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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 June 28, 2008

OR



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

For the transition period from  to

Commission File Number: 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 a large accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, non-accelerate filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                             
|-------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x        
|Non-accelerated filer   ̈   |  | Smaller Reporting Company   ̈

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

The number of shares outstanding of the Registrants Common Stock at July 31, 2008 was 27,026,125 shares.









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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                              |  |                                                                                                                                                     |  |         
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                              |  |                                                                                                                                                     |  | PAGE NO.
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                                    
|                              |  |                                                                                                                                                    
|Item 1.                       |  | Financial Statements                                                                                                                                |  |         
|                              |  |                                                                                                                                                    
|                              |  | Condensed Consolidated Balance Sheets (Unaudited) - at June 28, 2008 and March 29, 2008                                                             |  | 1       
|                              |  |                                                                                                                                                    
|                              |  | Condensed Consolidated Statements of Operations (Unaudited) - for the Fiscal Quarter ended June 28, 2008 and the Fiscal Quarter
 ended June 2, 2007 |  | 2       
|                              |  |                                                                                                                                                    
|                              |  | Condensed Consolidated Statements of Cash Flows (Unaudited) - for the Fiscal Quarter ended June 28, 2008 and the Fiscal Quarter
 ended June 2, 2007 |  | 3       
|                              |  |                                                                                                                                                    
|                              |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                                                                                    |  | 4       
|                              |  |                                                                                                                                                    
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                               |  | 14      
|                              |  |                                                                                                                                                    
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                          |  | 21      
|                              |  |                                                                                                                                                    
|Item 4.                       |  | Controls and Procedures                                                                                                                             |  | 21      
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                                                    
|                              |  |                                                                                                                                                    
|Item 1.                       |  | Legal Proceedings                                                                                                                                   |  | 22      
|                              |  |                                                                                                                                                    
|Item 1A.                      |  | Risk Factors                                                                                                                                        |  | 23      
|                              |  |                                                                                                                                                    
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                         |  | 30      
|                              |  |                                                                                                                                                    
|Item 6.                       |  | Exhibits                                                                                                                                            |  | 30      
|                              | 
|SIGNATURES                    |  | 32                                                                                                                                                 



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                                     |  |               |         |                |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------- | ------- | -------------- | - | ------- | -
|                                                                                                     |  | June 28, 2008 |         | March 29, 2008 |  
|ASSETS                                                                                               |  |               |         |                |   |         |  
|Current assets:                                                                                      |  |               |         |                |   |         |  
|Cash and cash equivalents                                                                            |  | $             | 135,294 |                | $ | 141,059 |  
|Investments                                                                                          |  |               | 3,071   |                |   | 2,011   |  
|                                                                                                     |  |               |         |                |   |         |  
|Total cash and investments                                                                           |  |               | 138,365 |                |   | 143,070 |  
|Trade receivables, net of allowances of $1,012 and $1,025                                            |  |               | 58,601  |                |   | 60,272  |  
|Inventories                                                                                          |  |               | 92,927  |                |   | 101,501 |  
|Shipped systems pending acceptance                                                                   |  |               | 1,409   |                |   | 2,583   |  
|Deferred income taxes, net                                                                           |  |               | 14,847  |                |   | 14,906  |  
|Prepaid and other current assets                                                                     |  |               | 9,135   |                |   | 7,822   |  
|                                                                                                     |  |               |         |                |   |         |  
|Total current assets                                                                                 |  |               | 315,284 |                |   | 330,154 |  
|Non-current investments                                                                              |  |               | 16,605  |                |   | 17,835  |  
|Property, plant and equipment, net of accumulated depreciation of $68,344 and $68,252                |  |               | 47,610  |                |   | 47,962  |  
|Deferred income taxes, net                                                                           |  |               | 1,419   |                |   | 1,026   |  
|Goodwill                                                                                             |  |               | 12,436  |                |   | 12,267  |  
|Acquired intangible assets, net of accumulated amortization of $2,790 and $2,050                     |  |               | 9,521   |                |   | 10,261  |  
|Other assets                                                                                         |  |               | 38,097  |                |   | 36,107  |  
|                                                                                                     |  |               |         |                |   |         |  
|Total assets                                                                                         |  | $             | 440,972 |                | $ | 455,612 |  
|                                                                                                     |  |               |         |                |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                 |  |               |         |                |   |         |  
|Current liabilities:                                                                                 |  |               |         |                |   |         |  
|Accounts payable                                                                                     |  | $             | 10,662  |                | $ | 17,604  |  
|Accrued liabilities                                                                                  |  |               | 18,072  |                |   | 25,300  |  
|Deferred revenue                                                                                     |  |               | 12,838  |                |   | 12,583  |  
|                                                                                                     |  |               |         |                |   |         |  
|Total current liabilities                                                                            |  |               | 41,572  |                |   | 55,487  |  
|Non-current liabilities:                                                                             |  |               |         |                |   |         |  
|Income taxes payable                                                                                 |  | $             | 8,459   |                | $ | 7,885   |  
|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; 26,990 and 27,112 issued and outstanding |  |               | 130,681 |                |   | 131,417 |  
|Retained earnings                                                                                    |  |               | 259,377 |                |   | 262,135 |  
|Accumulated other comprehensive income (loss)                                                        |  |               | 883     |                |   | (1,312  | )
|                                                                                                     |  |               |         |                |   |         |  
|Total shareholders equity                                                                           |  |               | 390,941 |                |   | 392,240 |  
|                                                                                                     |  |               |         |                |   |         |  
|Total liabilities and shareholders equity                                                           |  | $             | 440,972 |                | $ | 455,612 |  
|                                                                                                     |  |               |         |                |   |         |  

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                                            |  |                      |        |   |              |   |       
|----------------------------------------------------------- |  | -------------------- | ------ | - | ------------ | - | ------
|                                                            |  | Fiscal quarter ended
|                                                            |  | June 28, 2008        |        |   | June 2, 2007
|Net sales                                                   |  | $                    | 64,024 |   |              | $ | 71,744
|Cost of sales                                               |  |                      | 38,733 |   |              |   | 38,468
|                                                            |  |                      |        |   |              |   |       
|Gross profit                                                |  |                      | 25,291 |   |              |   | 33,276
|Operating expenses:                                         |  |                      |        |   |              |   |       
|Selling, service and administration                         |  |                      | 15,849 |   |              |   | 13,163
|Research, development and engineering                       |  |                      | 9,658  |   |              |   | 9,660 
|                                                            |  |                      |        |   |              |   |       
|Total operating expenses                                    |  |                      | 25,507 |   |              |   | 22,823
|                                                            |  |                      |        |   |              |   |       
|Operating (loss) income                                     |  |                      | (216   | ) |              |   | 10,453
|Other-than-temporary impairment of auction rate investments |  |                      | (5,094 | ) |              |   |      
|Interest and other income, net                              |  |                      | 860    |   |              |   | 2,607 
|                                                            |  |                      |        |   |              |   |       
|(Loss) income before income taxes                           |  |                      | (4,450 | ) |              |   | 13,060
|(Benefit from) provision for income taxes                   |  |                      | (1,692 | ) |              |   | 5,161 
|                                                            |  |                      |        |   |              |   |       
|Net (loss) income                                           |  | $                    | (2,758 | ) |              | $ | 7,899 
|                                                            |  |                      |        |   |              |   |       
|Earnings per share:                                         |  |                      |        |   |              |   |       
|Net (loss) income per share  basic                         |  | $                    | (0.10  | ) |              | $ | 0.27  
|                                                            |  |                      |        |   |              |   |       
|Net (loss) income per share  diluted                       |  | $                    | (0.10  | ) |              | $ | 0.27  
|                                                            |  |                      |        |   |              |   |       
|Weighted average number of shares  basic                   |  |                      | 27,108 |   |              |   | 29,111
|                                                            |  |                      |        |   |              |   |       
|Weighted average number of shares  diluted                 |  |                      | 27,108 |   |              |   | 29,457
|                                                            |  |                      |        |   |              |   |       

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                     |  |                      |          |   |              |   |          |  
|------------------------------------------------------------------------------------ |  | -------------------- | -------- | - | ------------ | - | -------- | -
|                                                                                     |  | Fiscal quarter ended |         
|                                                                                     |  | June 28, 2008        |          |   | June 2, 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                 |  |                      |          |   |              |   |          |  
|Net (loss) income                                                                    |  | $                    | (2,758   | ) |              | $ | 7,899    |  
|Adjustments to reconcile net (loss) income to cash provided by operating activities: |  |                      |          |   |              |   |          |  
|Depreciation and amortization                                                        |  |                      | 2,597    |   |              |   | 2,076    |  
|Amortization of intangible assets                                                    |  |                      | 740      |   |              |   |         |  
|Stock-based compensation expense                                                     |  |                      | 1,410    |   |              |   | 733      |  
|Provision for doubtful accounts                                                      |  |                      |         |   |              |   | 73       |  
|Loss (gain) on disposal of property and equipment                                    |  |                      | 24       |   |              |   | (6       | )
|Other-than-temporary impairment of auction rate investments                          |  |                      | 5,094    |   |              |   |         |  
|Deferred income taxes                                                                |  |                      | (372     | ) |              |   | 2,393    |  
|Changes in operating assets and liabilities:                                         |  |                      |          |   |              |   |          |  
|Decrease (increase) in trade receivables, net                                        |  |                      | 165      |   |              |   | (1,879   | )
|Decrease (increase) in inventories                                                   |  |                      | 6,397    |   |              |   | (2,423   | )
|Decrease in shipped systems pending acceptance                                       |  |                      | 1,174    |   |              |   | 652      |  
|(Increase) decrease in prepaid and other current assets                              |  |                      | (1,361   | ) |              |   | 1,310    |  
|(Decrease) increase in accounts payable and accrued liabilities                      |  |                      | (11,729  | ) |              |   | 3,798    |  
|Increase (decrease) in deferred revenue                                              |  |                      | 255      |   |              |   | (1,184   | )
|                                                                                     |  |                      |          |   |              |   |          |  
|Net cash provided by operating activities                                            |  |                      | 1,636    |   |              |   | 13,442   |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                 |  |                      |          |   |              |   |          |  
|Purchase of property, plant and equipment                                            |  |                      | (1,486   | ) |              |   | (1,318   | )
|Proceeds from sales of property, plant and equipment                                 |  |                      | 4        |   |              |   | 6        |  
|Purchases of securities                                                              |  |                      | (284,294 | ) |              |   | (159,424 | )
|Proceeds from sales of securities and maturing securities                            |  |                      | 281,844  |   |              |   | 163,323  |  
|Minority equity investment                                                           |  |                      | (876     | ) |              |   |         |  
|Decrease (increase) in other assets                                                  |  |                      | 283      |   |              |   | (587     | )
|                                                                                     |  |                      |          |   |              |   |          |  
|Net cash (used in) provided by investing activities                                  |  |                      | (4,525   | ) |              |   | 2,000    |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                 |  |                      |          |   |              |   |          |  
|Proceeds from exercise of stock options and stock plans                              |  |                      | 1,187    |   |              |   | 937      |  
|Excess tax benefits realized from stock options exercised                            |  |                      | 7        |   |              |   | 27       |  
|Share repurchases                                                                    |  |                      | (3,340   | ) |              |   | (9,804   | )
|                                                                                     |  |                      |          |   |              |   |          |  
|Net cash used in financing activities                                                |  |                      | (2,146   | ) |              |   | (8,840   | )
|Effect of exchange rate changes on cash                                              |  |                      | (730     | ) |              |   | 271      |  
|                                                                                     |  |                      |          |   |              |   |          |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                              |  |                      | (5,765   | ) |              |   | 6,873    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     |  |                      | 141,059  |   |              |   | 93,589   |  
|                                                                                     |  |                      |          |   |              |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                           |  | $                    | 135,294  |   |              | $ | 100,462  |  
|                                                                                     |  |                      |          |   |              |   |          |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                   |  |                      |          |   |              |   |          |  
|Cash paid for interest                                                               |  | $                    |         |   |              | $ |         |  
|Income tax refunds received                                                          |  |                      | 549      |   |              |   |         |  
|Cash paid for income taxes                                                           |  |                      | (1,264   | ) |              |   | (133     | )

The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.



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ELECTRO SCIENTIFIC INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

These unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted in these interim statements. Accordingly, these condensed consolidated financial statements are
to be read in conjunction with the financial statements and notes included in the Companys Transition Report on Form 10-K. 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. The results for the fiscal quarters ended June 28, 2008 and June 2, 2007 are not necessarily indicative of the results of operations for the entire year.

With the exception of the adoption of the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157) as discussed in Note 2, the Companys significant accounting policies remain unchanged from those presented in Note 1 to the consolidated financial statements included in the Companys
Transition Report on Form 10-K filed for the fiscal year ended March 29, 2008.

The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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: revenue
recognition; inventory valuation; product warranty reserves; allowances for doubtful accounts; share-based compensation; income taxes; valuation of cost method equity investments; long-lived asset valuations; valuation of auction rate securities and
goodwill and intangible assets valuation.

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 consisted of approximately a ten month period containing 43 weeks ending on March 29, 2008. The current fiscal
year financial statements are presented for the fiscal quarter ended June 28, 2008. As such, comparative data has been provided for the prior year using the fiscal quarter ending on the date nearest to June 28, which is the fourth quarter
of fiscal 2007 which ended on June 2, 2007. The Company believes that the fourth quarter of fiscal 2007 provides a meaningful comparison to the first quarter of fiscal 2009. All references to years or quarters relate to fiscal years or fiscal
quarters unless otherwise noted.

2. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, which 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. The Company has adopted the provisions of SFAS
157 with respect to its financial assets and liabilities only, effective March 30, 2008. In February 2008, the FASB issued Staff Position No. SFAS 157-2, Effective Date of FASB Statement No. 157, which provides a one
year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities. See Note 5 Fair Value Measurements for disclosure applicable to SFAS 157.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. SFAS 162 is effective 60 days following the
SECs



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approval by the Public Company Accounting Oversight Board (PCAOB) of amendments to AU Section 411, The Meaning of Present fairly
in conformity with generally accepted accounting principles. The Company is currently in compliance with this standard.

3. 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. 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 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,
an analysis 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                        |  | $ | 5,246   |  
|Inventory                                  |  |   | 6,110   |  
|Prepaid expense and other current assets   |  |   | 3,609   |  
|Property, plant and equipment              |  |   | 2,496   |  
|Intangible assets                          |  |   | 12,311  |  
|In-process research & development          |  |   | 2,800   |  
|Goodwill (1)                               |  |   | 10,994  |  
|Other non-current assets                   |  |   | 788     |  
|Accounts payable and accrued liabilities   |  |   | (11,532 | )
|Deferred revenue (2)                       |  |   | (1,603  | )
|                                           |  |   |         |  
|Net assets acquired                        |  |   | 31,219  |  
|Escrow deposits pending disbursement (3)   |  |   | 4,940   |  
|                                           |  |   |         |  
|Total purchase price, net of cash acquired |  | $ | 36,159  |  
|                                           |  |   |         |  



|(1) | The goodwill amount is not tax deductible.
|--- | ------------------------------------------



|(2) | 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.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | 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 non-current
assets at June 28, 2008 on the condensed consolidated balance sheet. The final disbursement of funds is anticipated to occur in fiscal 2009-2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 June 28, 2008:



|                                                  |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|------------------------------------------------- |  | --------------------- |  | -------------------------------------- | ------ | ----------------------- | - | ------ | ----------------------------- |  | - | -----
|(In thousands, except years)                      |  | Useful Life(in years) |  | EstimatedFair Value atAcquisition Date |        | AccumulatedAmortization |   |        | RecordedValue atJune 28, 2008
|Developed technology                              |  | 7                     |  | $                                      | 8,100  |                         | $ | (1,089 | )                             |  | $ | 7,011
|Customer relationships                            |  | 6                     |  |                                        | 2,700  |                         |   | (727   | )                             |  |   | 1,973
|Customer backlog                                  |  | 1                     |  |                                        | 700    |                         |   | (659   | )                             |  |   | 41   
|Trade name and trademarks                         |  | 3                     |  |                                        | 400    |                         |   | (125   | )                             |  |   | 275  
|Change of control agreements                      |  | 1                     |  |                                        | 100    |                         |   | (94    | )                             |  |   | 6    
|Fair value of below-market lease                  |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|(non-current portion)                             |  | 3.8                   |  |                                        | 311    |                         |   | (96    | )                             |  |   | 215  
|                                                  |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|Subtotal  long term                              |  |                       |  |                                        | 12,311 |                         |   | (2,790 | )                             |  |   | 9,521
|Fair value of below-market lease(current portion) |  |                       |  |                                        | 110    |                         |   |       |                               |  |   | 110  
|                                                  |  |                       |  |                                        |        |                         |   |        |                               |  |   |      
|Total acquired intangible assets                  |  |                       |  | $                                      | 12,421 |                         | $ | (2,790 | )                             |  | $ | 9,631
|                                                  |  |                       |  |                                        |        |                         |   |        |                               |  |   |      

Amortization expense for intangible assets purchased in the NWR acquisition was approximately $0.7 million for the
fiscal quarter ended June 28, 2008 and has been recorded in the condensed consolidated statement of operations as follows:



|                                    |  |                                   |    
|----------------------------------- |  | --------------------------------- | ---
|(In thousands)                      |  | Fiscal quarter endedJune 28, 2008
|Cost of sales                       |  | $                                 | 289
|Selling, service and administration |  |                                   | 451
|                                    |  |                                   |    
|Total                               |  | $                                 | 740
|                                    |  |                                   |    

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



|             |  |                            |       
|------------ |  | -------------------------- | ------
|Year         |  | Amortization(in thousands)
|2009         |  | $                          | 2,330 
|2010         |  |                            | 1,954 
|2011         |  |                            | 1,734 
|2012         |  |                            | 1,472 
|2013         |  |                            | 1,325 
|Future years |  |                            | 1,556 
|             |  |                            |       
|             |  | $                          | 10,371
|             |  |                            |       

In fiscal 2008, the $2.8 million allocated to the in-process research and development asset was written off at the
date of the acquisition. 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 current estimated commercialization dates for these products ranges from August 2008 to December
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.



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The NWR results of operations are included in the Companys condensed 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 the Companys overall financial position. Accordingly, pro forma financial statements of
the combined entities are not presented.

4. Share-Based Compensation

The Company adopted SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123R) in 2007 using the modified prospective approach as described in the statement and has not restated
prior year results. SFAS No. 123R requires that the fair value for share-based compensation be recognized as an expense over the service period that the awards are expected to vest. 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.

The impact to the results of operations due to
SFAS No. 123R was as follows:



|                                       |               |                      |              |  |   |    
|-------------------------------------- | ------------- | -------------------- | ------------ |  | - | ---
|(In thousands)                         |               | Fiscal quarter ended
|                                       | June 28, 2008 |                      | June 2, 2007
|Cost of sales                          |               | $                    | 207          |  | $ | 115
|Selling, service and administration    |               |                      | 888          |  |   | 442
|Research, development and engineering  |               |                      | 315          |  |   | 176
|                                       |               |                      |              |  |   |    
|Total share-based compensation expense |               | $                    | 1,410        |  | $ | 733
|                                       |               |                      |              |  |   |    

The total amount of cash received from the exercise of stock options and from ESPP purchases in the fiscal quarter
ended June 28, 2008 was $0.2 million and $1.0 million, respectively. For the fiscal quarter ended June 28, 2008, tax benefits realized from the exercise of stock options and ESPP purchases were not material. Upon exercise of stock options,
the Company issues new shares of common stock from its authorized shares.

As of June 28, 2008, no share-based compensation expenses were capitalized.
The Company had $17.4 million of total unamortized stock-based compensation costs, net of estimated forfeitures, to be recognized over a weighted average period of 2.87 years.

Valuation Assumptions

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 weighted
average assumptions used in the Black-Scholes model to estimate the fair values of options granted in the quarters ended June 28, 2008 and June 2, 2007 were as follows:



|                        |  |                      |   |  |              |  
|----------------------- |  | -------------------- | - |  | ------------ | -
|                        |  | Fiscal quarter ended |  
|                        |  | June 28, 2008        |   |  | June 2, 2007 |  
|Expected life in years  |  | 4.6                  |   |  | 4.6          |  
|Risk-free interest rate |  | 3.50                 | % |  | 4.55         | %
|Volatility              |  | 41                   | % |  | 49           | %
|Dividend yield          |  | 0                    | % |  | 0            | %

The risk-free rates used are based on the U.S. Treasury yields over the expected terms. The expected term and
forfeiture estimates for stock options are based on an analysis of actual exercise behavior. The Company uses its historical volatility over the estimated expected term as the expected volatility.



7



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##### Table of Contents

Share-Based Payment Award Activity

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 as follows:



|                                           |  |                      |       |              |   |      
|------------------------------------------ |  | -------------------- | ----- | ------------ | - | -----
|                                           |  | Fiscal quarter ended
|(In thousands, except per share data)      |  | June 28, 2008        |       | June 2, 2007
|Stock Option Awards:                       |  |                      |       |              |   |      
|Grant date fair value per share            |  | $                    | 6.47  |              | $ | 8.93 
|Total fair value of options granted        |  | $                    | 880   |              | $ | 688  
|Total fair value of options vested         |  | $                    | 95    |              | $ | 21   
|Total intrinsic value of options exercised |  | $                    | 65    |              | $ | 84   
|Unvested Stock Awards:                     |  |                      |       |              |   |      
|Grant date fair value per share            |  | $                    | 16.27 |              | $ | 20.53
|Total fair value of awards granted         |  | $                    | 5,591 |              | $ | 181  
|Employee Stock Purchase Plan:              |  |                      |       |              |   |      
|Grant date fair value per share            |  | $                    | 5.09  |              | $ | 6.16 
|Total grant date fair value                |  | $                    | 2,268 |              | $ | 1,827

Stock option activity for the fiscal quarter ended June 28, 2008 was as follows:



|                                             |  |                 |   |  |                               |       |                                                    |      |                                        |   |   
|-------------------------------------------- |  | --------------- | - |  | ----------------------------- | ----- | -------------------------------------------------- | ---- | -------------------------------------- | - | --
|                                             |  | Number ofShares |   |  | WeightedAverageExercise Price |       | WeightedAverageRemainingContractualTerm (in years) |      | AggregateIntrinsic Value(in thousands)
|Outstanding at March 29, 2008                |  | 4,012,580       |   |  | $                             | 25.16 |                                                    |      |                                        |   |   
|Granted                                      |  | 136,000         |   |  |                               | 16.58 |                                                    |      |                                        |   |   
|Exercised                                    |  | (16,834         | ) |  |                               | 12.13 |                                                    |      |                                        |   |   
|Expired or forfeited                         |  | (112,983        | ) |  |                               | 24.54 |                                                    |      |                                        |   |   
|                                             |  |                 |   |  |                               |       |                                                    |      |                                        |   |   
|Outstanding at June 28, 2008                 |  | 4,018,763       |   |  | $                             | 24.95 |                                                    | 5.40 |                                        | $ | 47
|                                             |  |                 |   |  |                               |       |                                                    |      |                                        |   |   
|Vested and expected to vest at June 28, 2008 |  | 3,965,476       |   |  | $                             | 25.02 |                                                    | 5.35 |                                        | $ | 45
|                                             |  |                 |   |  |                               |       |                                                    |      |                                        |   |   
|Exercisable at June 28, 2008                 |  | 3,594,705       |   |  | $                             | 25.62 |                                                    | 4.96 |                                        | $ | 36
|                                             |  |                 |   |  |                               |       |                                                    |      |                                        |   |   

Unvested stock awards activity for the quarter ended June 28, 2008 was as follows:



|                              |  |                 |   |  |                                     |      
|----------------------------- |  | --------------- | - |  | ----------------------------------- | -----
|                              |  | Number ofShares |   |  | WeightedAverageGrant DateFair Value
|Outstanding at March 29, 2008 |  | 576,997         |   |  | $                                   | 21.63
|Awarded                       |  | 343,750         |   |  |                                     | 16.27
|Vested                        |  | (4,950          | ) |  |                                     | 23.77
|Forfeited                     |  | (43,000         | ) |  |                                     | 20.75
|                              |  |                 |   |  |                                     |      
|Outstanding at June 28, 2008  |  | 872,797         |   |  | $                                   | 19.56
|                              |  |                 |   |  |                                     |      



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5. Fair Value Measurements

Effective March 20, 2008, the beginning of fiscal 2009, the Company adopted SFAS 157, Fair Value Measurements(SFAS 157). The Company has adopted the provisions of SFAS 157 with respect to its financial assets
and liabilities only. The adoption of this statement did not have a material impact on the Companys condensed consolidated results of operations and financial condition.

Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in
an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard
establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include the following:



| |  |  | Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2, defined as inputs other than quoted prices in active markets for similar assets or liabilities that are either directly or indirectly observable;
and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------

In accordance with SFAS 157, the following table represents the Companys fair value hierarchy for its financial assets (cash
equivalents and investments) measured at fair value on a recurring basis as of June 28, 2008:



|                                      |  |         |     |         |   |        |         |  |       |        |  |   |         |  
|------------------------------------- |  | ------- | --- | ------- | - | ------ | ------- |  | ----- | ------ |  | - | ------- | -
|(In thousands)                        |  | Level 1 |     | Level 2 |   |        | Level 3 |  | Total |       
|Money market securities               |  | $       | 244 |         | $ |       |         |  | $     |       |  | $ | 244     |  
|Commercial paper                      |  |         |    |         |   | 13,483 |         |  |       |       |  |   | 13,483  |  
|Corporate notes and bonds             |  |         |    |         |   | 3,097  |         |  |       |       |  |   | 3,097   |  
|U.S. Government agencies              |  |         |    |         |   | 79,830 |         |  |       |       |  |   | 79,830  |  
|Forward purchase or (sale) contracts: |  |         |     |         |   |        |         |  |       |        |  |   |         |  
|Japanese Yen                          |  |         |    |         |   | 8,074  |         |  |       |       |  |   | 8,074   |  
|Taiwan Dollar                         |  |         |    |         |   | 5,717  |         |  |       |       |  |   | 5,717   |  
|Singapore Dollar                      |  |         |    |         |   | 2,129  |         |  |       |       |  |   | 2,129   |  
|Korean Won                            |  |         |    |         |   | (8,712 | )       |  |       |       |  |   | (8,712  | )
|Euro                                  |  |         |    |         |   | (2,893 | )       |  |       |       |  |   | (2,893  | )
|British Pound                         |  |         |    |         |   | (2,547 | )       |  |       |       |  |   | (2,547  | )
|Auction rate securities               |  |         |    |         |   |       |         |  |       | 14,506 |  |   | 14,506  |  
|                                      |  |         |     |         |   |        |         |  |       |        |  |   |         |  
|                                      |  | $       | 244 |         | $ | 98,178 |         |  | $     | 14,506 |  | $ | 112,928 |  
|                                      |  |         |     |         |   |        |         |  |       |        |  |   |         |  

For Level 1 assets, the Company utilized quoted prices in active markets for identical assets as reflected in the
June 2008 account statements provided by the Companys investment managers.

For Level 2 assets, exclusive of forward contracts, the Company utilized
quoted prices in active markets for similar assets as reflected in the June 2008 account statements provided by the Companys investment managers. For the forward contracts, spot prices at June 27, 2008 were utilized to calculate the
unrealized gain/loss on open forward contracts which were recorded in accumulated other comprehensive income and other assets.

The Level 3 assets
consisted solely of auction rate securities (ARS). The Company utilized the fair values as reflected on the June 2008 account statements provided by the Companys investment managers. The Company has reviewed these fair market valuations and
the assumptions used. These estimated fair



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##### Table of Contents

values were based upon a discounted cash flow model for fixed income securities which took into account the following: (i) the underlying structure of
each security; (ii) the present value of future principal and interest payments discounted at rates that reflect current market conditions; (iii) consideration of the probabilities of default, auction failure, or redemption by the issuer;
(iv) estimates of the recovery rates in the event of default for each security; (v) the financial condition, results and ratings of the bond insurers and issuers and (vi) the underlying trust assets of the securities.

At June 28, 2008, the Company had a total of $19.6 million par value invested in ARS which were recorded at an estimated fair value of $14.5 million in non-current
investments. The $5.1 million charge for the unrealized loss was recorded as an other-than-temporary impairment of auction rate investments in the condensed consolidated statement of operations.

At the time of purchase in fiscal 2007, these ARS were rated AAA and AA. The Companys ARS are comprised predominately of securities issued by insurance companies
to raise funds to meet regulatory capital reserve requirements and the ARS take on the credit ratings of the bond insurers who guarantee the timely payment of principal and interest on these insured securities. These ARS historically provided
short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings
by selling such securities at par. The uncertainties in the current credit markets have reduced the liquidity of these securities as auctions have not been completed since the third quarter of fiscal 2008. Upon an unsuccessful auction, the interest
rate is reset at a predetermined rate as defined in the security offering and the Company continues to receive interest income when due.

In the fourth
quarter of fiscal 2008, based on managements review and analysis of the ARS, it was determined that the decline from par value was not other-than-temporary, and accordingly, the estimated unrealized loss of these securities
totaling $3.9 million was recorded in the accumulated other comprehensive income component of shareholders equity on the condensed consolidated balance sheet at March 29, 2008.

Recent events in the general credit markets and global economy, including the credit rating downgrades of the nations two largest bond insurers, resulted in the
downgrade of the majority of the credit ratings of the Companys ARS, as most of them are issued or insured by these two bond insurers. Given the continued challenges in the financial markets and the prolonged credit crisis, we also cannot
reasonably predict when these securities will become liquid. Consequently, it was determined that the decline in fair value of these securities represented an other-than-temporary impairment in accordance with U.S. generally accepted accounting
principles. Accordingly, the cost basis of these securities was written down to their estimated fair values with an other-than-temporary impairment charge of $5.1 million recorded in the results of operations for the fiscal quarter ended
June 28, 2008. The $14.5 million estimated fair value of these securities remains classified as a non-current investment on the condensed consolidated balance sheets at June 28, 2008, consistent with the classification at March 29,
2008.

6. Inventories

Inventories are principally
valued at standard costs, which approximate the lower of cost (first-in, first-out) or market. Components of inventories at June 28, 2008 and March 29, 2008 are as follows:



|                                  |  |               |        |                |   |        
|--------------------------------- |  | ------------- | ------ | -------------- | - | -------
|(In thousands)                    |  | June 28, 2008 |        | March 29, 2008
|Raw materials and purchased parts |  | $             | 60,564 |                | $ | 62,060 
|Work in process                   |  |               | 15,041 |                |   | 15,154 
|Finished goods                    |  |               | 17,322 |                |   | 24,287 
|                                  |  |               |        |                |   |        
|                                  |  | $             | 92,927 |                | $ | 101,501
|                                  |  |               |        |                |   |        



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##### Table of Contents

7. Other Assets

Other assets consisted of the following:



|                                    |  |               |        |                |   |       
|----------------------------------- |  | ------------- | ------ | -------------- | - | ------
|(In thousands)                      |  | June 28, 2008 |        | March 29, 2008
|Patents, net                        |  | $             | 122    |                | $ | 137   
|Consignment and demo equipment, net |  |               | 9,501  |                |   | 8,346 
|Minority equity investment          |  |               | 12,991 |                |   | 12,115
|All-Ring patent suit court bond     |  |               | 9,719  |                |   | 9,705 
|Acquisition escrow deposit          |  |               | 4,940  |                |   | 4,940 
|Other                               |  |               | 824    |                |   | 864   
|                                    |  |               |        |                |   |       
|Other current assets                |  | $             | 38,097 |                | $ | 36,107
|                                    |  |               |        |                |   |       

8. Accrued Liabilities

Accrued liabilities consisted of the following:



|                           |  |               |        |                |   |       
|-------------------------- |  | ------------- | ------ | -------------- | - | ------
|(In thousands)             |  | June 28, 2008 |        | March 29, 2008
|Payroll-related            |  | $             | 5,873  |                | $ | 11,248
|Product warranty           |  |               | 4,024  |                |   | 3,740 
|Purchase order commitments |  |               | 1,204  |                |   | 1,093 
|Professional fees          |  |               | 1,245  |                |   | 1,553 
|Other                      |  |               | 5,726  |                |   | 7,666 
|                           |  |               |        |                |   |       
|                           |  | $             | 18,072 |                | $ | 25,300
|                           |  |               |        |                |   |       

See Note 9 Product Warranty for a discussion of the accrual for product warranty.

9. Product Warranty

The following is a reconciliation of the change
in the aggregate accrual for product warranty for the fiscal quarters ended June 28, 2008 and June 2, 2007:



|                                    |  |                      |        |   |              |   |        |  
|----------------------------------- |  | -------------------- | ------ | - | ------------ | - | ------ | -
|                                    |  | Fiscal quarter ended |       
|(In thousands)                      |  | June 28, 2008        |        |   | June 2, 2007 |  
|Product warranty accrual, beginning |  | $                    | 3,740  |   |              | $ | 3,954  |  
|Warranty charges incurred, net      |  |                      | (2,239 | ) |              |   | (1,674 | )
|Provision for warranty charges      |  |                      | 2,523  |   |              |   | 1,613  |  
|                                    |  |                      |        |   |              |   |        |  
|Product warranty accrual, ending    |  | $                    | 4,024  |   |              | $ | 3,893  |  
|                                    |  |                      |        |   |              |   |        |  

Warranty charges incurred include labor charges and replacement parts for system repairs under warranty and are
recorded net of any estimated cost recoveries resulting from either successful repair of damaged parts or from warranties offered by the Companys suppliers for defective components. The provision for warranty charges reflects the estimate of
future anticipated net warranty costs to be incurred for all products under warranty at quarter end and is recorded to cost of sales.

10. 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.



11



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##### Table of Contents

The following is a reconciliation of the changes in deferred revenue for the fiscal quarters ended June 28, 2008 and
June 2, 2007:



|                            |  |                      |        |   |              |   |        |  
|--------------------------- |  | -------------------- | ------ | - | ------------ | - | ------ | -
|                            |  | Fiscal quarter ended |       
|(In thousands)              |  | June 28, 2008        |        |   | June 2, 2007 |  
|Deferred revenue, beginning |  | $                    | 12,583 |   |              | $ | 13,474 |  
|Revenue deferred            |  |                      | 7,539  |   |              |   | 6,200  |  
|Revenue recognized          |  |                      | (7,284 | ) |              |   | (7,384 | )
|                            |  |                      |        |   |              |   |        |  
|Ending Balance              |  | $                    | 12,838 |   |              | $ | 12,290 |  
|                            |  |                      |        |   |              |   |        |  

11. Earnings Per Share

The following is a reconciliation of weighted average shares outstanding used in the calculation of basic and diluted earnings per share for the fiscal quarters ended June 28, 2008 and June 2, 2007:



|                                              |  |                      |  |             
|--------------------------------------------- |  | -------------------- |  | ------------
|                                              |  | Fiscal quarter ended
|(In thousands)                                |  | June 28, 2008        |  | June 2, 2007
|Weighted average shares outstanding - basic   |  | 27,108               |  | 29,111      
|Incremental dilutive shares                   |  |                     |  | 346         
|                                              |  |                      |  |             
|Weighted average shares outstanding - diluted |  | 27,108               |  | 29,457      
|                                              |  |                      |  |             

As a result of the first quarter of fiscal 2009 net loss, 80,497 incrementally dilutive shares were excluded from
the calculation as their impact would have been antidilutive.

For the fiscal quarters ended June 28, 2008 and June 2, 2007, awards of options
and unvested shares representing an additional 4.3 million and 2.8 million shares of common stock were outstanding, respectively, but were not included in the calculation of diluted net earnings per share because their effect would have
been antidilutive.

12. Comprehensive Income

The
components of comprehensive income, net of tax are as follows:



|                                                                          |  |                      |        |   |              |   |       |  
|------------------------------------------------------------------------- |  | -------------------- | ------ | - | ------------ | - | ----- | -
|                                                                          |  | Fiscal quarter ended |       
|(In thousands)                                                            |  | June 28, 2008        |        |   | June 2, 2007 |  
|Net (loss) income                                                         |  | $                    | (2,758 | ) |              | $ | 7,899 |  
|Other comprehensive income                                                |  |                      | 2      |   |              |   |      |  
|Foreign currency translation adjustment                                   |  |                      | (281   | ) |              |   | 162   |  
|Reclassification of unrealized loss on auction rate investments           |  |                      | 2,496  |   |              |   |      |  
|Net unrealized gain (loss) on securities classified as available for sale |  |                      | (22    | ) |              |   | (142  | )
|                                                                          |  |                      |        |   |              |   |       |  
|Other comprehensive income (loss)                                         |  | $                    | (563   | ) |              | $ | 7,919 |  
|                                                                          |  |                      |        |   |              |   |       |  



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13. Share Repurchase Program

On May 15, 2008, the Board of Directors authorized a new share repurchase program for up to $20.0 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation programs. The
repurchases are to be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and
other factors. There is no fixed completion date for the repurchase program.

During the fiscal quarter ended June 28, 2008, the Company repurchased
213,654 shares for $3.3 million under this share repurchase program at an average price per share of $15.63, which was calculated inclusive of commissions and fees. Cash used to settle repurchase transactions is reflected as a component of cash used
in financing activities in the condensed consolidated statements of cash flows.

14. Product and Geographic Information

Net sales by product type were as follows:



|                                   |  |                      |        |              |   |       
|---------------------------------- |  | -------------------- | ------ | ------------ | - | ------
|                                   |  | Fiscal quarter ended
|(In thousands)                     |  | June 28, 2008        |        | June 2, 2007
|Semiconductor group (SG)           |  | $                    | 21,728 |              | $ | 50,166
|Passive Component (PCG)            |  |                      | 13,275 |              |   | 12,784
|Interconnect/Micro-machining (IMG) |  |                      | 29,021 |              |   | 8,794 
|                                   |  |                      |        |              |   |       
|                                   |  | $                    | 64,024 |              | $ | 71,744
|                                   |  |                      |        |              |   |       

Net sales by geographic area, based on the location of the end user, were as follows:



|               |  |                      |        |              |   |       
|-------------- |  | -------------------- | ------ | ------------ | - | ------
|               |  | Fiscal quarter ended
|(In thousands) |  | June 28, 2008        |        | June 2, 2007
|Asia           |  | $                    | 44,439 |              | $ | 55,707
|Americas       |  |                      | 12,903 |              |   | 8,296 
|Europe         |  |                      | 6,682  |              |   | 7,741 
|               |  |                      |        |              |   |       
|               |  | $                    | 64,024 |              | $ | 71,744
|               |  |                      |        |              |   |       

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). As part of this proceeding, the Court issued a Provisional Attachment Order (PAO) in August 2005, restricting the use of some of All Rings assets. All Ring then filed a bond with the Court to obtain
relief from the attachment of its assets. In July 2007, the Court issued a second PAO and approximately US$6.0 million was restricted in All Rings accounts. The second PAO remains in effect and cannot be revoked.

In October 2005, the Company filed a formal patent infringement action against All Ring in the Court. The Court-appointed expert has concluded that the Capacitor Tester
and All Rings RK-T2000 both infringe every claim of the 207469 patent and that All Rings RK-L50 infringes a number of the claims as well. Also in October 2005, the Court executed a Preliminary Injunction Order (PIO) 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. The Court dismissed All Rings application to revoke the PIO on January 18, 2008,
and the PIO remains in place.



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##### Table of Contents

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.

On March 4, 2008, pursuant to All Rings motion, the Court issued a suspension
order, staying the formal action until after a final decision is rendered in the cancellation action. The High Court revoked the Courts suspension decision on May 2, 2008. On May 12, 2008, All Ring appealed the High Courts
ruling. At the latest, the formal action will re-start soon after July 2008, when Taiwans new Intellectual Property Law comes into effect. Any cases previously suspended, such as the Companys formal action, will re-start upon a party
making a motion with the Court to do so. The Company intends to make such a motion and continue to vigorously pursue its patent infringement claims against All Ring and defend against the cancellation action.

Pursuant to the Courts Provisional Attachment Order and Preliminary Injunction Order, in October 2005, the Company was required to post a Taiwan dollar security
bond with the Court. An additional Taiwan dollar bond of approximately US$2.1 million was posted in June 2007 related to the second PAO. The total security bonds were valued at approximately US$9.7 million at June 28, 2008 and this amount was
included in the Companys other assets on the consolidated balance sheet at June 28, 2008. In addition to the legal matters described above, in the ordinary course of business the Company is involved in various other legal matters, either
asserted or unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on the Companys consolidated financial position, results of operations or cash flows.

In addition to the legal matters described above, in the ordinary course of business the Company is involved in various other legal matters, either asserted or
unasserted, and investigations. In the opinion of management, ultimate resolution of these matters will not have a material effect on the Companys consolidated financial position, results of operations or cash flows.

16. Restructuring and Cost Management Plans

In fiscal 2008, the
Company began to see the impact of weakness in the memory market and lower capital spending, particularly in the fourth quarter. In response, in the fourth quarter of fiscal 2008, the Company initiated a restructuring plan designed to reduce costs
through a reduction-in-force and office consolidation in foreign subsidiary locations. In conjunction with this restructuring plan, 25 positions were eliminated in the Companys U.S. and overseas offices, impacting all functional groups. The
majority of these restructuring actions were completed in early April 2008 and resulted in approximately $1.0 million in expenses related to the restructuring plan, of which $0.6 million was included in accrued liabilities at March 29, 2008.
During the fiscal quarter ended June 28, 2008, a second plan was initiated and restructuring expenses of $0.7 million were included in selling, service and administration expense, and an unpaid amount of $0.4 million was included in accrued
liabilities at June 28, 2008. We expect to pay the remainder of the accrued amounts in the second quarter of fiscal 2009 along with incurring certain additional expenses related to the closure of a research and development facility.



|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 Risk Factors.



14



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##### Table of Contents

Overview of Business

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 manufacturing 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.

Change in Fiscal Reporting Periods

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, our fiscal year 2008 consisted of approximately a ten month period containing 43 weeks ending on March 29, 2008. The
current fiscal year financial statements are presented for the fiscal quarter ended June 28, 2008. As such, comparative data has been provided for the prior year using the fiscal quarter ending on the date nearest to June 28, which is the
fourth quarter of fiscal 2007 which ended on June 2, 2007.

We believe that the fourth quarter of fiscal 2007 provides a meaningful comparison to the
first quarter of fiscal 2009. All references to years or quarters relate to fiscal years or fiscal quarters unless otherwise noted.

Acquisition of New
Wave Research, Incorporated

On July 20, 2007, we acquired New Wave Research, Incorporated, a privately-held company headquartered in Fremont,
California. New Wave Research, Incorporated 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. See Note 3 Acquisition of
New Wave Research, Incorporated of the Notes to the Condensed Consolidated Financial Statements for additional discussion.

Summary of Sequential
Quarterly Results

During fiscal 2008, the semiconductor memory market began to experience falling memory prices which significantly impacted the
profitability of memory producers and resulted in lower capital spending among our customers. We began to see the impact of this trend in our fourth quarter fiscal 2008 resulting in a significant reduction in orders for our semiconductor memory
yield improvement products. In addition, we began to see weakness in our passive component business due to absorption of capacity added earlier in fiscal 2008 and cautious spending related to concerns about the global economic environment. Looking
forward to the remainder of fiscal 2009, we expect these conditions to continue and the timing of a recovery in our markets is uncertain.



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For the first quarter of fiscal 2009, orders of $59.6 million increased $8.4 million, compared to $51.1 million for the
fourth quarter of fiscal 2008. This increase was primarily due to an increase in interconnect/micro-machining group (IMG) partially offset by lower order levels in our semiconductor group (SG) and passive components group (PCG).

Orders for our IMG products increased by approximately 80% from the fourth quarter of fiscal 2008 compared to the first quarter of fiscal 2009. The increase in orders
for IMG was largely attributable to strong demand for our new Model 5800 micro-machining system. This reflects our penetration into markets that require high-quality micro features on a broad array of materials.

Orders for our SG products decreased by approximately 30% compared to the fourth quarter of fiscal 2008. The decrease in orders for the SG products was primarily due to
reductions in capital spending from customers because of reluctance to purchase additional capacity during a period of softness in the memory markets.

PCG
product orders decreased by approximately 10% compared to the fourth quarter of fiscal 2008 due to a weak demand environment. Capacity expansion in this market is paced by demand for consumer electronics, which has been impacted by the slowing of
the global economy, especially in the United States.

Gross margins were 39.5% on net sales of $64.0 million in the first quarter of fiscal 2009, compared
to 44.7% on net sales of $70.6 million in the fourth quarter of fiscal 2008. The decrease was primarily due to lower production volumes, higher warranty costs, and a higher sales volume of low margin upgrades. The decline in production volumes was
greater than the decline in revenues as we sold existing finished goods inventory built in prior quarters. Warranty costs increased significantly in the quarter as a result of specific supplier-related laser failures, one-time transition costs of
warranty support in Japan from our previous distributor to an in-house service team and the associated increase in our warranty reserve. Included in cost of sales in both quarters were $0.3 million in purchase accounting expenses related to the
acquisition of NWR.

Operating expenses decreased $3.2 million to $25.5 million in the first quarter of fiscal 2009, compared to $28.7 million in the
fourth quarter of fiscal 2008. This decrease was primarily due to our effort to reduce costs through restructuring and cost management plans and lower variable costs corresponding to the level of sales and production activity.

Operating income decreased $3.0 million in the first quarter of fiscal 2009 compared to the fourth quarter of fiscal 2008 based on the factors described above.

An other-than-temporary impairment of auction rate securities (ARS) held in our investment portfolio resulted in a non-operating expense of $5.1 million
in the first quarter of fiscal 2009. Previously, unrealized losses on ARS were not considered other-than-temporary and estimated changes in fair value were recorded in equity as a reduction to accumulated other comprehensive income.

Interest and other income, net was $0.9 million in the first quarter of fiscal 2009 compared to $1.8 million in the fourth quarter of fiscal 2008. This decrease of $0.9
million was due to lower interest income and movements in foreign currency exchange rates. Lower interest income resulted from lower average invested assets which declined approximately $10 million and lower yields. In the prior quarter, we had a
foreign exchange gain which did not repeat in the current quarter.

We recorded an income tax benefit of $1.7 million in the current quarter compared to a
$1.6 million income tax provision in the fourth quarter of fiscal 2008. The decrease in the income tax provision was primarily due to the loss generated as a result of the other-than-temporary impairment charge related to ARS.

Net loss for the current quarter was $2.8 million or $0.10 per basic and diluted share, compared to net income of $3.0 million or $0.11 per basic and diluted share in
the fourth quarter of fiscal 2008.

Looking forward, we believe economic uncertainties and cautious capital spending will continue to weigh on the demand
for our products, especially in the memory market. Based on our assessment of the market, we expect sequentially lower shipments and revenues in the second quarter, reflecting the continued weak environment.



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##### Table of Contents

Results of Operations  Comparison of the fiscal quarters ended June 28, 2008 and June 2, 2007

Due to the change in our fiscal reporting periods, 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 June 30, 2007, which is the fiscal quarter ended June 2, 2007. The results for the current quarter include the results of our NWR division which was purchased on
July 20, 2007.

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



|                                                            |  |                      |    |  |              |  
|----------------------------------------------------------- |  | -------------------- | -- |  | ------------ | -
|                                                            |  | Fiscal quarter ended |   
|                                                            |  | June 28, 2008        |    |  | June 2, 2007 |  
|Net sales                                                   |  | 100.0                | %  |  | 100.0        | %
|Cost of sales                                               |  | 60.5                 |    |  | 53.6         |  
|                                                            |  |                      |    |  |              |  
|Gross margin                                                |  | 39.5                 |    |  | 46.4         |  
|Selling, service and administrative                         |  | 24.8                 |    |  | 18.3         |  
|Research, development and engineering                       |  | 15.1                 |    |  | 13.5         |  
|                                                            |  |                      |    |  |              |  
|Operating (loss) income                                     |  | (0.3                 | )  |  | 14.6         |  
|Other-than-temporary impairment of auction rate investments |  | (8.0                 | )  |  |             |  
|Interest and other income, net                              |  | 1.3                  |    |  | 3.6          |  
|                                                            |  |                      |    |  |              |  
|(Loss) income before income taxes                           |  | (7.0                 | )  |  | 18.2         |  
|(Benefit from) provision for income taxes                   |  | (2.6                 | )  |  | 7.2          |  
|                                                            |  |                      |    |  |              |  
|Net (loss) income                                           |  | (4.3                 | )% |  | 11.0         | %
|                                                            |  |                      |    |  |              |  

Net Sales

Net sales were $64.0 million for the quarter ended June 28, 2008, a decrease of $7.7 million or 10.8% compared to net sales of $71.7 million for the quarter ended June 2, 2007. The overall decrease was driven by a decrease in SG
net sales, partially offset by a significant increase in IMG net sales.

Information regarding our net sales by product group is as follows:



|                                   |  |                      |        |                |              |   |           |   |                |  |       |  
|---------------------------------- |  | -------------------- | ------ | -------------- | ------------ | - | --------- | - | -------------- |  | ----- | -
|                                   |  | Fiscal quarter ended |       
|                                   |  | June 28, 2008        |        |                | June 2, 2007 |  
|(Net Sales in thousands)           |  | Net Sales            |        | % of Net Sales |              |   | Net Sales |   | % of Net Sales | 
|Semiconductor (SG)                 |  | $                    | 21,728 |                | 33.9         | % |           | $ | 50,166         |  | 69.9  | %
|Passive components (PCG)           |  |                      | 13,275 |                | 20.7         | % |           |   | 12,784         |  | 17.8  | %
|Interconnect/Micro-machining (IMG) |  |                      | 29,021 |                | 45.3         | % |           |   | 8,794          |  | 12.3  | %
|                                   |  |                      |        |                |              |   |           |   |                |  |       |  
|                                   |  |                      | 64,024 |                | 100.0        | % |           | $ | 71,744         |  | 100.0 | %
|                                   |  |                      |        |                |              |   |           |   |                |  |       |  

SG sales in the first quarter of fiscal 2009 decreased $28.4 million or 56.7% compared to the fourth quarter of
fiscal 2007, including a $2.1 million increase resulting from the acquisition of NWR. The overall decrease in sales was primarily due to reductions in capital spending by customers who currently have excess capacity due to softening in the memory
markets.

PCG sales were up slightly at $13.3 million compared to $12.8 million in the fourth quarter of fiscal 2007. The increase in PCG net sales was
driven by capacity buys from key customers, though this trend was limited by the utilization of capacity by customers with systems delivered in prior periods.



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##### Table of Contents

IMG sales were $29.0 million in the first quarter of fiscal 2009, an increase of $20.2 million, which was more than
double the IMG sales of $8.8 million in the fourth quarter of fiscal 2007, inclusive of an increase of $4.1 million resulting from the acquisition of NWR. The remaining increase was driven primarily by increased demand for our expanded
micro-machining product line combined with continued demand in the flex-circuit and integrated circuit packaging segments of this market.

Net sales by
geographic region were as follows:



|                         |  |                      |        |                |              |   |           |   |                |  |       |  
|------------------------ |  | -------------------- | ------ | -------------- | ------------ | - | --------- | - | -------------- |  | ----- | -
|                         |  | Fiscal quarter ended |       
|                         |  | June 28, 2008        |        |                | June 2, 2007 |  
|(Net Sales in thousands) |  | Net Sales            |        | % of Net Sales |              |   | Net Sales |   | % of Net Sales | 
|Asia                     |  | $                    | 44,439 |                | 69.4         | % |           | $ | 55,708         |  | 77.6  | %
|Americas                 |  |                      | 12,903 |                | 20.2         | % |           |   | 8,295          |  | 11.6  | %
|Europe                   |  |                      | 6,682  |                | 10.4         | % |           |   | 7,741          |  | 10.8  | %
|                         |  |                      |        |                |              |   |           |   |                |  |       |  
|                         |  | $                    | 64,024 |                | 100.0        | % |           | $ | 71,744         |  | 100.0 | %
|                         |  |                      |        |                |              |   |           |   |                |  |       |  

Net sales to Asia in the first quarter of fiscal 2009 decreased $11.3 million compared to the fourth quarter of
fiscal 2007, primarily driven by weakness in SG sales.

Net sales to the Americas in the first quarter of fiscal 2009 increased $4.6 million compared to
the fourth quarter of fiscal 2007. This increase was driven by an increase in SG and IMG net sales.

Gross Profit

Gross profit was $25.3 million (39.5% of net sales) for the first quarter of fiscal 2009 compared to $33.3 million (46.4% of net sales) for the fourth quarter of fiscal
2007. Cost of sales in the current quarter included $3.9 million of NWR expenses and $0.3 million in purchase accounting expenses. The margin decrease was primarily due to lower production volumes, higher warranty costs, and a higher sales volume of
low-margin upgrades. Warranty costs increased significantly in the quarter as a result of specific supplier-related laser failures, one-time transition costs of warranty support in Japan from our previous distributor to an in-house service team and
an associated increase in our warranty reserve. Although we see variability quarter to quarter in warranty activity, we do not expect to see the same level of warranty expense in coming quarters. Looking forward, we expect margins to improve
sequentially as warranty activity normalizes, mix improves driven by fewer low-margin upgrades and the full impact of our cost reductions takes effect.

Operating Expenses

Selling, Service and Administrative Expenses

The primary items included in selling, service and administration (SS&A) expenses are labor and other employee-related expenses, travel expenses, professional fees, commissions and facilities costs. SS&A
expenses were $15.8 million (24.8% of net sales) in the first quarter of fiscal 2009, an increase of $2.7 million compared to $13.2 million (18.3% of net sales) in the fourth quarter of fiscal 2007. This increase was primarily attributable to the
impact of the addition of NWR SS&A in the first quarter of fiscal 2009 as compared to the fourth quarter of fiscal 2007. NWR expenses were $2.7 million which included $0.5 million of amortization of acquired intangible assets. In addition,
share-based compensation expenses increased $0.4 million in the first quarter of fiscal 2009 as compared to the fourth quarter of fiscal 2007. Excluding NWR SS&A expenses, SS&A expenses remained essentially flat.

Research, Development and Engineering Expenses

Research, development
and engineering (RD&E) expenses are primarily comprised of labor and other employee-related expenses, professional fees, project materials, equipment and facilities costs. RD&E expenses totaled $9.7 million (15.1% of net sales) for the first
quarter of fiscal 2009, which was relatively consistent with the $9.7 million (13.5% of net sales) in the fourth quarter of fiscal 2007. Excluding NWR expenses, RD&E expenses decreased $1.3 million which was driven by our effort to reduce costs
through restructuring and cost management plans.



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Non-operating Income and Expense

Other-than-temporary impairment of auction rate investments

In the first quarter of fiscal 2009, we recorded an
other-than-temporary impairment charge of $5.1 million in the results of operations related to our ARS. Recent events in the general credit markets and global economy, including the credit rating downgrades of the nations two largest bond
insurers, resulted in the downgrade of the majority of the credit ratings of the Companys ARS, as most of them are issued or insured by these two bond insurers. Given the continued challenges in the financial markets and the prolonged credit
crisis, we also cannot reasonably predict when these securities will become liquid. Consequently, it was determined that the decline in fair value of these securities represented an other-than-temporary impairment in accordance with U.S. generally
accepted accounting principles. Accordingly, the cost basis of these securities was written down to their estimated fair values with an other-than-temporary impairment charge of $5.1 million recorded in the results of operations for the fiscal
quarter ended June 28, 2008. The $14.5 million estimated fair value of these securities remains classified as a non-current investment on the condensed consolidated balance sheets at June 28, 2008, consistent with the classification at
March 29, 2008. We have the intent and ability to hold these securities for an extended period of time and we continue to receive interest income when due.

The Company continues to monitor the market for auction rate securities and consider its impact (if any) on the fair value of its ARS. It is not possible to ascertain when or whether market conditions will change resulting in the recovery
of fair value on these auction rate securities. It is also possible that a secondary market for auction rate securities may emerge in which securities similar to our own would trade at prices below our currently recorded fair values. Under such
scenarios, or if other events arise that impact the fair value of the securities, we may have to recognize further other-than temporary impairment charges, which would adversely impact our financial position and results of operations.

Interest and Other Income, net

Interest and other income for the
first quarter of fiscal 2009 was $0.9 million compared with $2.6 million in the fourth quarter of fiscal 2007, primarily due to lower interest income. Interest income was lower due to lower average invested assets which declined by approximately $79
million, resulting from funds used for the acquisition of NWR and share repurchases. Additionally, yields on our invested assets decreased due to lower market interest rates and a shift in our portfolio to investments with shorter durations to
maturity.

Income Taxes

The income tax benefit
recorded for the first quarter of fiscal 2009 was $1.7 million on a pretax net loss of $4.5 million, an effective rate of 38.0%. Comparatively, the income tax provision was $5.2 million on pretax income of $13.1 million in the fourth quarter of
fiscal 2007, an effective tax rate of 39.5%.

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 anticipate no significant changes
in unrecognized tax benefits in the next 12 months as the result of examinations or lapse of statutes of limitation.

Net Income

Resulting from the factors discussed above, net loss for the first quarter of fiscal 2009 was $2.8 million, or $0.10 per basic and 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.



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Financial Condition and Liquidity

At June 28, 2008, our principal sources of liquidity consisted of cash, cash equivalents and marketable investments of $140.5 million and accounts receivable of $58.6 million. At June 28, 2008, we had a
current ratio of 7.6 and no long-term debt. Working capital of $273.7 million remained generally consistent with the March 29, 2008 balance of $274.7 million.

On May 15, 2008, the Board of Directors authorized a new share repurchase program for up to $20 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation programs. The
repurchases are to be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and
other factors. There is no fixed completion date for the repurchase program.

During the fiscal quarter ended June 28, 2008, the Company repurchased
213,654 shares for $3.3 million under this share repurchase program at an average price per share of $15.63, calculated inclusive of commissions and fees. Cash used to settle repurchase transactions is reflected as a component of cash used in
financing activities in the condensed consolidated statements of cash flow.

As of June 28, 2008, we had a total of $19.6 million at par value
invested in auction rate securities. The contractual maturities of these securities range up to calendar year 2050 and several securities do not have stated maturities. At the time of purchase in fiscal 2007, these ARS were rated AAA and AA. The
Companys ARS are comprised predominately of securities issued by insurance companies to raise funds to meet regulatory capital reserve requirements and the ARS take on the credit ratings of the bond insurers who guarantee the timely payment of
principal and interest on these insured securities. Prior to September 2007, these securities provided short-term liquidity through a Dutch auction process that reset the applicable interest rate at pre-determined calendar intervals, generally every
28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings by selling such securities at par. With the liquidity issues experienced in the global credit and capital markets over the past year, our auction
rate securities have experienced failed auctions. While we continue to receive interest income on these investments at the maximum contractual rate, the estimated market value of these auction rate securities no longer approximates par value.

Recent events in the general credit markets and global economy, including the credit rating downgrades of the nations two largest bond insurers,
resulted in the downgrade of the majority of the credit ratings on the Companys ARS, as most of them are issued or insured by these two bond insurers. Consequently, it was determined that the decline in fair value of these securities
represented an other-than-temporary impairment in accordance with U.S. generally accepted accounting principles. Accordingly, the cost basis of these securities was written down to their estimated fair values with an other-than-temporary impairment
charge of $5.1 million recorded in the results of operations for the fiscal quarter ended June 28, 2008. The $14.5 million estimated fair value of these securities remains classified as a non-current investment on the condensed consolidated
balance sheets at June 28, 2008, consistent with the classification at March 29, 2008.

Cash flows provided by operating activities were $1.6
million for the fiscal quarter ended June 28, 2008 and cash provided by net loss adjusted for non-cash items was $6.7 million. Significant impacts to cash flows for the quarter were decreases in accounts payable and accrued liabilities, a
decrease in inventories and cash used for share repurchases.

Net trade receivables were $58.6 million at June 28, 2008, a decrease of $1.7 million
from March 29, 2008, which was primarily due to the impact of foreign currency exchange rate movements.

Inventories at June 28, 2008 were $92.9
million compared with $101.5 million at March 29, 2008, which represented a decrease of $8.6 million, driven primarily by lower production and sales of existing finished goods.

Accounts payable and accrued liabilities of $28.7 million at June 28, 2008 were down $14.2 million from March 29, 2008, primarily due to lower inventory purchases and timing of payments of accrued
compensation.



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##### Table of Contents

We believe that our existing cash, cash equivalents and marketable securities are adequate to fund our operations, share
repurchase program and contractual obligations for at least the next twelve months.

Critical Accounting Policies and Estimates

Except as discussed below, we reaffirm the Critical Accounting Policies and Estimates in Part II Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations reported in our Form 10-K for the year ended March 29, 2008.

Fair Value Measurements

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. In February 2008, the FASB issued Staff Position No. SFAS 157-2, Effective Date of FASB Statement No. 157, which provides a one-year deferral of the effective date of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Company has adopted the provisions of SFAS 157 with respect to its
financial assets and liabilities only, effective with fiscal 2009.



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

There have been no material changes in the market risk disclosure contained in our fiscal 2008 Transition Report on Form 10-K for our fiscal year ended on March 29, 2008. 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.



|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 (CEO) and our Chief Financial Officer (CFO) 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 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. This disclosure should be read in conjunction with the Section 302 Certifications for a complete understanding of the topics presented.

Disclosure Controls and Procedures

Our management has
evaluated, under the supervision and with the participation of our CEO and CFO, 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 CEO and CFO 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 CEO and CFO, 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 June 28, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.



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PART II  OTHER INFORMATION



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

All Ring Patent Infringement
Prosecution

In August 2005, we 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). As part of this proceeding,
the Court issued a Provisional Attachment Order (PAO) in August 2005, restricting the use of some of All Rings assets. All Ring then filed a bond with the Court to obtain relief from the attachment of its assets. In July 2007, the Court issued
a second PAO and approximately US$6.0 million was restricted in All Rings accounts. The second PAO remains in effect and cannot be revoked.

In
October 2005, we filed a formal patent infringement action against All Ring in the Court. The Court-appointed expert has concluded that the Capacitor Tester and All Rings RK-T2000 both infringe every claim of the 207469 patent and that All
Rings RK-L50 infringes a number of the claims as well. Also in October 2005, the Court executed a Preliminary Injunction Order (PIO) 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. The Court dismissed All Rings application to revoke the PIO on January 18, 2008, and the PIO remains in place.

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.

On March 4, 2008, pursuant to All Rings motion, the Court issued a suspension order, staying the formal infringement action until after a final decision is
rendered in the cancellation action. The High Court revoked the Courts suspension decision on May 2, 2008. On May 12, 2008, All Ring appealed the High Courts ruling. At the latest, the formal action will re-start soon after
July 2008, when Taiwans new Intellectual Property Law comes into effect. Any cases previously suspended, such as our formal action, will re-start upon a party making a motion with the Court to do so. We intend to make such a motion and
continue to vigorously pursue our patent infringement claims against All Ring and defend against the cancellation action.

Pursuant to the Courts
Provisional Attachment Order and Preliminary Injunction Order, in October 2005, we were required to post a Taiwan dollar security bond with the Court. An additional Taiwan dollar bond of approximately US$2.1 million was posted in June 2007 related
to the second PAO. The total security bonds were valued at approximately US$9.7 million at June 28, 2008 and this amount was included in other assets on the consolidated balance sheet at June 28, 2008.



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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 differ materially. 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 and we are experiencing weakness in some of our markets and may experience weakness
in the future.

Our business depends upon the capital expenditures of manufacturers of components and circuitry used in wireless communications,
computers and other electronic products. The markets for electronic devices have experienced sharp downturns. In fiscal 2008, we began to see the impact of weakness in the memory market and lower capital spending, particularly in the fourth quarter.
For example, orders in our SG group were 30% lower in the first quarter of fiscal 2009 than in the fourth quarter of fiscal 2008 and there could be further declines in this market and others. During such downturns, semiconductor and
micro-electronics manufacturers, including our customers, can be expected to delay or cancel capital expenditures, which may have a negative impact on our financial results. During a downturn, we are not able to project when demand for our products
will increase or that demand will not decrease further. Even if demand for our products does increase, there may be significant fluctuations in our profitability and net sales.

During this and any downturn, it is difficult for us to maintain our sales levels. As a consequence, to maintain profitability we 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 need to continue to
invest in certain areas such as research and development. This and any economic downturn may also cause us to incur charges related to impairment of assets and inventory write-offs, and we may 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. 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.

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;
| | - |  | -----------------------------------------------



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##### Table of Contents

| |  |  | Our ability to ship products on schedules 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.

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

We depend on a few significant customers for a large portion of our revenue. For example, our top ten customers for fiscal 2008 accounted for approximately 59% of total
net sales in fiscal 2008, with two customers accounting for a cumulative 23% of total net sales in fiscal 2008. 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. In addition, the semiconductor industry, and particularly the memory market, is very cyclical, which could result in consolidation or changes in various partnership and technology arrangements
amongst our customers. These changes could affect demand for our products and impact our technology strategies.

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, or alternative
technologies, 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, technology changes or emerging industry standards. Any failure to respond to technology change that may render our current products or technologies
obsolete could significantly harm our business.



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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 from numerous suppliers in the
production of our products, including custom electronic and mechanical components. 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, 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.

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. Such 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.

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 schedules 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 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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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. While we attempt in our designs to avoid patent infringement, 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.

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.

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.



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We 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.

In fiscal 2008, we 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Implementation of the Companys ERP system for the acquired company;
| | - |  | --------------------------------------------------------------------



| |  |  | 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 and could require us to borrow in order to fund the acquisition
or our operations. 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 may make additional strategic
investments in development stage companies and such investments are subject to a high degree of risk, and therefore it is possible that we could lose our entire investment.

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 82% of net sales in fiscal 2008, with 74% 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
| | - |  | ------------------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | -----------------------------------------------------------------------

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 deferred tax assets, (c) taxes, refunds, 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 and results of operations.

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 worldwide 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 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. 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.

No market currently exists for the auction rate
securities (ARS) we hold and as a result we may not be able to liquidate them at the current valuation, if at all. As a result, we have written down the cost basis of these securities to their estimated fair value with an other-than-temporary
impairment charge to earnings and we may have to do so again in the future under certain scenarios.

We currently hold ARS with an aggregate par
value of $19.6 million that had an estimated fair value of $14.5 million at June 28, 2008. At the time of purchase in fiscal 2007, these ARS were rated AAA and AA. The contractual maturities of these securities range up to calendar year 2050
and several securities do not have stated maturities. The Companys ARS are comprised predominately of securities issued by insurance companies to raise funds to meet regulatory capital reserve requirements and the ARS take on the credit
ratings of the bond insurers who guarantee the timely payment of principal and interest on these insured securities. Prior to September 2007, these securities provided short-term liquidity through a Dutch auction process that reset the applicable
interest rate at pre-determined calendar intervals, generally every 28 to 35 days. This mechanism allowed existing investors to either retain or liquidate their holdings by selling such securities at par. With the liquidity issues experienced in the
global credit and capital markets over the past year, our auction rate securities have experienced failed auctions. While we continue to receive interest income on these investments at the maximum contractual rate, the estimated market value of
these auction rate securities no longer approximates par value.



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Recent events in the general credit markets and global economy, including the credit rating downgrades of the
nations two largest bond insurers, resulted in the downgrade of the majority of the credit ratings of the Companys ARS, as most of them are issued or insured by these two bond insurers. Given the continued challenges in the financial
markets and the prolonged credit crisis, we also cannot reasonably predict when these securities will become liquid. Consequently, it was determined that the decline in fair value of these securities represented an other-than-temporary impairment in
accordance with U.S. generally accepted accounting principles. Accordingly, the cost basis of these securities was written down to their estimated fair values with an other-than-temporary impairment charge of $5.1 million recorded in the results of
operations for the fiscal quarter ended June 28, 2008. The $14.5 million estimated fair value of these securities remains classified as a non-current investment on the condensed consolidated balance sheets at June 28, 2008, consistent with
the classification at March 29, 2008. We have the intent and ability to hold these securities for an extended period of time and we continue to receive interest income when due.

It is not possible to ascertain when or whether market conditions will change resulting in the recovery of fair value on these auction rate securities. It is also possible that a secondary market for auction rate
securities may emerge in which securities similar to our own would trade at prices below our currently recorded fair values. Under such scenarios, or if other events arise that impact the fair value of the securities, we may have to recognize
further other-than temporary impairment charges, which would adversely impact our financial position and results of operations.

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 other-than-temporary impairment on the value of those investments,
which would negatively impact our financial position and results of operations.

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. 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.

Our internal control over financial reporting could be adversely affected if material weaknesses are discovered in the future.

During fiscal 2007, we reported a material weakness in our internal control over financial reporting, which we have since remediated. 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.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

On May 15, 2008, the Board of Directors authorized a new share repurchase program for up to $20.0 million in shares of the Companys outstanding common stock primarily to offset dilution from equity compensation programs. The
repurchases are to be made at managements discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price and
other factors. There is no fixed completion date for the repurchase program. During the fiscal quarter ended June 28, 2008, the Company repurchased 213,654 shares at an average price of $15.63, calculated inclusive of commissions and fees. The
required shares were immediately retired and became authorized and unissued shares, as required under Oregon corporate law.

The following table sets forth
information about the share repurchase transactions in accordance with SEC Regulation S-K, Item 703:



|                              |  |                               |  |                            |  |                                                                              |     |  |                                                                                      |           
|----------------------------- |  | ----------------------------- |  | -------------------------- |  | ---------------------------------------------------------------------------- | --- |  | ------------------------------------------------------------------------------------ | ----------
|Period                        |  | TotalNumber ofSharesPurchased |  | Average PricePaid perShare |  | Total Number ofShares Purchasedas Part ofPublicly AnnouncedPlans or Programs |     |  | Approximate DollarValue of Sharesthat May Yet BePurchased Under thePlans or Programs
|March 30, 2008 to May 3, 2008 |  |                              |  |                           |  | 2,478,758                                                                    | (a) |  |                                                                                      |          
|May 4, 2008 to May 31, 2008   |  | 83,300                        |  | 15.56                      |  | 2,562,058                                                                    |     |  | $                                                                                    | 18,706,281
|June 1, 2008 to June 28, 2008 |  | 130,354                       |  | 15.68                      |  | 2,692,412                                                                    |     |  | $                                                                                    | 16,663,567
|                              |  |                               |  |                            |  |                                                                              |     |  |                                                                                      |           
|Total                         |  | 213,654                       |  | 15.63                      |  |                                                                              |     |  |                                                                                      |           
|                              |  |                               |  |                            |  |                                                                              |     |  |                                                                                      |           



|(a) | The beginning total number of shares purchased as part of publicly announced plans or programs, 2,478,758, reflects shares repurchased from April 17, 2007 to March 29,
2008 under a previous share repurchase program. This program was initially approved by the Board of Directors on March 9, 2007, and after being suspended on October 9, 2007, resumed by approval of the Board of Directors on January 22,
2008. The program had expired as of March 29, 2008 in conjunction with the fulfillment of the $50.0 million authorized repurchase amount.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

This list is intended to
constitute the exhibit index.



|    |  |                                                                                                                                                                                                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.
|    | 
|4.2 |  | First Amendment to Amended and Restated Rights Agreement, dated as of August 26, 2002, between the Company and Mellon Investor Services LLC. Incorporated by reference to Exhibit 4 of the
Companys Current Report on Form 8-K filed on August 27, 2002.                                                         



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|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|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: August 5, 2008 |  |  |  | ELECTRO SCIENTIFIC INDUSTRIES, INC.
|                      |  |  |  |                                    
|                      |  |  |  |                                     |  | By |  | /s/ Nicholas Konidaris                         
|                      |  |  |  |                                     |  |    |  | Nicholas Konidaris                             
|                      |  |  |  |                                     |  |    |  | President and Chief Executive Officer          
|                      |  |  |  |                                     |  |    |  | (Principal Executive Officer)                  
|                      |  |  |  |                                    
|                      |  |  |  |                                     |  | By |  | /s/ Paul Oldham                                
|                      |  |  |  |                                     |  |    |  | Paul Oldham                                    
|                      |  |  |  |                                     |  |    |  | Vice President of Administration,              
|                      |  |  |  |                                     |  |    |  | Chief Financial Officer and Corporate Secretary
|                      |  |  |  |                                     |  |    |  | (Principal Financial Officer)                  
|                      |  |  |  |                                    
|                      |  |  |  |                                     |  | By |  | /s/ Kerry Mustoe                               
|                      |  |  |  |                                     |  |    |  | Kerry Mustoe                                   
|                      |  |  |  |                                     |  |    |  | Vice President, Corporate Controller and       
|                      |  |  |  |                                     |  |    |  | Chief Accounting Officer                       
|                      |  |  |  |                                     |  |    |  | (Principal Accounting Officer)                 



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