodwill, to be amortized over their estimated useful lives, unless an asset has an indefinite life. Purchased intangible assets with definite useful lives are carried at cost less accumulated
amortization. Amortization expense is recognized on a straight-line basis over the estimated useful lives of the intangible assets, which range from one to seven years. The valuation of intangibles and their useful lives are subject to change as the
purchase price allocations of NWR are still under review.



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

There have been no material changes in the market risk disclosure contained in our 2007 Annual Report on Form 10-K for our fiscal year ended on June 2, 2007. The information regarding liquidity of auction rate securities under the
heading Financial Condition and Liquidity in Item 2 of Part I of this report is incorporated herein by reference.



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|Item 4. | Controls and Procedures
|------- | -----------------------

Attached to this quarterly report
as exhibits 31.1 and 31.2 are the certifications of our President and Chief Executive Officer and our Interim Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This portion
of our quarterly report on Form 10-Q is our disclosure of the conclusions of our management, including our President and Chief Executive Officer and our Interim Chief Financial Officer, regarding the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report based on managements evaluation of those disclosure controls and procedures. You should read this disclosure in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Interim Chief Financial Officer, the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (Exchange Act). Based on that evaluation, our President and
Chief Executive Officer and our Interim Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in
our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and our Interim Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our fiscal quarter ended September 29, 2007
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We completed the acquisition of NWR on July 20, 2007. In connection with this acquisition, we are currently reviewing our
internal control over financial reporting and implementing new processes and procedures to integrate the activities associated with accounting for NWR. We excluded NWR from our assessment of the effectiveness of our internal control over financial
reporting as of September 29, 2007



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PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

All Ring Patent Infringement
Prosecution

In August 2005, ESI commenced a proceeding in the Kaohsiung District Court of Taiwan (the Court) directed against All Ring Tech Co., Ltd.
(All Ring) of Taiwan. We alleged that All Rings Capacitor Tester Model RK-T6600 (the Capacitor Tester) infringes our Taiwan Patent No. 207469, entitled Circuit Component Handler (the 207469 patent). This patent corresponds to
our U.S. Patent No. 5,842,579. The patented technology is used in the Model 3340 Multifunction MLCC Tester. The Court issued a Provisional Attachment Order (PAO) in August 2005 and All Ring filed a bond with the Court to obtain relief from the
attachment of its assets. In July 2007, pursuant to our application, the Court issued a second PAO and approximately US$6.0 million was restricted in All Rings accounts. All Ring appealed the second PAO to the High Court in August 2007 and the
High Court revoked the second PAO in September 2007. We have appealed the High Courts decision and the Supreme Court has not yet ruled on the our appeal. The second PAO remains in effect unless and until the High Courts ruling becomes
final.

Pursuant to the Courts orders, in October 2005 we were required to post with the Court a Taiwan dollar security bond, which is valued at
approximately US$6.9 million and is included in other assets on our consolidated condensed balance sheets. An additional bond amount of US$2.1 million was posted in June 2007 related to the second Provisional Attachment Order.

In October 2005, the Court executed a Preliminary Injunction Order that prohibits All Ring from manufacturing, selling, offering for sale or using the Capacitor Tester
until final judgment is entered in the formal patent infringement action. In October 2007, All Ring filed an application to revoke the Preliminary Injunction Order. We have filed a defense brief responding to the application and the Court has not
yet ruled on the application.

In October 2005, we filed a formal patent infringement action against All Ring in the Court. In May 2006, after all parties
filed briefs on the topic, the Court appointed an expert to conduct a patent infringement assessment. The Court-appointed expert has completed the assessment of the Capacitor Tester and concluded that it infringes every claim of the 207469 patent.
The Court-appointed expert subsequently concluded that All Rings RK-T2000 also infringes on every claim of the 207469 patent and that All Rings RK-L50 infringes on a number of the claims as well.

In November 2005, All Ring filed a cancellation action against our 207469 patent in the Taiwan Intellectual Property Office (the IPO). On July 5, 2007, the IPO
issued a notice requiring us to cancel two of the claims in the 207469 patent. No other claims of the patent have been rejected. We filed a response canceling the two claims and amending the remaining claims accordingly in August 2007. We intend to
vigorously pursue its patent infringement claims against All Ring and defend against the cancellation action.



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|Item 1A. | Risk Factors
|-------- | ------------

Factors That May Affect Future Results

The statements contained in this report that are not statements of historical fact, including without limitation statements containing the words
believes, expects and similar words, constitute forward-looking statements that are subject to a number of risks and uncertainties. From time to time we may make other forward-looking statements. Investors are cautioned that
such forward-looking statements are subject to an inherent risk that actual results may materially differ. The following information highlights some of the factors that could cause actual results to differ materially from the results expressed or
implied by our forward-looking statements. Forward-looking statements should be considered in light of these factors. Factors that may result in such variances include, but are not limited to, the following:

The industries that comprise our primary markets are volatile and unpredictable.

Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications, computers and other electronic products. In the past, the markets for electronic devices
have experienced sharp downturns. During these downturns, electronics manufacturers, including our customers, have delayed or canceled capital expenditures, which has had a negative impact on our financial results. In the event of a downturn, we
will not be able to assure you when demand for our products will increase or that demand will not decrease. Even if demand for our products does increase, there may be significant fluctuations in our profitability and net sales.

During any downturn, it will be difficult for us to maintain our sales levels. As a consequence, to maintain profitability we will need to reduce our operating expenses.
Our ability to quickly reduce operating expenses is dependent upon the nature of the actions we take to reduce expense and our subsequent ability to implement those actions and realize expected cost savings. Additionally, we may be unable to defer
capital expenditures and we will need to continue to invest in certain areas such as research and development. An economic downturn may also cause us to incur charges related to impairment of assets and inventory write-offs and we may also
experience delays in payments from our customers, which would have a negative effect on our financial results.

In addition, because we derive a
substantial portion of our revenue from the sale of a relatively small number of products, the timing of, or changes to, orders by our customers may also cause our order levels and results of operations to fluctuate between periods, perhaps
significantly. For example, in the second quarter of fiscal 2007, a customer requested that the Company convert part of a previous order for UV-based semiconductor systems to IR-based systems and to postpone shipment of additional UV-based systems,
which resulted in approximately $18 million being removed from backlog. Accordingly, order levels or results of operations for a given period may not be indicative of order levels or results of operations for following periods.



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Delays in manufacturing, shipment or customer acceptance of our products could substantially decrease our sales for
a period.

We depend on manufacturing flexibility to meet the changing demands of our customers. Any significant delay or interruption in receiving
raw materials or in our manufacturing operations as a result of software deficiencies, natural disasters, or other causes could result in reduced manufacturing capabilities or delayed product deliveries, any or all of which could materially and
adversely affect our results of operations.

We also have an arrangement with a contract manufacturer in Singapore to complete the manufacture of certain
of our products. Any significant interruption in this contract manufacturers ability to provide manufacturing services to us as a result of contractual disputes with us or another party, labor disruptions, natural disasters, delay or
interruption in the receipt of inventory or other causes could result in reduced manufacturing capabilities or delayed deliveries for certain of our products, any or all of which could materially and adversely affect our results of operations

In addition, we derive a substantial portion of our revenue from the sale of a relatively small number of products. Consequently, shipment and/or customer
acceptance delays, including acceptance delays related to new product introductions or customizations, could significantly impact recognition of revenue and could be further magnified by announcements from us or our competitors of new products and
technologies, which announcements could cause our customers to defer purchases of our systems, change existing orders or purchase products from our competitors. Any of these delays could result in a material adverse change in our results of
operations for any particular period.

Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient
quantities to us in a timely and cost-effective manner could negatively affect our business.

We use a wide range of materials in the production of
our products, including custom electronic and mechanical components, and we use numerous suppliers for those materials. We generally do not have guaranteed supply arrangements with our suppliers. We seek to reduce the risk of production and service
interruptions and shortages of key parts by selecting and qualifying alternative suppliers for key parts, monitoring the financial stability of key suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts
to ensure that parts are available from multiple suppliers, some key parts are available only from a single supplier or a limited group of suppliers in the short term. Operations at our suppliers facilities are subject to disruption for a
variety of reasons, including changes in business relationships, competitive factors, work stoppages, and fire, earthquake, flooding or other natural disasters. Such disruption could interrupt our manufacturing. Our business may be harmed if we do
not receive sufficient parts to meet our production requirements in a timely and cost-effective manner.

We depend on a few significant customers and
we do not have long-term contracts with any of our customers.

Our top ten customers for fiscal 2007 accounted for approximately 62% of total net
sales in fiscal 2007, with two customers each accounting for more than 10% of total net sales in fiscal 2007. In addition, none of our customers has any long-term obligation to continue to buy our products or services, and any customer could delay,
reduce or cease ordering our products or services at any time.



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Our markets are subject to rapid technological change, and to compete effectively we must continually introduce new
products that achieve market acceptance.

The markets for our products are characterized by rapid technological change and innovation, frequent new
product introductions, changes in customer requirements and evolving industry standards. Our future performance will depend on the successful development, introduction and market acceptance of new and enhanced products that address technological
changes as well as current and potential customer requirements. The introduction by us or by our competitors of new and enhanced products may cause our customers to defer, change or cancel orders for our existing products, which may harm our
operating results. In the past we have also experienced delays in new product development. Similar delays may occur in the future. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements
or, where necessary, to license these technologies from others.

Product development delays may result from numerous factors, including:



| |  |  | Changing product specifications and customer requirements;
| | - |  | ----------------------------------------------------------



| |  |  | Difficulties in hiring and retaining necessary technical personnel;
| | - |  | -------------------------------------------------------------------



| |  |  | Difficulties in reallocating engineering resources and overcoming resource limitations;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Difficulties with contract manufacturers;
| | - |  | -----------------------------------------



| |  |  | Changing market or competitive product requirements; and
| | - |  | --------------------------------------------------------



| |  |  | Unanticipated engineering complexities.
| | - |  | ---------------------------------------

The
development of new, technologically advanced products is a complex and uncertain process, requiring high levels of innovation and highly skilled engineering and development personnel, as well as the accurate anticipation of technological and market
trends. We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely basis. Further, we cannot assure you that our new products will gain market
acceptance or that we will be able to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Any failure to respond to technological change that may render our current products or
technologies obsolete could significantly harm our business.

We acquire inventory based upon projected demand. If these projections are incorrect we
may carry inventory that cannot be used, which may result in significant charges for excess and obsolete inventory.

Our business is highly
competitive and one factor on which we compete is the ability to ship products on the schedule required by customers. In order to facilitate timely shipping, management forecasts demand, both in type and amount of products, and these forecasts are
used to determine our inventory to be purchased. Certain types of inventory, including lasers and optical equipment, are particularly expensive and can only be used in the production of a single type of product. If actual demand is lower than
forecast with respect to the type or amount of products actually ordered, or both, our inventory levels may increase. As a result, there is a risk that we may have to incur material accounting charges for excess and obsolete inventory if inventory
cannot be used, which could negatively affect our financial results.



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Our ability to reduce costs is limited by our need to invest in research and development.

Our industry is characterized by the need for continued investment in research and development. Because of intense competition in the industries in which we compete, if
we were to fail to invest sufficiently in research and development, our products could become less attractive to potential customers, and our business and financial condition could be materially and adversely affected. As a result of our need to
maintain our spending levels in this area, our operating results could be materially harmed if our net sales fall below expectations. In addition, as a result of our emphasis on research and development and technological innovation, our operating
costs may increase in the future, and research and development expenses may increase as a percentage of total operating expenses and as a percentage of net sales.

We are exposed to the risks that others may violate our proprietary rights, and our intellectual property rights may not be well protected in foreign countries.

Our success is dependent upon the protection of our proprietary rights. In the high technology industry, intellectual property is an important asset that is always at risk of infringement. We incur substantial costs
to obtain and maintain patents and defend our intellectual property. For example, we have initiated litigation alleging that certain parties have violated various patents of ours, such as the action we initiated in Taiwan against All Ring Tech Co.,
Ltd. in August 2005. We rely upon the laws of the United States and of foreign countries in which we develop, manufacture or sell our products to protect our proprietary rights. However, these proprietary rights may not provide the competitive
advantages that we expect or other parties may challenge, invalidate or circumvent these rights.

Further, our efforts to protect our intellectual property
may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against
infringement in foreign countries. If we fail to adequately protect our intellectual property in these countries, it could be easier for our competitors to sell competing products in foreign countries, which could result in reduced sales and gross
margins.

We may be subject to claims of intellectual property infringement.

Several of our competitors hold patents covering a variety of technologies, applications and methods of use similar to some of those used in our products. From time to time, we and our customers have received
correspondence from our competitors claiming that some of our products, as used by our customers, may be infringing one or more of these patents. Competitors or others have in the past and may in the future assert infringement claims against our
customers or us with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. If claims of infringement are asserted against
our customers, those customers may seek indemnification from us for damages or expenses they incur.

If we become subject to infringement claims, we will
evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are
not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our financial condition and results of operations could be materially and adversely affected.



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Our business is highly competitive, and if we fail to compete effectively, our business will be harmed.

The industries in which we operate are highly competitive. We face substantial competition from established competitors, some of which have greater
financial, engineering, manufacturing and marketing resources than we do. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. Our competitors can be expected to continue to
improve the design and performance of their products and to introduce new products. New companies may enter the markets in which we compete, or industry consolidation may occur, further increasing competition in those markets. Furthermore, our
technological advantages may be reduced or lost as a result of technological advances by our competitors.

Our competitors greater resources in the
areas described above may enable them to:



| |  |  | Better withstand periodic downturns;
| | - |  | ------------------------------------



| |  |  | Compete more effectively on the basis of price and technology; and
| | - |  | ------------------------------------------------------------------



| |  |  | More quickly develop enhancements to and new generations of products.
| | - |  | ---------------------------------------------------------------------

We believe that our ability to compete successfully depends on a number of factors, including:



| |  |  | Performance of our products;
| | - |  | ----------------------------



| |  |  | Quality of our products;
| | - |  | ------------------------



| |  |  | Reliability of our products;
| | - |  | ----------------------------



| |  |  | Cost of using our products;
| | - |  | ---------------------------



| |  |  | The ability to upgrade our products;
| | - |  | ------------------------------------



| |  |  | Consistent availability of critical components;
| | - |  | -----------------------------------------------



| |  |  | Our ability to ship products on the schedule required;
| | - |  | ------------------------------------------------------



| |  |  | Quality of the technical service we provide;
| | - |  | --------------------------------------------



| |  |  | Timeliness of the services we provide;
| | - |  | --------------------------------------



| |  |  | Our success in developing new products and enhancements;
| | - |  | --------------------------------------------------------



| |  |  | Our understanding of the needs of our customers;
| | - |  | ------------------------------------------------



| |  |  | Existing market and economic conditions; and
| | - |  | --------------------------------------------



| |  |  | Price of our products as compared to our competitors products.
| | - |  | ---------------------------------------------------------------

We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins and loss of market share.

The loss of key personnel or our inability to attract, retain and assimilate sufficient numbers of managerial, financial, engineering and other technical personnel
could have a material effect upon our results of operations.

Our continued success depends, in part, upon key managerial, financial, engineering
and technical personnel as well as our ability to continue to attract, retain and assimilate additional personnel. The loss of key personnel could have a material adverse effect on our business or results of operations. We may not be able to retain
our key managerial, financial, engineering and technical employees. For example, our Chief Financial Officer retired on September 29, 2007. We have not identified a new Chief Financial Officer at this time. Attracting qualified personnel may be
difficult and our efforts to attract and retain these personnel may not be successful. In addition, we may not be able to assimilate qualified personnel, including any new members of senior management, which could disrupt our operations.



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Our worldwide direct sales and service operations and our overseas research and development facility expose us to
employer-related risks in foreign countries.

We have established direct sales and service organizations throughout the world. We have also
established a research and development facility in China. Having overseas employees involves certain risks. We are subject to compliance with the labor laws and other laws governing employers in the countries where our operations are located and as
a result we may incur additional costs to comply with these local regulations. Additionally, we may encounter labor shortages or disputes that could inhibit our ability to effectively sell, market and service our products. If we cannot effectively
manage the risks related to employing persons in foreign countries, our operating results could be adversely affected.

We recently completed an
acquisition and may make acquisitions in the future, and these acquisitions may subject us to risks associated with integrating these businesses into our current business.

We recently completed the acquisition of New Wave Research, Incorporated (NWR) and in the future we may make acquisitions of, or significant investments in, other businesses with complementary products, services or
technologies.

Acquisitions, including the acquisition of NWR, involve numerous risks, many of which are unpredictable and beyond our control, including:



| |  |  | Difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Diversion of managements attention from other operational matters;
| | - |  | -------------------------------------------------------------------



| |  |  | The potential loss of key employees of acquired companies;
| | - |  | ----------------------------------------------------------



| |  |  | Lack of synergy, or inability to realize expected synergies, resulting from the acquisition;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | Acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance by the acquired company;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Difficulties establishing satisfactory internal controls at acquired companies; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Incurring liabilities for which we may not be indemnified in full or at all.
| | - |  | ----------------------------------------------------------------------------

Our inability to effectively manage these acquisition risks could materially and adversely affect our business, financial condition and results of operations and could cause us not to realize the anticipated benefits
of an acquisition on a timely basis or at all. In addition, if we issue equity securities to pay for an acquisition the ownership percentage of our existing shareholders would be reduced and the value of the shares held by our existing shareholders
could be diluted. If we use cash to pay for an acquisition the payment could significantly reduce the cash that would be available to fund our operations or to use for other purposes. In addition, the accounting for acquisitions, including the NWR
acquisition, could result in significant charges resulting from amortization of intangible assets related to such acquisitions. We have made, and in the future may make, strategic investments in development stage companies, which investments are
subject to a high degree of risk, and therefore it is possible that we could lose our entire investment.



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We are exposed to the risks of operating a global business, including risks associated with exchange rate
fluctuations, legal and regulatory changes and the impact of regional and global economic disruptions.

International shipments accounted for 84% of
net sales in fiscal 2007, with 75% of our net sales to customers in Asia. We expect that international shipments will continue to represent a significant percentage of net sales in the future. We also have an arrangement with a contract manufacturer
in Singapore to complete the manufacture of certain of our products. Our non-U.S. sales, purchases and operations, including contract manufacturing, are subject to risks inherent in conducting business abroad, many of which are outside our control,
including the following:



| |  |  | Periodic local or geographic economic downturns and unstable political conditions;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | Price and currency exchange controls;
| | - |  | -------------------------------------



| |  |  | Fluctuation in the relative values of currencies;
| | - |  | -------------------------------------------------



| |  |  | Difficulties protecting intellectual property;
| | - |  | ----------------------------------------------



| |  |  | Local labor disputes;
| | - |  | ---------------------



| |  |  | Shipping delays and disruptions;
| | - |  | --------------------------------



| |  |  | Increases in shipping costs, caused by increased fuel costs or otherwise, which we may not be able to pass on to our customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing suppliers, distributors and representatives, and
repatriation of earnings.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our business and operating results are subject to uncertainties arising out of the possibility of regional or
global economic disruptions (including those resulting from natural disasters and outbreaks of infectious disease), the economic consequences of military action or terrorist activities and associated political instability, and the impact of
heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:



| |  |  | The risk that future tightening of immigration controls may adversely affect the residence status of non-U.S. engineers and other key technical employees in our
U.S. facilities or our ability to hire new non-U.S. employees in such facilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The risk of more frequent instances of shipping delays; and
| | - |  | -----------------------------------------------------------



| |  |  | The risk that demand for our products may not increase or may decrease.
| | - |  | -----------------------------------------------------------------------

We reported a material weakness in our internal control over financial reporting in a prior fiscal year and if additional material weaknesses are discovered in the future, our internal controls over financial
reporting could be adversely affected.

In connection with our managements assessment of the effectiveness of our internal control over
financial reporting at the end of the third quarter of fiscal 2007, we concluded that, as of March 3, 2007, our disclosure controls and procedures were not effective in ensuring accurate reporting of financial information due to a material
weakness in our processes, procedures and controls related to the review and analysis of inventory cost variances resulting from certain inventory transactions. A material weakness is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected.



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We have taken the steps necessary to remediate the previously identified material weakness. However, the identification
of one or more additional material weaknesses in the future could result in material misstatements in our financial reports and could lead us or our auditors to conclude that we do not have effective controls over financial reporting as required
under Section 404 of the Sarbanes-Oxley Act. This may negatively impact the markets view of our control environment and, potentially, our stock price.

No market currently exists for auction rate securities we hold and as a result we may not be able to liquidate them for par value, if at all. In addition, if the credit quality of the issuers declines we may have to recognize an
impairment with respect to those securities.

As of September 29, 2007, the Company had a total of $19.6 million invested in auction rate
securities. These securities historically provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism allows existing investors
to either retain their holdings or liquidate their holdings by selling such securities at par. The recent uncertainties in the credit markets have reduced the liquidity of these securities as recent auctions have not been completed. As such, we have
reclassified these securities, which were previously included in current assets, as long-term marketable securities on our consolidated condensed balance sheet at September 29, 2007. We believe that these securities will ultimately be
liquidated in orderly transactions at an amount equal to the cost of the assets. However, if we need to liquidate the securities in the near future or if no orderly liquidation occurs, we may not be able liquidate these securities at par or at all,
which could impair our liquidity. In addition, while these investments continue to be of high credit quality and the respective credit ratings of the securities issuers have not been lowered, if their credit quality decreases or such credit ratings
decline we may have to recognize an impairment to the value of the securities, which could harm our financial results. It is possible that continued uncertainty in the credit markets could also impact the liquidity of our other investments and cash
equivalents, which could impair our liquidity or require us to recognize an impairment to the value of those investments, which could harm our business.

Our tax rates are subject to fluctuation, which could impact our financial position, and our estimates of tax liabilities may be subject to audit, which could result in additional assessments.

Our effective tax rates are subject to fluctuation as the income tax rates for each year are a function of: (a) taxable income levels and the effects of a mix of
profits (losses) earned by ESI and our subsidiaries in numerous tax jurisdictions with a broad range of income tax rates, (b) our ability to utilize recorded deferred tax assets, (c) taxes, interest or penalties resulting from tax audits,
(d) the magnitude of various credits and deductions as a percentage of total taxable income and (e) changes in tax laws or the interpretation of such tax laws. Changes in the mix of these items may cause our effective tax rates to
fluctuate between periods, which could have a material adverse effect on our financial position.

We are subject to income taxes in both the United States
and numerous foreign jurisdictions. During the ordinary course of business there are transactions and calculations for which the ultimate tax determination is uncertain. Significant judgment is exercised in determining our world wide provisions for
income taxes. Furthermore, we are occasionally under audit by tax authorities. Although we believe our tax estimates are reasonable, the final outcome of tax audits and examinations and the impact of changes in tax laws or the interpretation of tax
laws could result in material differences from what is reflected in historical income tax accruals. For example, we recorded an additional $1.0 million of income taxes payable in the fourth quarter of fiscal 2007 due to new technical guidance from
the Internal Revenue Service regarding foreign sales and leasing income. If additional taxes are assessed as a result of an examination, a material effect on our financial results, tax positions or cash flows could occur in the period or periods in
which the determination is made.



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##### Table of Contents

|Item 2. | Issuer Purchases of Equity Securities
|------- | -------------------------------------

On March 9,
2007, the Board of Directors authorized the repurchase of up to $50 million in shares of our outstanding common stock beginning April 17, 2007 through transactions in the open market or in negotiated transactions with brokers or shareholders.
During the four months ended September 29, 2007, we repurchased 1,124,578 shares at an average price of $22.34. The following table sets forth information about the share repurchase transactions in accordance with SEC Regulation S-K,
Item 703:



|                  |  |                                             |  |                                          |       |                                                                                            |           |                                                                                                                         |   |           
|----------------- |  | ------------------------------------------- |  | ---------------------------------------- | ----- | ------------------------------------------------------------------------------------------ | --------- | ----------------------------------------------------------------------------------------------------------------------- | - | ----------
|Period            |  | (a) TotalNumber ofShares (orUnits)Purchased |  | (b) AveragePrice Paidper Share (or Unit) |       | (c) TotalNumber of Shares (or Units)Purchased as Partof PubliclyAnnounced Plansor Programs |           | (d) Maximum Number (or Approximate DollarValue) of Shares (orUnits) that May Yet BePurchased Under thePlans or Programs
|6/3/07 to 6/30/07 |  | 300,000                                     |  | $                                        | 21.07 |                                                                                            | 300,000   |                                                                                                                         | $ | 33,248,095
|7/1/07 to 8/4/07  |  | 329,174                                     |  | $                                        | 22.23 |                                                                                            | 329,174   |                                                                                                                         | $ | 25,929,302
|8/5/07 to 9/1/07  |  | 258,400                                     |  | $                                        | 22.77 |                                                                                            | 258,400   |                                                                                                                         | $ | 20,045,757
|9/2/07 to 9/30/07 |  | 237,004                                     |  | $                                        | 23.62 |                                                                                            | 237,004   |                                                                                                                         | $ | 14,447,280
|                  |  |                                             |  |                                          |       |                                                                                            |           |                                                                                                                         |   |           
|Total             |  | 1,124,578                                   |  | $                                        | 22.34 |                                                                                            | 1,124,578 |                                                                                                                         | $ | 14,447,280
|                  |  |                                             |  |                                          |       |                                                                                            |           |                                                                                                                         |   |           

On October 9, 2007, the Company suspended purchase transactions under its share repurchase program. In total,
the Company repurchased approximately 1.7 million shares for $37.3 million since April 17, 2007.



|Item 5. | Other Information
|------- | -----------------

Shareholder Proposals not in the
Companys Proxy Statement

We held our last annual meeting of shareholders on October 25, 2007. As a result of the change in our fiscal year,
our next annual meeting of shareholders will be held more than 30 days before the anniversary date of our last annual meeting. In the definitive proxy statement for our October 25, 2007 meeting, filed September 6, 2007, we advised our
shareholders that we expected to hold our next annual meeting of shareholders on August 21, 2008. The Company has now determined that our next annual meeting of shareholders will be held on August 5, 2008. Accordingly, under the guidelines
described below, any notice relating to a shareholder proposal for the 2008 annual meeting, to be timely, must be received by the Company between April 7, 2008 and May 7, 2008.

Shareholders wishing to present proposals for action at this annual meeting or at another shareholders meeting must do so in accordance with the Companys Bylaws. A shareholder must give timely notice of
the proposed business to the Secretary. To be timely, a shareholders notice must be in writing and delivered to the secretary not less than 90 days nor more than 120 days prior to the anniversary date of the proxy statement for the prior
years annual meeting of shareholders; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed (other than as a result of adjournment or postponement) by more than 70 days from the
anniversary of the previous years annual meeting, notice by the shareholder, to be timely, must be received by the Secretary no earlier than 120 days before such annual meeting and no later than the later of 90 days before such annual meeting
or 10 days following the day on which public announcement of the date of the meeting was first made. A shareholder proposal must include the information specified in the Companys Bylaws, and a copy of the relevant provisions of the Bylaws will
be provided to any shareholder upon written request to the Companys Secretary. The chairman of the meeting may, if the facts warrant, determine and declare that the business was not properly brought before the meeting in accordance with the
Companys Bylaws.



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##### Table of Contents

Shareholders who wish to submit a shareholder proposal should do so in writing addressed to the Board of Directors, c/o
Chairman of the Board, Electro Scientific Industries, Inc., 13900 NW Science Park Drive, Portland, Oregon 97229-5497.

Shareholder Proposals in the
Companys Proxy Statement

Shareholders wishing to submit proposals for inclusion in the Companys proxy statement for the 2008 annual meeting
of shareholders must submit the proposals for receipt by the Company not later than February 29, 2008.



|Item 6. | Exhibits
|------- | --------

This list is intended to
constitute the exhibit index.



|     |  |                                                                                                                                                                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  |  | Agreement and Plan of Merger dated as of July 4, 2007, by and among the Company, New Wave Research, Incorporated, Neptune Merger Corp. and the Security holder Representative. Incorporated
by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K filed on July 25, 2007.                       
|     | 
|3.1  |  | Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-A of the Companys Annual Report on Form 10-K for the fiscal year ended May 31, 1991.                                                                                                                                                  
|     | 
|3.2  |  | Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3-B of the Companys Annual Report on Form 10-K for the fiscal year ended May 31,
1999.                                                                                                                   
|     | 
|3.3  |  | Articles of Amendment of Third Restated Articles of Incorporation. Incorporated by reference to Exhibit 3 of the Companys Quarterly Report on Form 10-Q for the fiscal quarter ended
December 2, 2000.                                                                                                           
|     | 
|3.4  |  | 2004 Restated Bylaws, as amended. Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October 21, 2004.                                                                                                                                                                 
|     | 
|4.1  |  | Amended and Restated Rights Agreement, dated as of March 1, 2001, between the Company and Mellon Investor Services, relating to rights issued to all holders of Company common stock. Incorporated
by reference to Exhibit 4-A of the Companys Annual Report on Form 10-K for the fiscal year ended June 2, 2001.
|     | 
|10.1 |  | Separation and Release Agreement, dated July 27, 2007, between the Company and John Metcalf. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on
August 2, 2007.                                                                                                       
|     | 
|10.2 |  | 2004 Stock Incentive Plan, as amended.                                                                                                                                                                                                                                                                            
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                        
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                        
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                



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SIGNATURES

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



|                        |  |  |  |                                     |  |                                                   |  |                       
|----------------------- |  |  |  | ----------------------------------- |  | ------------------------------------------------- |  | ----------------------
|Dated: November 7, 2007 |  |  |  | ELECTRO SCIENTIFIC INDUSTRIES, INC.
|                        |  |  |  |                                    
|                        |  |  |  |                                     |  | By                                                |  | /s/ Nicholas Konidaris
|                        |  |  |  |                                     |  | Nicholas Konidaris                               
|                        |  |  |  |                                     |  | President and Chief Executive Officer            
|                        |  |  |  |                                     |  | (Principal Executive Officer)                    
|                        |  |  |  |                                    
|                        |  |  |  |                                     |  | By                                                |  | /s/ Kerry Mustoe      
|                        |  |  |  |                                     |  | Kerry Mustoe                                     
|                        |  |  |  |                                     |  | Vice President, Interim Chief Financial Officer, 
|                        |  |  |  |                                     |  | Corporate Controller and Chief Accounting Officer
|                        |  |  |  |                                     |  | (Principal Financial and Accounting Officer)     



38